In our previous article in our series on money service businesses, we discussed the compliance reporting obligations for MSBs in Canada. In this article, we will explore the key similarities and differences between the MSB regulatory systems in Canada and the United States.
What is a money service business?
Money service businesses (“MSBs”) are crucial intermediaries in the financial sector, offering a range of services such as money transmission, currency exchange, cheque cashing, and prepaid access to funds. Yet, the critical nature of their function in the financial ecosystem also renders MSBs susceptible to potential misuse for illicit financial activities, including money laundering and terrorist financing. In response to these concerns, both Canada and the United States have established rigorous regulatory frameworks to govern MSBs and ensure compliance with anti-money laundering (“AML”) and the know-your-customer (“KYC”) practices.
Canadian regulatory regime
In Canada, the regulation of MSBs is predominantly overseen at the federal level, with the exception of Quebec, which has established its own provincial regulatory regime. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (the “PCMLTFA“) serves as the governing legislation for MSBs. Such regulation falls under the purview of the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC“). The Canadian regulatory framework is multi-faceted and comprises several essential components. MSBs operating in Canada are mandated to register with FINTRAC.
The cornerstone of Canada’s regulatory structure is its reporting requirements. MSBs are obligated to report various types of financial transactions to FINTRAC, including large cash transactions, electronic funds transfers, and transactions that are deemed suspicious and may be indicative of money laundering or terrorist financing. Robust KYC and customer due diligence procedures are fundamental requirements in Canada, necessitating the verification of customer identities and the assessment of transaction-related risks. Compliance programs are pivotal, requiring MSBs to establish and maintain comprehensive policies, procedures, internal controls, and employee training to ensure compliance with legal and regulatory requirements.
MSBs must adhere to stringent record-keeping requirements, maintaining transaction records, customer identification information, and other pertinent documentation for a prescribed period, typically five years. While risk assessments are not mandatory, MSBs in Canada are encouraged to conduct these assessments to identify and evaluate potential risks associated with their business activities. Certain MSBs, especially those involved in foreign exchange dealing and electronic money transfers, are considered reporting entities and are subject to heightened regulatory oversight.
United States regulatory regime
The United States follows a more decentralized regulatory model for MSBs. While there are federal-level regulations, such as the Bank Secrecy Act (“BSA”) and its regulations, individual states also play a significant role. Many states have established their own regulatory regimes, often requiring MSBs to obtain state licenses or registrations to operate within their borders. Notable examples include New York and California, where the frameworks are more comprehensive. For instance, in New York, MSBs are subject to the New York State Department of Financial Services regulations, which include a separate licensing process known as the BitLicense for virtual currency businesses. In California, the equivalent regulatory framework is known as the Money Transmitter License. This state-specific terminology reflects the variations in nomenclature and regulatory requirements that exist across jurisdictions within the U.S.
At the federal level, the Financial Crimes Enforcement Network (“FinCEN”), operating under the U.S. Department of the Treasury, plays a pivotal role in regulating MSBs through the implementation and administration of the BSA. Designed to combat money laundering and various financial crimes, the BSA addresses AML and KYC concerns, placing heightened beneficial ownership reporting requirements on both financial institutions and MSBs. By doing so, FinCEN actively contributes to the protection against illicit financial practices, solidifying its role as a key player in fostering a secure financial environment. MSBs operating in the United States must register with FinCEN, enabling the government to monitor these businesses and their operations. AML programs are a central requirement, and MSBs are mandated to establish and maintain these programs, encompassing policies and procedures for customer identification, reporting suspicious transactions, and the maintenance of transaction records. Suspicious activity reports must be promptly filed with FinCEN when MSBs encounter transactions that raise suspicions of illegal or fraudulent activities.
Currency transaction reports (“CTRs”) are another essential aspect of U.S. MSB regulation. MSBs are mandated to file CTRs for transactions involving currency or other monetary instruments that exceed USD$10,000. Customer identification is paramount in the United States, and MSBs must establish customer identification programs to verify the identity of their customers. Like Canada, the U.S. imposes record-keeping requirements, with MSBs required to maintain transaction records and customer identification information for a prescribed period, typically five years. Compliance programs are an integral part of U.S. based MSBs’ operations, ensuring that the businesses adhere to the law.
Distinguishing features: Reporting requirements
While the regulatory frameworks in Canada and the United States share common objectives aimed at combating money laundering and terrorist financing, there are also notable differences that distinguish them. Differences emerge in reporting thresholds and specific requirements, with variations in thresholds for reporting large cash transactions or electronic funds transfers, reflecting unique nuances in each country’s financial landscape.
Canadian reporting requirements:
- Suspicious Transaction Report: For financial transactions linked to money laundering or terrorist financing;
- Large Cash Transaction Report: Required for cash transactions of CAD$10,000 or more in a single transaction or multiple transactions totaling CAD$10,000;
- Large Virtual Currency Transaction Report: Required for virtual currency transactions equivalent to CAD$10,000 or more in a single transaction; and
- Electronic Funds Transfer Report: Mandatory for funds transfers of CAD$10,000 or more into or out of Canada in a single transaction or multiple transactions totaling CAD$10,000.
U.S. reporting requirements:
- CTRs must be filed within 15 days for transactions involving more than USD$10,000 in cash;
- MSBs selling money orders or traveler’s checks must record cash purchases between USD$3,000 and USD$10,000;
- MSBs providing money transfer services need to gather and record specific information for transfers of USD$3,000 or more, regardless of payment method; and
- Currency exchangers are required to keep records for exchanges exceeding USD$1,000 in domestic or foreign currency.
The regulatory landscapes for MSBs in Canada and the United States share significant similarities, laying the foundation for enhanced cross-border transactions through streamlined compliance processes and regulatory alignment. While these commonalities create a promising environment, MSBs must navigate potential obstacles arising from nuanced differences in regulatory requirements and the dynamic nature of evolving regulations. Moreover, external factors such as exchange rates, international cooperation, and geopolitical events continue to exert influence, shaping the landscape for cross-border financial services. The contrasting regulatory approaches — the decentralized model in the U.S. versus Canada’s more centralized federal system — underscore the importance for MSBs to maintain vigilance and implement nuanced compliance strategies that encompass both federal and state-level regulations, emphasizing the need for adaptability in this ever-evolving financial environment.
Please reach out to a member of Miller Thomson’s Structured Finance and Securitization team if you have any questions regarding money service businesses, the PCMLTFA and its related regulations.