Anti-Money Laundering
Consulting Services & Strategies

0 Items - Total: $0.00 CAD

Why We Believe In The Right To Business Banking

I remember my first thoughts on money services businesses (MSBs) very distinctly.   Years ago, when I moved from being a banker to being a consultant, I thought of MSBs as being predatory and fly by night. I didn’t know much about MSBs, and I was hesitant to work with them as clients. Fortunately, a colleague determined to change my point of view, brought me to a meeting with one of her clients, a remittance company that served a particular ethnic community.

My colleague asked her client to walk me through the business model, and as the discussion progressed, I quickly understood that the MSB was offering many services that the banks were not – some of them free of charge. Not only was the MSB providing services in their customers’ native language, the fees were low and there were a slew of additional services like lawyer and employment agency referrals (all services in the customers’ native language). The office space was a bright and clean retail location and all of the staff seemed genuinely excited to be there. It was clear that I had misjudged MSBs (or at the very least, this MSB).

Over the years I’ve worked with many MSB clients and have come to understand that this was not a unique situation. In Canada we have many great MSBs that are providing services in nimble and efficient ways that truly meet the needs of their communities. My team and I have been able to help MSBs build compliance programs, risk assessments, training and complete effectiveness reviews, but the most common request that we’ve received is something that we’re simply not able to do: open a bank account.

From startups to MSB businesses that have been in existence for many years, opening a bank account (and keeping it open) is more difficult than staying in compliance with the law, or running a profitable business. Recently, we’ve also been approached by companies that deal in digital currencies like bitcoin with the same type of request. While we can certainly provide advice on how to approach the problem (see our blog on keeping your bank happy), we aren’t a bank and don’t have the power to compel banks to open accounts for our customers, or to keep them open. The lack of available banking facilities is deeply troubling to me, both as a Canadian entrepreneur and as a compliance expert.

Stifling Innovation

Recently, the Canadian Senate Committee on Banking, Trade and Commerce held sessions related to digital currency. One of the messages that was clear in all sessions was the disconnect between the traditional financial system (represented primarily by banks) and the emerging digital currency markets. While digital currency has come a long way, companies have difficulty operating using digital currency alone. Unfortunately, many of these companies are currently unbanked (including companies that have a history of profitability and companies that accept payment in digital currency – but do not sell digital currency to the public). While Canada is, in many ways, recognized as a hotbed of digital currency innovation, banking challenges are daunting to companies considering a Canadian presence.

While some laud the regulation of digital currencies expected to come into play following the Royal Assent of Bill C-31 earlier this year, it is noteworthy that this is unlikely to solve the existing banking issues faced by these companies. ‘Dealers in digital currency’ (a term that has yet to be fully defined) will be regulated as MSBs, and MSBs face very similar banking challenges despite being regulated entities. New MSB startups (including MSBs that aren’t dealing in digital currency) have great difficulty in obtaining and maintaining basic banking facilities.

The Risk of ‘De-Risking’

As an entrepreneur, it troubles me that companies that have followed all of the rules are denied the opportunity to innovate because they don’t have access to banking services. As a compliance professional, I’m equally troubled by the workarounds that I’ve seen in action. These have ranged from misrepresenting the nature of a company’s business to incorporating multiple companies that settle transactions between one another (or access banking services on one another’s behalf) to the use of personal bank accounts to operate businesses. In essence, accessing banking in a way that banking service providers don’t understand because providing accurate information is seen as putting the business at risk.

Banks and other banking service providers are heavily regulated, and their requirements include knowing their customers and understanding their customers’ transactions. MSBs and digital currency businesses are generally (effectively always) seen as being higher risk and requiring enhanced due diligence (EDD). There are few motivations for banking service providers to take on higher risk customers, in particular if the banking service provider cannot be certain that the account will be profitable. To this end, some banks have openly stated that they will not deal with MSBs or digital currency companies at all. Others charge screening fees (which can range up to several thousand dollars) required as part of the account application process, with no guarantee of an account. Most banks that offer accounts to these types of businesses charge fees (in addition to regular banking fees) in order to maintain accounts.

Even when an MSB or digital currency company opens a bank account, there is the possibility that the banking service provider will close the account (referred to in the banking community as “de-marketing” or “de-risking”) with very little notice. Consequently, there is very little incentive for MSBs or digital currency companies to be transparent with their banking service providers. These businesses need bank accounts in order to thrive, and they don’t perceive themselves as being able to access banking services by being open and transparent. This creates a situation wherein many companies operate “under the radar,” accessing banking services without providing a fulsome understanding of their business or transactions.

