Remittances to Fragile Countries: Treasury Should Assess Risks from Shifts to Non-Banking Channels

The United States is the largest source of remittances, with an estimated $67 billion sent globally in 2016, according to the World Bank. Many individuals send remittances through money transmitters, a type of business that facilitates global money transfers. Recent reports found that some money transmitters have lost access to banking services due to derisking—the practice of banks restricting services to customers to, in part, avoid perceived regulatory concerns about facilitating criminal activity.

GAO was asked to review the possible effects of derisking on remittances to fragile countries. This report examines (1) what stakeholders believe are the challenges facing money transmitters in remitting funds from the United States to selected fragile countries, (2) actions U.S. agencies have taken to address identified challenges, and (3) U.S. efforts to assess the effects of such challenges on remittance flows to fragile countries. GAO selected four case-study countries—Haiti, Liberia, Nepal, and Somalia—based on factors including the large size of U.S. remittance flows to them. GAO interviewed U.S.-based money transmitters, banks, U.S. agencies, and individuals remitting to these countries and also surveyed banks.

Stakeholders, including money transmitters, banks, and U.S. Department of the Treasury (Treasury) officials, reported a loss of banking access for money transmitters as a key challenge, although remittances continue to flow to selected fragile countries. All 12 of the money transmitters GAO interviewed, which served Haiti, Liberia, Nepal, and particularly Somalia, reported losing some banking relationships during the last 10 years. As a result, 9 of the 12 money transmitters reported using channels outside the banking system (hereafter referred to as non-banking channels), such as cash couriers, to move funds domestically or, in the case of Somalia, for cross-border transfer of remittances (see figure). Several banks reported that they had closed the accounts of money transmitters because of the high cost of due diligence actions they considered necessary to minimize the risk of fines under Bank Secrecy Act regulations. Treasury officials noted that despite some money transmitters losing bank accounts, they see no evidence that the volume of remittances is falling.

Example of a Cash-to-Cash Remittance Transfer Using a Cash Courier

U.S. agencies have taken steps that may mitigate money transmitters' loss of banking access. For example, several agencies have issued guidance to clarify expectations for providing banking services to money transmitters. In addition, Treasury is implementing projects to strengthen financial institutions in some fragile countries. However, U.S. agencies disagreed with other suggestions, such as immunity from enforcement actions for banks serving money transmitters, since those actions could adversely affect goals related to preventing money laundering and terrorism financing.

Treasury cannot assess the effects of money transmitters' loss of banking access on remittance flows because existing data do not allow Treasury to identify remittances transferred through banking and non-banking channels. Remittance data that U.S. agencies collect from banks do not include transfers that banks make on behalf of money transmitters. Additionally, the information Treasury collects on transportation of cash from U.S. ports of exit does not identify remittances sent as cash. Therefore, Treasury cannot assess the extent to which money transmitters are shifting from banking to non-banking channels to transfer funds due to loss of banking access. Non-banking channels are generally less transparent than banking channels and thus more susceptible to the risk of money laundering and terrorism financing.

Treasury should assess the extent to which shifts in remittance flows to non-banking channels for fragile countries may affect Treasury's ability to monitor for financial crimes and, if necessary, should identify corrective actions. GAO requested comments from Treasury on the recommendation, but none were provided.

The United States is the largest source of remittances to other countries,  with an estimated $67 billion sent globally in 2016. Remittances are the  largest source of foreign currency for many receiving countries, often  exceeding official development assistance from developed countries,  according to the World Bank. Remittances can be sent through money  transmitters as well as depository institutions, such as banks and credit  unions, among other methods.

In recent years, the World Bank and others have reported that some  money transmitters have been losing access to banking services with  depository institutions due to derisking. In a prior report, we identified  derisking as the practice of banks limiting certain services or ending their  relationships with customers to, among other things, avoid perceived  regulatory concerns about facilitating money laundering, or other criminal  activity, such as financing to terrorist groups. Further, the International  Monetary Fund has raised concerns that large depository institutions may  be reducing correspondent banking relationships due to fear of risk  exposure, which in turn may limit the ability of smaller depository  institutions to provide remittance transfer services to their customers,  including money transmitters. According to Oxfam America, constraints  on money transmitters’ access to banking services may have significant  humanitarian, economic, and security implications, effectively cutting off a  stable source of funds and isolating communities from the global financial  system.

