Presentation Prepared for the Money Transmitter Regulators Association Annual Conference

Presentation Prepared for the Money Transmitter Regulators

Association Annual Conference

The Road Ahead: Opportunities and Challenges in the Money Transfer Industry

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Opportunities and Challenges

Compliance and control Bank account discontinuance Compliance as a shared responsibility – Regulator, bank, MTO, agent New areas for compliance programs Spillover of immigration debate into money transfer General pressure on the agent model: agents vs. branches Critical nature of agent receivables in safety and soundness

The Brazilian Doleiro Market: Danger to the Industry

Industry evolution Agile and large public competitors Well capitalized large private competitors Continued trend toward consolidation Continued efforts by banks to penetrate market

Development impact Money Transfer Operators are in a unique position to serve transnational

families. Product innovation will be key New products present new regulatory issues

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Compliance and Control

Bank account discontinuance Continues to be the largest challenge; banks dividing into those that take a rational risk-based

approach and those that are irrationally totally closed. Federal legislative approach is now realistic: Rep. Rangel, presumptive new Chair of the House Ways

and Means Committee, is a friend of the industry; Rep. Frank, presumptive new Chair of the House Banking Committee, sent the letter to the Fed that led to CRA credit for banks offering remittance services. The legislative effort must be bi-partisan and it must have Treasury’s support.

Current efforts of the federal banking agencies are vague, floundering and counterproductive. They damage national security.

Compliance as a shared responsibility Regulators, banks, MTOs and agents need to coordinate Companies that compete by being lax in ID requirements or soft in compliance generally endanger

banking relationships for all companies

New areas such as internet gambling payments need to be built into compliance programs

Spillover of immigration debate into money transfer operations, as happened in Arizona, will continue

General pressure on the agent model: agents vs. branches Some banks are unwilling to bank the agent model Danger is structuring – Tighter FinCEN ID requirements would help here Aggregation and data analysis of all MTO transactions by law enforcement would be FAR more effective

in detecting and reporting structuring than the current system.

Critical nature of agent receivables in safety and soundness State regulators should bar any agent that defaults in its obligations with one licensee from

dealing with any licensee

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The Brazilian Doleiro Market

What is the Brazilian Doleiro (black) currency market?

How do some U.S. Licensed Money Transmitters operate in the Brazilian Doleiro market?

Why do some U.S. licensed money transmitters operate in this market?

Why is it a problem? It is illegal in Brazil and in the USA It puts banking relationships for money transmitters at further risk. It puts bonding sureties (and therefore bonding relationships) at risk. It allows for unfair competition in other markets.

What questions need to be asked? Does the money transmitter provide service to Brazil? If so, what institution do they pay through? If it is not a bank, it is illegal.

Who needs to ask? State regulators, bonding agencies and banks. Money transmitters need to self police.

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Israel Discount Bank to pay $12M in probe

By: David JonesPublished: October 31, 2006 - 3:41 pm

Israel Discount Bank of New York agreed to pay $12 million in civil penalties to settle state and federal money laundering charges.

The New York State Banking Department said that the bank processed $35.4 billion in suspect wire transfers from March 2004 to March 2005. A large number of the 181,000 wire transfers showed patterns, like moving large amounts of funds through high risk countries, that are often associated with money laundering, according to court records.

The investigation found that the bank had no system for tracking alerts generated by these wire transfers, and that it failed to collect adequate information on customers making these transactions.

"The size of the settlement should serve as a reminder to all financial institutions that detecting and reporting violations of Bank Secrecy Act and anti-money laundering regulations is necessary if we are to keep our financial system free from fraud and abuse," said New York State Superintendent of Banks Diana Taylor, in a statement.

Half the $12 million will be paid to the U.S. Treasury Department and the other half to New York state. .The Federal Deposit Insurance Corp. and the Financial Crimes Enforcement Network were also part of the investigation.

The settlement stems from an investigation by Manhattan District Attorney Robert Morgenthau of the bank for allegedly allowing $2.2 billion in illegal money transfers from Transmar Tourismo of Brazil. ...