In these situations, banking service providers are not meeting their regulatory obligations as they don’t truly know their customer, nor understand their transactions. Many financial institutions have mechanisms in place to detect undeclared MSB activity and /or digital currency related activity. While it’s not possible to say with certainty how effective these controls are, my experience would suggest that the number of financial institutions that are dealing with MSBs and digital currency businesses is close to 100% (regardless of the policies or controls in place). In other words, de-risking MSBs today is about as effective as the prohibition of alcohol in the USA in the 1920s

Not Just A Canadian Issue

Businesses across the globe are facing similar issues, and international groups such as the World Bank have become more vocal in proposing solutions.  In their 2013 Special-Purpose Note titled “Barriers to Access to Payment Systems in Sending Countries and Proposed Solutions,” the World Bank’s  Global Remittances Working Group (GRWG) suggest five solutions, including the creation of banks focussed on serving money transfer businesses.  The issue was raised again during Global Payments Week in New York, where it was noted that it has been brought to the attention of the G20 Ministers of Finance.  While the issue is not uniquely Canadian, we believe that Canada could become a world leader in implementing a solution.

Solving The Problem

We believe that the solution to mitigating the risk related to MSB and digital currency transactions is not de-risking. This strategy only penalizes honest companies and creates an environment of mistrust. We believe that all Canadian businesses should have a right to basic banking services, in the same way that individuals are entitled to these services. In order for this to be true, businesses would need to be included in the rules set out in the Access to Basic Banking Services Regulations under the Bank Act, or similar legislation.

The risk posed by MSBs and digital currency businesses should be assessed and managed. This can only occur where these companies understand that revealing the nature of their business will not lead to “de-risking,” provided that the business is operating within the parameters set out by Canadian law (including the requirement for MSBs to be registered with FINTRAC in Canada and licensed by the AMF in Quebec). While the cost of managing related risks and performing enhanced due diligence exist, the fees related to MSB and digital currency accounts should not be so unreasonably high as to prevent access for smaller companies.

We’re Not Lobbyists, But…

Canada’s 2014 Economic Action Plan mentions “universal banking.” The website reads: “Universal access to basic banking is a cornerstone of Canada’s financial sector in which Canadians can take pride.” We’re working with industry groups to spread the message. We believe that universal banking should apply not only to individuals, but to the Canadian organizations that are innovating and helping to make Canada great.

What You Can Do

If you believe in the right to business banking, as we do, we encourage you to contact your Member of Parliament to share your thoughts.

If you own a business in Canada, you can also contact the Canadian Federation of Independent Businesses (CFIB) to request action on this initiative.  CFIB has been a powerful lobbying force for Canadian businesses in the past, and we have discussed these issues with them.  Action is most likely when it is clearly supported by their membership.

MSBs and those that work with MSBs may also consider contacting the Canadian MSB Association (CMSBA) to learn about their current initiatives.  The CMSBA represents the interests of Canadian MSBs, in addition to providing training and conferences (the next of which takes place November 18th in Toronto).

Contact Us

You can contact Outlier at any time using our online form or contact the author directly by emailing amber@outliercanada.com.

Keeping Your Bank Happy

For many reporting entities, a growing concern has become obtaining and maintaining banking relationships.  Most, if not all, businesses need a banking relationship to survive and prosper.  If you are an individual in Canada, you are entitled to basic banking services, but it is not so for businesses.  Banks and other financial service providers choose the business customers that they will serve.  This means that the stakes can be very high for businesses shopping for a banking relationship.

As reporting entities themselves, banks and other financial services companies have similar obligations to other reporting entities.  They must understand their customers and their customer’s transactions.  There is mounting pressure for banks to conduct due diligence that includes reviewing the compliance programs of clients that are reporting entities.  As a business owner, your best defence against losing your banking relationship is making your banker’s work easier.

This isn’t something that most business owners have spent a lot of time thinking about, but a few hours every year can go a long way towards ensuring that your banking relationships keep operating smoothly.  Based on my clients (and my own) experiences, I’ve summed up a five-step plan to help you on your way, which includes links to free resources to help you get started.

