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merchant compliance

This week I attended a session at the ABA Regulatory and Compliance Conference entitled “Compliance Management Systems: Does One Size Fit Most?”. In this session, presenter Elizabeth Snyder, regulatory compliance team leader at Plante Moran, provided insights into the three main areas for a solid compliance management system to help meet heightened regulator expectations.

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money laundering

In a practice referred to as “derisking,” banks have been avoiding customer classes with a higher propensity for money laundering and terrorist financing activity. But as certain business types like charities, remittance facilitators, crypto-currencies, and other money service businesses (MSBs) lose access to banking altogether, regulators are trying to course-correct.

The FDIC backtracked from initial guidance to avoid certain classes of customers. As stated in FIL-5-2015:

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Recently, I listened to a head of treasury operations at a $10B bank tell a story about how she fixed delays in ACH underwriting. Traditionally, underwriting was conducted by credit department, which asked credit applicants the kinds of things a credit analyst would ask for. These included three years of financial statements describing revenue, net worth, liquidity, profitability, debt service coverage and debt/income.

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Although the Operation Choke Point initiative came into effect over two years ago and the financial industry has taken many measures to respond, the high degree of uncertainty for banks, Third Party Payment Processors (TPPPs) and Third Party Senders (TPSs) continues to plague the industry as seen in recent headlines from CommerceWest Bank and Plaza Bank, with settlements totaling over $6 million. This atmosphere of uncertainty was apparent in a session titled “Payroll Processors & Operation Choke Point” at last week’s PAYMENTS 2015 Conference in New Orleans, where attendees expressed their challenges with the current environment.

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KYC policies are causing nervousness within banks. Half of the anxiety is caused by regulators and the other half by customers.

First, there are the regulatory frameworks. FDIC and OCC guidance is constantly changing. Enforcement varies from month to month. Operation Chokepoint ebbs, flows, and ebbs again.

Second, there’s the nature of today’s customer base. New business entities are replacing old ones with a twist on the old proverb, “no history is good history.” Further, customers are increasingly cross-border, global actors.

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The creation of the CFPB by the Dodd-Frank Act of 2010 not only added another financial regulator, it has changed the dynamics of existing regulators. Like an athletic team that has drafted a new player, the incumbents have found themselves sometimes competing, sometimes collaborating.

Or as one bank panelist at the ETA Transact 15 conference in San Francisco put it last week, “we now have the regulatory Olympics.”

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The US is the last G-20 country to shift to the EMV standard for credit cards. In this context, the Retail Payments Risk Forum blog of Federal Reserve of Atlanta published a piece last Monday  by David Lott called, “Squeezing the Fraud Balloon.”

The post starts with the consensus prediction that EMV cards and hardware will boost security. Next, fraud will begin declining at point of sale. For example, stolen credit cards will be harder to  exploit when POS systems verify the chips in EMV cards rather than magnetic strips alone.

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Operation Choke Point has produced a spike in activity, with last week yielding two major settlements totaling over $6 million after a year of relative calm. As a result, G2 is reprising our 10 Steps guide for avoiding the unlawful activity that got the two defendant banks in trouble.

Recent headlines from CommerceWest Bank and Plaza Bank continue to underscore the need for a strong due diligence process when managing relationships with merchants and TPPPs. Although both cases involve complicity in fraud, they do highlight the consequences of being involved with such acts as well as how to avoid suspicions of impropriety. In the case of CommerceWest Bank, the pleading outlines several steps to ensure the bank is not abetting consumer fraud by taking precautions when working with payment processor customers including…

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– January 22, 2014 –  Allied Wallet, a G2 Web Services client, uses Global Boarding to dig deep into its potential merchants’ histories to uncover hidden risks and make more informed boarding decisions. Due diligence during the boarding process is the first line of defense when it comes to protecting a company’s merchant portfolio from financial loss due to risky merchants. With the increasing demand for a quick turnaround time at boarding, the careful balancing act of thorough due diligence along with the need for speed at boarding is a rising challenge. G2 Web Services developed Global Boarding, a fast flexible due diligence solution precisely to solve this problem.

As the payment industry continues to undergo significant changes spurred by strong innovation and new payment methods, online merchant risks are on the rise, making it challenging for payment providers to stay one step ahead. With an increase in data compromises and government regulations, as well as new compliance concerns, the importance of performing extensive due diligence before boarding a new merchant could not be greater.

Bringing on the wrong merchant can be detrimental to your portfolio, as you could potentially bear the burden of any fraud, card network compliance violations, chargebacks and data breaches, which can cost you extensive financial damage, not to mention legal and regulatory penalties. Unfortunately, many acquirers do not thoroughly investigate their merchants’ online presence and history of risk. The good news is that many of these potential threats can be avoided by ensuring you follow the right steps and knowing exactly what to look for during the merchant boarding process.

The following are five areas of a merchant’s history to pay extra attention to at boarding:

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