Chapter 2 -UN-SILICON VALLEY — Evaluating The Risk Posed by Money Transmitters to Banks — book excerpt

I consistently heard from banks and regulatory compliance experts that money transmitters were risky, but none of them was able to quantify the risk. They pointed to headline-grabbing cases like the $1.8 billion fine imposed on HSBC in 2013 or the $100 million penalty Wachovia paid, but none of these cases was related to money transmitter misconduct.

To understand the trends in sanctions violations, I reviewed Civil Penalty Enforcement Reports published by Office of Foreign Asset Control (OFAC) on individual cases of violations between 2011 and 2015. There were 145 individual reports. Each report was in PDF format and sometimes contained multiple violations for the entity. I consolidated specific data points from the reports and analyzed the data. The data showed some interesting trends:

a. OFAC appeared to be focusing on more egregious cases which involved large amounts of money and intentional actions to circumvent US sanction regulations. For example, civil penalty fines which are typically assessed based on the related dollar volume of the violation, significantly increased from an average of $12,000 in 2008 to $52 million in 2015. However, the number of cases decreased during this period indicating that OFAC was focusing its resources on larger cases. (Refer to figure 1.)

Figure 1

b. While terrorism financing was cited as the impetus for bank de-risking of money transmitters, we identified only five violations of the GTSR (or 6% of total violations) during the five-year period we reviewed. None of the five cases involved individuals from African countries, and none of the violations were perpetrated by money transmitters; 71% of these violations involved sanction regulations targeting individuals and entities associated with the Iranian, Cuban, and Sudanese governments. (Refer to figure 2.)

Figure 2

c. The data also showed that businesses with international sales were the largest perpetrators of sanction violations, making up 66% of all the cases during the period under review. There was only one case of a money transmitter violating sanction regulations, and that was PayPal, a large established operator. This data showed that financial service providers like money transmitters with strong oversight by regulators were least likely to violate sanctions regulations. Businesses that do not regularly export their goods and services to international customers may not have sufficient training and oversight within their existing processes to ensure compliance with these regulations, and therefore are more likely to fall victim to nefarious actors. (Refer to figure 3.)

Figure 3

The OFAC data on sanction violations did not point to money transmitters being a high-risk client group for banks; in fact it showed the opposite. So, what could explain the decision by most banks to stop offering services to money transmitters? The media coverage of the terrorism risk could explain this. Terrorism-related incidents get a disproportionate share of media coverage compared to other risks, like the drug epidemic. A study conducted in 2017 and reported by the Independent Newspaper found that terror attacks receive five times more media coverage if the perpetrator is Muslim. The study covered attacks in the US between 2011 and 2015 and showed that Muslims committed 12.4% of attacks during that period but received 41.4% of news coverage (Kentish, 2017). The Foreign Narcotic Kingpin Sanctions Regulation was the fourth most violated sanction regulation, making up close to 10% of all the cases. Yet African money transmitters with no record of violating the GTSR and are not considered a major supplier of drugs were being penalized by US banks. The perceived risk was greater than the actual risk.