Financial institutions that provide international money transfers are  subject to regulations to prevent financial crimes such as money  laundering or terrorist financing. In a 2016 report, we described money  laundering risks related to remittances, including risks involving agents,  customers, geographic location, and products. Remittances can be used  to launder proceeds from different types of criminal activities, including  drug trafficking, human smuggling, and consumer fraud. Money  transmitters and depository institutions are subject to the Bank Secrecy  Act (BSA), an important tool in federal law enforcement efforts to detect  and deter the use of financial institutions (including those that send  remittances) for criminal activity, including money laundering and terrorist  financing. In another 2016 report, we found that from January 2009 to  December 2015 the U.S. government collected over $5 billion in  penalties, fines, and forfeitures for various BSA violations, including the  failure to identify or report suspicious activity.

This is one of four reports addressing your request that we review the  various effects of derisking, including on remittance senders in the United  States. This report examines (1) what stakeholders believe are the  challenges facing money transmitters in remitting funds from the United  States to selected fragile countries, (2) what actions U.S. agencies have  taken to address identified challenges, and (3) U.S. efforts to assess the  effects of such challenges on remittance flows to fragile countries.

To address our objectives, we identified four case-study countries: Haiti,  Liberia, Nepal, and Somalia. We selected these countries based on their  inclusion in the Organisation for Economic Co-operation and  Development’s States of Fragility reports from 2013 to 2015. In addition,  we limited our selection to countries that have a foreign-born population  of 50,000 or more living in the United States. Finally, we considered the  size of estimated total remittances from the United States relative to the  recipient countries’ gross domestic product (GDP). We rank ordered the  17 countries that met these criteria and selected the top four.

To identify what stakeholders believe are the challenges facing money  transmitters in remitting funds from the United States to fragile countries,  we interviewed officials from the U.S. Department of the Treasury  (Treasury) and held semi-structured interviews with six small groups of  remittance senders in the United States who remit to our case-study  countries. The results of our interviews are not generalizable to all  remittance senders to these countries. We interviewed 12 of the 18  money transmitters that the World Bank’s Remittance Prices Worldwide  database indicates account for about at least 80 percent of the market  transfers from the United States to each of our case-study countries.  Eight of the 12 money transmitters we interviewed provided remittance  services from the United States to one of our case study countries. Four  larger money transmitters we interviewed provided remittance services  from the United States to three or more of our case-study countries.

In addition, we used two methods—a web-based survey instrument and  semi-structured interviews—to collect information to evaluate the extent  to which banks are terminating accounts for money transmitters serving  fragile countries, among other things. We administered the survey to a  nationally representative sample of banks. We also interviewed  representatives of eight banks considered to be extra-large by asset size.  These banks reported about 47 percent of all remittances by U.S. banks  in their 2016 Consolidated Reports of Condition and Income (Call  Reports). In addition, we interviewed representatives of two credit  unions that had terminated accounts of at least one of the money  transmitters we interviewed.

To determine what actions U.S. agencies have taken to address identified  challenges, we analyzed pertinent U.S. agency information, including  relevant documentation and public statements, and interviewed officials  from the Federal Deposit Insurance Corporation (FDIC), the Board of  Governors of the Federal Reserve System (Federal Reserve), the U.S.  Department of State, the U.S. Agency for International Development, and  key offices in Treasury including the Office of Financial Crimes  Enforcement Network (FinCEN), the Office of the Comptroller of the  Currency (OCC), and the Office of Technical Assistance (OTA).  Additionally, we interviewed officials from the World Bank, as well as  nongovernmental organizations including the Center for Global  Development and Oxfam America.

To examine U.S agencies’ efforts to assess the effects of such challenges  on remittance flows to fragile countries, we analyzed data on remittances  and interviewed relevant agency officials. Specifically, for available data  on remittance flows through the banking channel, we analyzed Call  Report data from the Federal Financial Institutions Examination Council.  For data on remittance flows through non-banking channels, we  obtained and analyzed data from filings of FinCEN’s Form 105 – Report  of International Transportation of Currency or Monetary Instruments  (CMIR). We obtained the tabulated data from FinCEN by arrival country,  state of U.S. exit port, and calendar year for 2006 through 2016. We also  interviewed officials from FDIC, the Federal Reserve, OCC, and FinCEN.  See appendix I for additional details about our scope and methodology.

We conducted this performance audit from September 2016 to March  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Remittances can be sent through money transmitters and depository  institutions, among other organizations. A typical remittance sent  through a bank may be in the thousands of dollars, while the typical  remittance sent by money transmitters is usually in the hundreds of  dollars. International remittances through money transmitters and banks  may include cash-to-cash money transfers, international wire transfers,  some prepaid money card transfers, and automated clearinghouse  transactions.