Source: http://newyorkbusiness.com/apps/pbcs.dll/article?AID=/20061031/FREE/61031011/1048/FREE&template=printart

The Brazilian Doleiro Market

Why is this a problem?

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The Brazilian Doleiro Market

Why is this a problem?

Bank of America Settles Money Laundering Probe and Pays $7.5 Fine

September 27, 2006

• Based on illegal transfers to / from Brazil

• “As part of the settlement with the New York County District Attorney's Office, BAC recognized its failure to take adequate steps to verify the accuracy of information supplied by their South American money service business customers. The bank also acknowledged that some of its internal anti-money laundering controls were deficient.

• “As part of the agreement, BAC has taken steps to revise its anti-money laundering policies, systems and controls and will continue to cooperate with the District Attorney’s Office and other federal regulators.”

• “All of the defendants were associated with illegal Brazilian money transmittal activity. In a civil

action related to the indictment, the District Attorney's Office has frozen $17.4 million that was illegally transmitted from Brazil to New York by Brazilian money service businesses.”

Source: http://www.northcountrygazette.org/articles/092706MoneyLaundering.html

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The Gauntlet RUN THE GAUNTLET - “To be hounded on all sides. Corruption of gantlope, the passage between

two files of soldiers. (German, ganglaufen or gassenlaufen.) The reference is to a punishment common among sailors. If a companion had disgraced himself, the crew, provided with gauntlets or ropes' ends, were drawn up in two rows facing each other, and the delinquent had to run between them, while every man dealt him, in passing, as severe a chastisement as he could. … The punishment itself came into use in the Royal Navy in 1661 but was abolished in 1813.”

Source: http://www.phrases.org.uk/bulletin_board/6/messages/267.html

THROW DOWN THE GAUNTLET - "The English language contains two wholly different words spelled and pronounced gauntlet. The gauntlet in this expression means glove derives from the medieval French gauntlet, 'a little glove.' Knights of the age of chivalry, though not as noble as they seem in romances, did play by certain rules. When one knight wanted to cross swords with another, he issued a challenge by throwing down his mailed glove, or gauntlet, and his challenge was accepted if the other knight picked up the metal-plated leather glove. This custom gave us the expression 'to throw down the

gauntlet,' 'to make a serious challenge."

WHY IS DEALING WITH DOLEIROS A PROBLEM?It is illegal in Brazil and in the USAIt puts banking relationships for money transmitters at further risk.It puts bonding sureties (and therefore bonding relationships) at risk.It allows for unfair competition in other markets.

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Industry Evolution

Largest competitors will continue to become more agile Western Union spin-off makes largest money transmitter a pure-play money

transfer public, reporting company

Well capitalized large private competitors Private equity acquisitions have created large, aggressive and well funded

competitors

Continued trend toward consolidation

Continued efforts by banks to penetrate market Money transfer products seen as loss leaders to attract Latino customers Systematic federal government bias in favor of banks

CRA incentives Federal banking agency hostility to MSB accounts Heavy subsidization of efforts to develop new products

These factors will lead to continued pressure on margins in some markets and channels, and drive a continuing need for MTOs to strive for greater efficiencies in operations.

Cash cycle efficiency Operating cost efficiencies

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Remittances are Different

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50

100

150

2001988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

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FDI

RemittancesCapital market flows

Net official flows

Source: World Bank (Dilip Ratha). 2003. “Workers’ Remittances—An Important and Stable Source of External Development Finance.” In Global Development Finance 2003 (chapter 7). Washington, D.C.: World Bank.

US billion,

worldwide figures

A steady, non-volatile, growing source of balance of payments support

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Remittances are Different

FDI, Capital Market Flows

Official Flows

Family Remittances

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Development Impact

Money Transfer Operators are in a unique position to serve transnational families. Customer contact on both sides Established relationship and trust

Product innovation will be key “De-commoditize” service; value added products

can better serve customers and help mitigate margin compression

New products present new regulatory issues Regulatory dialogue on whether new products are

permissible under banking and other laws will be important

Paul Dwyer, CEO

[email protected]