Step 1:  Have A Compliance Program (and Keep It Up To Date)

All reporting entities need to have an anti money laundering (AML) and counter terrorist financing (CTF) compliance program in place, that includes these five elements:

  1. Appoint A Compliance Officer (this is the person that is responsible for the compliance program; they should be fairly senior within your company and their appointment should be documented);
  2. Document Your Policies And Procedures (your documentation should be detailed enough to describe what you actually do, and be updated at least once a year);
  3. Create A Risk Assessment (this is a document that describes the risk that your business could be used to launder money or finance terrorism, and the controls that you have in place to prevent that from happening);
  4. Train Your Staff (this should happen at least once a year and all training sessions should be documented); and
  5. Have An AML Compliance Effectiveness Review (this is like an audit of your AML program and operations; it must be done at least every two years).

When you are creating and updating your documentation, remember that you and your staff are not the only people that will see it.  Your regulators, bankers and other people that don’t know your business the way that you do will also need to rely on your documentation.  This means that you need to write as if your reader doesn’t know your business.  Take the time to explain everything clearly.

If you need help creating a compliance program, please have a look at our resources pages for your reporting entity type or contact us.

Step 2:  Have a business plan

Your business plan should describe what you do, how you make money and include historical business volumes (for existing businesses) and predicted business volumes (for new and existing businesses).  This document should explain your business simply and clearly (to someone outside of your industry).  To make things easier for your banking service provider, you should explain the types of transactions that will go through your bank account and the estimated volumes.

Many business owners are hesitant to describe their transactions and marketing strategies in any type of document that will leave their hands.  This type of thinking can seriously harm banking relationships, especially if the bank perceives you as being secretive or evasive.  Remember that the bank needs to understand your business in order to keep you as a customer, and the easier that you can make it for them to understand, the better off you’ll be.

I’ve worked with consulting firms that charge high rates for business planning, but there is no real need to spend a lot of money creating a business plan.  There are many free resources available for Canadian businesses.  Here are some of my favourites:

Not surprisingly, the banks themselves offer many of these resources!

Step 3:  Have Contracts In Place

Any third party that is involved in your business (vendors, agents, etc) should have contracts in place, and your bankers may ask to see these agreements.  The contracts should spell out what the third party is obligated to do on your behalf and the copies of the agreements that you provide to your banker should be signed and dated by all parties.  Don’t provide original documents to your bank unless you are required to do so (often banks want copies only, as they will not be returned to you).

Many existing businesses have long-term business relationships that may never have had a formal agreement in place.  In these cases, especially if the third party is doing something like identifying customers on your behalf, you will need to get written agreements.  These don’t need to be overly complicated.  The agreement should state what all parties are required to do and when.  It can be a plain language document that you draft yourself, or something more complicated that you work on with the advice of a lawyer.  The important thing is that you have agreements in place and that they’re clear enough to allow the reader to understand how the parties are related.

Step 4:  Take The Time to Build Alliances

You don’t usually get to speak directly with your bank’s compliance department. The sales representative or branch manager is your liaison. They need to be your advocate.  In this type of scenario, a person becomes your advocate not because you’re cute or gave a nice gift but because they know, understand and can explain your business. This takes patience and time.  Remember you need them as much as they need you. Make it a no brainer for them to want you as a customer (profitable, low risk, low effort).

Your representative at the branch is your point of contact and can act as a sounding board for your documentation.  For instance, if they have requested your business plan, ask if you can walk through it with them and get their advice before it is submitted to the bank’s head office or compliance department.  Remember that they can’t write documentation for you, but they can provide excellent insights about what the bank expects to see.

Step 5:  Consider Having Audited Financial Statements Completed

In some cases, your financial service provider may require audited financial statements. Only a licensed accounting professional or firm (specifically someone with a CA or CPA) can issue this type of report in Canada.  The process involves an independent evaluation of your company’s financial statements and other documents.  The auditor expresses an opinion about your company’s financial statements, based on the audit work performed, to state if they feel that the financials are free from material errors.  This is not specific to anti-money laundering.  The audit report refers to the company’s financial risk and fraud risk, among many other topics, to give your financial service provider more comfort over the financials they are reviewing to help lower your risk profile.  While we at Outlier aren’t accountants, and don’t perform this type of work, we’re happy to recommend accounting firms that have experience with audited financial statements, including our friends at Helen Loukatos Chartered Accountant, who’ve generously given us permission to link to this Money Service Businesses Audit FAQ.

Stepping It Up

All of this is relatively simple, but it takes time.  Consider it an investment in your business.  If you need a hand getting started, please feel free to contact us.

Return to Blog Listing


PROCESSING...