Transfers through money transmitters. Historically, many consumers  have chosen to send remittances through money transmitters due to  convenience, cost, familiarity, or tradition. Money transmitters typically  work through agents—separate business entities generally authorized  to, among other things, send and receive money transfers. Most  remittance transfers are initiated in person at retail outlets that offer  these services. Money transmitters generally operate through their  own retail storefronts, or through grocery stores, financial services  outlets, convenience stores, and other retailers that serve as agents.  In one type of common money transmitter transaction—known as a  cash-to-cash transfer—a sender walks into a money transmitter agent  location and provides cash to cover the transfer amount and fees.  Generally, for transfers at or above $3,000, senders must provide  basic information about themselves (typically a name and address,  among other information) at the time of the transfer request. The  agent processes the transaction, and the money transmitter’s  headquarters screens it for BSA compliance. The money is then  transferred to a recipient, usually through a distributor agent in the  destination country. The money may be wired through the money  transmitter’s bank to the distributor agent’s bank (see fig. 1), or  transferred by other means to a specified agent in the recipient’s  country. The distributor agent pays out cash to the recipient in either  U.S. dollars or local currency.

Money transmitters also offer other transfer methods, including online or  mobile technology, prepaid money cards or international money orders  sent by U.S. Postal Service, cash courier services, or informal value  transfer systems such as hawala.

Transfers through banks. Another method which remittance senders  use to send funds is through bank to bank transfers. Figure 2 is an  example of a simple funds transfer between two customers with only  the remittance sender’s and remittance recipient’s banks involved.

If a remittance sender’s bank does not have a direct relationship with the  remittance recipient’s bank, the bank-to-bank transfer scenario becomes  more complicated. In such cases, one or more financial institutions may  rely upon correspondent banking relationships to complete the  transaction, as illustrated in figure 3.

Federal and State Oversight of Money Transmitters and Banks

Both federal and state agencies oversee money transmitters and banks.  In general, money transmitters must register with FinCEN and provide  information on their structure and ownership. According to Treasury, in  all states except one, money transmitters are required to obtain licenses  from states in which they are incorporated or conducting business.  Banks are supervised by state and federal banking regulators according  to how they are chartered, and the banks provide related information  when obtaining their charter. The key federal banking regulators include  OCC, FDIC, the Federal Reserve, and National Credit Union  Administration (NCUA).

FinCEN often works with federal and state regulators. For example, as  administrator of the BSA, FinCEN issues BSA regulations and has  delegated examination authority for BSA compliance to the federal  banking regulators for banks within their jurisdictions. Further, the federal  banking regulators have issued regulations requiring institutions under  their supervision to establish and maintain a BSA compliance program.  FinCEN has also delegated examination authority for BSA compliance for  money transmitters to the Internal Revenue Service (IRS). Money  transmitters are subject to the BSA but are not examined by federal  regulators for safety and soundness.

To ensure consistency in the application of BSA requirements, in 2005  the federal banking regulators collaborated with FinCEN on a BSA  examination manual that was issued by the Federal Financial Institutions  Examination Council for federal bank examiners conducting BSA  examinations of banks. Similarly, in 2008 FinCEN issued a BSA examination manual to guide reviews of money transmitters, including  reviews by the IRS and state regulators. The manual for BSA  examinations of banks was updated in 2014 to further clarify supervisory  expectations and regulatory changes.

FinCEN has authority for enforcement and compliance under the BSA  and may impose civil penalties and seek injunctions to compel  compliance. In addition, each of the federal banking regulators has the  authority to initiate enforcement actions against supervised institutions for  violations of law and also impose civil money penalties for BSA  violations. Under the BSA, the IRS also has authority for investigating  criminal violations. The U.S. Department of Justice prosecutes  violations of federal criminal money laundering statutes and violations of  the BSA, and several law enforcement agencies can conduct BSA-related  criminal investigations.

Components of Anti- Money Laundering Compliance Programs for Money Transmitters and Banks under the Bank Secrecy Act

Money transmitters and banks are subject to requirements under the  BSA. They are generally required to design and implement a written anti- money laundering (AML) program, report certain transactions to Treasury,  and meet recordkeeping and identity documentation requirements for  funds transfers of $3,000 or more. All financial institutions subject to the  BSA—including banks and money transmitters—are required to establish  an anti-money laundering program. At a minimum, each AML program  must establish written AML compliance policies, procedures, and internal designate an individual to coordinate and monitor day-to-day provide training for appropriate personnel; and provide for an independent audit function to test for compliance.

Bank Secrecy Act anti-money laundering (BSA/AML) regulations require  that each financial institution tailor a compliance program that is specific  to its own risks based on factors such as the products and services  offered, customers, and locations served. BSA/AML compliance  programs are expected to address the following:

Customer Identification Program. Banks must have written procedures  for opening accounts and must specify what identifying information  they will obtain from each customer. At a minimum, the bank must  obtain the following identifying information from each customer before  opening the account: name, date of birth, address, and identification  number. In addition, banks’ Customer Identification Programs must  also include risk-based procedures for verifying the identity of each  customer to the extent reasonable and practicable.

