Presentation Prepared for the

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 bipartisan 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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The Brazilian Doleiro Market
Why is this a problem?
Israel Discount Bank to pay $12M in probe
By: David Jones
Published: 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
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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 antimoney 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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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.”
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
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
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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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200
FDI
150
100
Capital market flows
Remittances
50
Net official flows
0
US billion, worldwide figures
-50
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.
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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
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Paul Dwyer, CEO pdwyer@viamericas.com