1. TEXAS DEPARTMENT OF BANKINGBSA, USA Patriot Act and Terrorist Financing TrainingLubbock, TexasOctober 13, 2005Stephanie Newberg, Deputy CommissionerRussell Reese, Director of Special Audits

2. Topics of Discussion • Overview of Department’s Licensing Requirements of Money Service Businesses (MSBs) • Overview of Department’s MSBs Examination Program • New Texas MSB Act • Recommended File Documentation for MSB Accounts

3. Licensing and Supervision of MSBs

4. Which activities do we license? • Money Transmissions • Money Orders • Travelers Checks • Currency Exchangers/Dealers • Currency Transporters • Third Party Bill Payers • Gift Cards (in open systems) • Stored Value Products – not issued by insured financial institutions

5. What activities are not licensed? • Check cashing • Stored value products – issued by an insured financial institution • Agents of MSBs • Gift Cards in closed systems

6. Which Statute Applies? • Chapter 151 – Money Services Businesses – Two types of Licenses: Currency Exchange License - Exchangers/Dealers, Casa de Cambios Must be: • Solvent • Reduced bonding requirement - $2,500 • No separate license for each location

7. Which Statute Applies? (continued) • Transmission License – More stringent requirements. Most licensees have this license • Money Orders, Travelers Checks. Drafts, Electronic Transfers, ACH products, Stored Value Products, Gift Cards, Third Party Bill Payers • Transporters

8. What are the requirements for a transmission license? • Minimum net worth • $100,000 for four or fewer locations • $500,000 for five or more locations • Commissioner can increase to $1 million if warranted • Sound financial condition and practices • Current status for payment of taxes and fees

9. What are the requirements for a transmission license? (continued) • Principals must “pass muster” – background checks • Bonded/Letter of Credit/Deposit in Lieu of Bond • $300,000 or 1% of annual transaction volume not to exceed $2 million • Registered with IRS as MSB

10. What checks are made on an applicant? • Filed corporate documents • Credit report • OFAC list • Check with Comptroller of Public Accounts • Review financial statements • Check with IRS • Clearing bank account officer • Clearing bank BSA/AML officer

11. What checks are made on an applicant?(continued) • Check other state regulators • Department of Homeland Security check, is necessary • Check with other Texas state agencies, if warranted • Conduct on-site investigation, if warranted • May require independent search firm report

12. What checks are run on a principal, control shareholder, or responsible individual? • DPS criminal check • DOB examiners • OFAC lists • Credit report • IRS/FBI fingerprint check • Check personal history • May require search firm report

13. What checks are run on a principal? • Department of Homeland Security • Internet search firm • Other state or federal agencies • Personal financial statements

14. What other documents do we review? • AML policy • Receipt – for required disclosures • Business plan

15. What other documents do we review? (continued) • Contract, if utilizing authorized delegates: • Authorized delegate or agent must certify that they are familiar with and understand MSB statutes • Outline records to be maintained • Acknowledge receipt of procedures • Note the agent is subject to examination by the DOB

16. What about authorized delegates of licensed entities? • Authorized delegate – is a person that a license holder appoints to conduct money transmission business on behalf of the license holder (Sec 151.001 (b)(2)) • Individual authorized delegates or agents are not licensed • However: • Issuer must be licensed and is responsible for actions of agents • Must have written polices and procedures for agent to follow • Must conduct risk based background check on agent • Written contract between the agent and the issuer • The contract must meet the requirements of 151.402(c)

17. How do I know that my customer is appropriately licensed? • Check the MSB website – www.msb.gov/guidance/msbstateselector.php • Check the DOB website - www.banking.state.tx.us/

18. Texas MSB Examination Program

19. Overview of Examination Program • History • Purpose • Examination Procedures • Compliance with State Statutes • Compliance with Federal Statutes • Assess Safety & Soundness • Issue Exam Report of Findings • On-going Monitoring

20. History • Department has been performing exams on MSBs since the late 1980’s • MSB license holders range in size from sole proprietors to large publicly traded companies • To date, we have 135 MSB license holders: • Includes international companies (India & Canada)

