MTRA 2006 ANNUAL CONFERENCE Santa Fe New Mexico

MTRA 2006 ANNUAL CONFERENCE Santa Fe, New Mexico Examiner School-November 14, 2006 HOW TO INVESTIGATE A MONEY TRANSMITTER APPLICATION Presented by: Nick Kyrus, Deputy Commissioner and Karen Heede, Principal Financial Analyst Bureau of Financial Institutions Virginia State Corporation Commission

It’s not quite this simple!

TABLE OF CONTENTS Purpose of Regulation Sources of Information and Collection Devising the Application Form Required Findings Items to Review/Analyze to Make Findings Reasons for Denial Questions and Discussion

PURPOSE OF REGULATION Protect the consumers who entrust their money for transmission. Losses may be incurred as a result of fraud by the transmitter and its employees and agents (both paying and receiving), fly-by-night operators, operational losses, systemic failure, and AML violations (seizure of funds)

SOURCES OF INFORMATION AND COLLECTION Application form and attachments Credit reporting agencies Regulatory contacts Law enforcement agencies Previous employers Banks Competitors Internet and others

DEVISING APPLICATION FORM Review the specific legal requirements and devise an application form to elicit all information needed to make the findings required by law.

REQUIRED FINDINGS Financial responsibility, experience, character, reputation and general fitness of applicant, its senior officers, directors and principals lead us to believe the business will be operated efficiently and fairly, in the public interest and in accordance with law Applicant will meet obligations Security/bonding requirements

REQUIRED FINDINGS (cont. ) Applicant has sufficient fidelity insurance Minimum net worth requirements Permissible investments requirements Other

ITEMS TO REVIEW/ANALYZE TO MAKE FINDINGS Investigate senior officers, directors and principals. Examine applicant’s record. Review history of operations. Review applicant’s business plan. Review capital/ permissible investments. Review surety bond/security. Verify registration as an MSB with Fin. CEN.

Findings Related to Officers, Directors and Principals: Review personal financial reports and biographical information. Verify out-of-line assets. Request tax returns if necessary. Obtain credit reports. Are principals able and willing to invest additional capital in the applicant, if necessary? Conduct background/law enforcement checks. Check with other regulators.

Findings Related to Officers, Directors and Principals: (cont. ) Verify previous employment. Check business and banking references. Obtain secondary references. Conduct internet search. Have discussions with officers to determine knowledge of laws and regulations and applicant’s business plan, policies and procedures. Have meetings, if necessary.

Findings Related to Record of Applicant Review financial statements (last audit, current, and several previous year-end statements, if applicable). History of Operations Proposed business plan

Review Applicant’s Financial Statements Minimum net worth requirements Balance sheet composition Trends Verify source of capital in new company. Is there sufficient liquidity and capital to support operations? If in doubt, request statements to verify assets.

Review History of Operations Get detailed description of business, to include flow of funds from initial remitter to recipient. Identify each bank or company involved and names on all accounts. Request copies of all agreements under which business is conducted. (i. e. banks, receiving and paying agents) Contact IRS for exam or ask applicant for copy.

Review History of Operations (cont. ) Check business and bank references. Request regulatory information and copies of recent examination reports from states in which applicant is licensed. Use regulatory contacts to make inquiries and share information by phone or e-mail. Request copy of most recent independent AML/BSA review. (Scope and frequency to be commensurate with risk. May be conducted by employee who does not report to compliance officer. )

Review Proposed Business Plan Target market AML/BSA policies and procedures Locations/countries in which payments to be made Banking arrangements Complete description of funds flow Use of agents and/or employees and methods and scope of training provided Sales volume projections Pro-forma financial statements

Review Proposed Business Plan (cont. ) Fees to be charged Fees paid to other parties Copies of all documents used in transaction with customer (i. e. order form, receipt, etc. ) Verify establishment of bank relationships Length of time to effect transfer of funds Exchange rate foreign transactions

Review AML/BSA Policies and Procedures Are USA Patriot Act, BSA and OFAC fully addressed? Do stated AML/BSA policies and procedures correspond with business plan and scope of proposed operations? Is compliance officer identified?

Review AML/BSA Policies and Procedures (cont. ) Is guidance specific? (i. e. What is suspicious activity? When should SARs and CTRs be filed & by whom? When should ID be taken and what types are acceptable? ) Do policies adequately address agent/employee training and oversight?

Review AML/BSA Policies and Procedures (cont. ) Records retention policies Is applicant’s senior management and compliance officer sufficiently knowledgeable to oversee implementation? Is independent AML/BSA review provided for?

Review Agent/Employee Selection, Training and Oversight How are background investigations conducted? What is training process? Who is required to be trained? How is agent knowledge determined? Is there ongoing periodic training? How is agent compliance monitored?

DETERMINE CAPITAL REQUIREMENTS Minimum capital requirements vary by state. Virginia law gives authority to require a net worth of not less than $100, 000 and not more than $1 million, as determined by Commission. Minimum capital requirements determined by reviewing past performance, liquidity of assets, business plan and pro-forma projections. Applicant must have sufficient beginning capital to absorb losses until profitable while maintaining minimum net worth.

BONDING/SECURITY REQUIREMENTS Virginia Code requires a minimum security/ surety bond of $25, 000 up to $1 million. Regulation limits amount to $500, 000 in normal cases, but allows up to $1 million on the basis of the impaired financial condition of a licensee (i. e. net worth reduction, financial losses, etc. ) Amount is generally based on monthly transaction volume.

Registration with Fin. CEN Applicant should submit copy of Fin. CEN Form 107 filed with IRS, along with confirmation of receipt. Also verify applicant is registered as an MSB on web site of Fin. CEN at: http: //www. msb. gov/index. html

REASONS FOR DENIAL Furnishing the Bureau with a false statement of assets Failure to credibly substantiate source of capital or assets Failure to meet the statutory minimum net worth requirement Insufficient capital to absorb projected losses Lack of experience of officers and directors

REASONS FOR DENIAL (cont. ) False statements by officers/directors Inadequate policies and procedures Failure to submit requested information IRS tax returns do not match reported income Audit performed by unlicensed CPA Unsatisfactory record in other states

REASONS FOR DENIAL (cont. ) Operating a money transmission business in Virginia without the required license after being informed it was illegal to do so Failure to disclose fines and regulatory action by other state or federal authorities **One reason alone may not be sufficient cause for denial, but may build a strong case when combined. **

QUESTIONS AND DISCUSSION Contact Information: Nick Kyrus – Phone: (804)371 -9191 E-mail: Nick. Kyrus@scc. virginia. gov Karen Heede – Phone: (804) 371 -9372 E-mail: Karen. Heede@scc. virginia. gov

Virginia Bureau of Financial Institutions www. scc. virginia. gov/division/banking Application Forms and Instructions Laws (Chapter 12, Title 6. 1 of the Virginia Code) Regulations