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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.

Does Québec MSB Licensing Apply to Me?

We recently sought clarification from the Autorité des marchés financiers (AMF), Québec’s provincial regulator, on when money services businesses (MSBs) need to be licensed in Québec.  The Québec licensing process is completely separate from the federal MSB registration with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).  The full text of the response that we received appears below this blog entry.

Are You Required To Be Licensed in Québec?

To determine whether or not you need to be licensed in Québec, we’ve developed a chart:

Screen Shot 2014-05-19 at 2.08.51 PM

If you are offering any of the defined MSB services to people of organizations in Québec (including via the web) you are expected to be licensed as an MSB in that province.

The AMF has announced that digital currency exchanges and ATMs are also regulated under the MSB Act.

How Can You Become Licensed And What Does It Cost?

Before you apply for an MSB license, you must obtain a Québec Enterprise Number from the Enterprise Registrar.  This is a unique numeric identifier that you will use when dealing with Québec government agencies and business partners.  The registration process will cost approximately CAD 34.00 and will require you to provide documents such as your articles of incorporation.  We recommend that you speak with your tax professional about the implications of registering as an enterprise in Québec, as it is likely that you will need to consider this in future tax filings.  You can access the registration site here.

Next, you’ll need to apply for your Québec MSB license.  The AMF has developed a user guide that explains the process in plain language.  You must have a respondent (someone acting on your behalf) in the province of Québec.  If you do not have any physical operations in Québec, the respondent  can be a third party that you trust, such as a lawyer, paralegal, accountant, consultant  or other professional that will act on your behalf.  A licensing fee of CAD 650.00 applies to each category of product or service that you offer (except for ATMs).  This means that the total fee for this stage will range from CAD 650.00 to CAD 2600.00.

In addition, MSBs that operate ATMs will be required to pay a fee of CAD 216.00 per ATM machine (located in the province of Québec) later in the process.

In addition to these fees, specific security clearance fees are required.  These include CAD 121.00 for the enterprise and each of the following (that apply to your business):

  • The Respondent;
  • Officers;
  • Directors;
  • Partners;
  • Branch managers;
  • Any person or entity who directly or indirectly owns or controls the money-services business;
  • Employees working in Québec (unless they are not involved in any of the MSB business);
  • Mandataries (who are responsible for the money services offered on behalf of the MSB);
  • Officers of the mandataries;
  • Any lender that is not a financial institution; and
  • For any lender that is not a financial institution or a natural person, lender is not a natural person, its officers, directors or partners.

You must obtain consent and information from each of these individuals in order to complete the security clearance process.  You must also assemble and submit corporate documents for your MSB, including:

  • Business plan and description of business activities;
  • Financial statements;
  • Document showing legal structure of the business;
  • Document confirming appointment of respondent; and
  • Document showing corporate structure of the business.

You should expect the application process to take six to eight weeks if all of the forms are filled out completely and correctly.  It can take significantly longer if your applications are missing information or signatures.  We recommend looking over all of your documents carefully before you submit them and reaching out proactively to the AMF if you have questions about how to complete the application forms.

Need A Hand?

Many MSBs have successfully gone through this process on their own (you don’t need to hire a lawyer or consultant), but if you want a hand assembling your package and communicating with the AMF we’re happy to assist – please contact us.

Full Text Of AMF Response

As discussed earlier, any entity who executes from Québec or makes available the following money services for the people of Québec has to submit an application in order to have the Autorité des marchés financiers release a Money services business (MSB) licence:

  • Currency exchange;
  • Funds transfer (over the counter or internet);
  • Issue / redemption of traveller’s cheque, money order, bank drafts.
  • Cheque cashing
  • Operation of ATM

A corporation does not have to have an establishment, an address, a post office box or even a telephone line in Québec for it to be considered as carrying an activity in Québec as long as it conducts business for a profit. It is often the case for corporations acting in the funds transfer category.

 The first step towards registration for a MSB should first be registration as a corporate entity with the Registraire des entreprises (http://www.registreentreprises.gouv.qc.ca/). This will provide a corporation number (NEQ) to the registrant that will be required for application purposes.

 Afterwards will come the submission of the E-services access form by its appointed respondent (see section 5 of the MSB Act) along with a payment of 614$ for each money services category to appear on the licence.

 All info and documentation is available on our website (www.lautorite.qc.ca).

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