21. Examination Purpose • Assess compliance with State and Federal Statutes: • Focus is on Compliance Issues; and, • Safety and Soundness

22. Examination Procedures • Verify Compliance with State Laws: • Reporting Requirements • Quarterly Report Filings • Transaction Volume • Permissible Investments

23. ExaminationProcedures(continued) • Recordkeeping Requirements for Threshold Transactions • Same as Federal Requirements • Transaction Receipt Disclosures • Consumer Complaint Notice Posting

24. Examination Procedures(continued) • Verify Compliance with Federal Laws: • Recordkeeping Requirements for Threshold Transactions • $1,000 for “exchanges” or $3,000 for “transmissions” • Reference: 31 CFR 103.37(b)(3) and 103.33(f) • Anti-Money Laundering Program • Reference: 31 CFR 103.125

25. Examination Procedures(continued) • Verify Compliance with Federal Laws: (continued) • Suspicious Activity Reports (SARs) • Reference: 31 CFR 103.20 (Form: TDF 90-22.56) • Currency Transaction Reports (CTRs) • Reference: 31 CFR 103.22 (Form: FinCEN 104)

26. Examination Procedures(continued) • Verify Compliance with Federal Laws: (continued) • Office of Foreign Assets Control Requirements • Reference: 31 CFR PART 500 • MSB Registration Requirement • Reference: 31 CFR 103.41(a)(c), (Form: TDF 90-22.55)

27. Examination Procedures(continued) • Assess Safety & Soundness: • Minimum Net Worth Requirements • Minimum Bonding Requirements • Management Supervision

28. Examination Procedures(continued) • Exit Meeting held with Management to Discuss Exam Findings • License Holder is Issued an Overall Rating Based on Exam Findings

29. Examination Procedures(continued) • License Holder is Issued Report of Examination • Joint/Coordinated Exams Performed with Other MSB State Regulators • For FY 2005 We Completed Eight Joint Exams

30. On-going Monitoring • Quarterly Reporting: • Required to file Financial Statements • Required to file Transaction Volume

31. On-going Monitoring(continued) • License Renewal: • Required to Pay Annual Renewal and Assessment Fees • Required to file Annual Renewal Application • Must be able to Demonstrate Compliance with All Licensing Requirements

32. Texas New Money Services Act Effective date: September 1, 2005

33. Texas New Money Services Act • Major Changes: • Combines Chapters 152 & 153 of the Texas Finance Code into New Chapter 151 • Expands the Department’s authority to “drill down” to the Authorized Delegate (Agent) level

34. Texas New Money Services Act(continued) • Person - an individual or a legal entity [Sec.151.001(b)(17)] • The Department will take a risk based approached to examining authorized delegates, but ultimate responsibility for authorized delegates compliance remains with the license holder.

35. Questions to ask a MSB Accountholder?

36. Questions to ask a MSB Accountholder • What “type” of MSB Activity is this Account Used For? • The answer will assist you with determining the proper documentation that you should request from the MSB

37. Questions to ask a MSB Accountholder? (continued) • Is this Account only Used For Your MSB Activity?; or, Do You Plan on Using this Account for “non” MSB Activity? • The answer will assist you in determining what is a “reasonable” amount of account activity

38. Documentation to Request if MSB Licensed with Department • Copy of Current License Issued by the Department • Copy of MSB registration form • Copy of AML Program • Copy of Independent Review of AML Program

39. Documentation to Request if Conducting MSB Activity as an “Authorized Delegate” • Verification of the Principal’s License from the Department • Copy of Delegate Agreement • Copy of AML Program • Copy of Independent Review of AML Program

40. Documentation to Request if Conducting MSB Activity as an “Authorized Delegate”(continued) • Copy of MSB Registration Form • If “Delegate” does not conduct any other MSB services outside of Delegate Agreement; then, Registration is NOT Required

41. How the DOB can help you? • Check our website at www.banking.state.tx.us • Make an open records request • Talk to the examiners and check periodicals • Call us (512) 475 -1322