Customer Due Diligence. These procedures enable banks to predict,  with relative certainty, the types of transactions in which a customer is  likely to engage, which assists banks in determining when  transactions are potentially suspicious. Banks must document their  process for performing Customer Due Diligence.

Enhanced Due Diligence. Customers who banks determine may pose  a higher risk for money laundering or terrorist financing are subject to  these procedures. Enhanced Due Diligence for higher-risk customers  helps banks understand these customers’ anticipated transactions  and implement an appropriate suspicious activity monitoring system.  Banks review higher-risk customers and their transactions more  closely at account opening and more frequently throughout the term of  their relationship with the bank.

Suspicious Activity Monitoring. Banks and money transmitters must  also have policies and procedures in place to monitor and identify  unusual activity. They generally use two types of monitoring systems  to identify or alert staff of unusual activity: manual transaction  monitoring systems, which involve manual review of transaction  summary reports to identify suspicious transactions, and automated  monitoring systems that use computer algorithms to identify patterns  of unusual activity. Large-volume banks typically use automated  monitoring systems.

Banks and money transmitters also must comply with certain reporting  requirements, including:

Currency Transaction Report. Banks and money transmitters must  electronically file this type of report for each transaction in currency— such as a deposit, withdrawal, exchange, or other payment or  transfer—of more than $10,000.

Suspicious Activity Report. Banks and money transmitters are  required to electronically file this type of report when (1) a transaction  involves or aggregates at least $5,000 in funds or other assets (for  banks) or at least $2,000 in funds or other assets (for money  transmitters), and (2) the institution knows, suspects, or has reason to  suspect that the transaction is suspicious.

Remittances from the United States are an important source of funds for  our case-study countries—Haiti, Liberia, Nepal, and Somalia. The  Organisation for Economic Co-operation and Development identified  these countries as fragile states because of weak capacity to carry out  basic governance functions, among other things, and their vulnerability to  internal and external shocks such as economic crises or natural disasters.

Haiti. Currently the poorest country in the western hemisphere, Haiti  has experienced political instability for most of its history. In January  2010, a catastrophic earthquake killed an estimated 300,000 people  and left close to 1.5 million people homeless. Haiti has a population of  approximately 11 million, of which roughly 25 percent live on less than  the international poverty line of $1.90 per day. Nearly 701,000  Haitians live in the United States. In 2015, estimated remittances  from the United States to Haiti totaled roughly $1.3 billion, or about 61  percent of Haiti’s overall remittances. Official development assistance  for Haiti in 2015 totaled slightly more than $1 billion.

Liberia. In 2003, Liberia officially ended a 14-year period of civil war  but continued to face challenges with rebuilding its economy,  particularly following the Ebola epidemic in 2014. Liberia has a  population of nearly 5 million people, of which roughly 39 percent live  on less than $1.90 per day. There are roughly 79,000 Liberians in the  United States. In 2015, remittances from the United States to Liberia  were estimated to be roughly $328 million, which represented over  half of that country’s estimated total remittances. In 2015, Liberia  reported roughly $1.1 billion in official development assistance.

Nepal. In 2006, Nepal ended a 10-year civil war between Maoist and  government forces, which led to a peace accord, and ultimately a  constitution that came into effect 9 years later. In April 2015, Nepal  was struck by a 7.8 magnitude earthquake, which resulted in  widespread destruction and left at least 2 million people in need of  food assistance from the World Food Programme 6 weeks following  the earthquake. Nepal has a population of nearly 29 million people, of  which 15 percent live on less than $1.90 per day. In 2015, the foreign- born population of Nepalese in the United States was nearly 125,000,  and roughly $320 million in remittances flowed from the United States  to Nepal. For 2015, Nepal received over $1.2 billion in official  development assistance.

Somalia. Since 1969, Somalia has endured political instability and civil  conflict, and is the third largest source of refugees, after Syria and  Afghanistan. According to a 2017 State report, Somalia remained a  safe haven for terrorists who used their relative freedom of movement  to obtain resources and funds to recruit fighters, and plan and mount  operations within Somalia and neighboring countries. Somalia has  an estimated population of over 11 million people, of which about half  the population live on less than $1.90 per day, and roughly 82,000  Somalis reside in the United States. Oxfam estimated global  remittances to Somalia in 2015 at $1.3 billion, of which $215 million  originated from the United States. In 2015, Somalia received nearly  $1.3 billion in official development assistance.

Figure 4 shows the estimated U.S. remittances to each of our case-study  countries as a total amount in U.S. dollars and as a percentage of the  country’s GDP.

Stakeholders Identified Money Transmitters’ Loss of Banking Access as a Key Challenge, Although Remittances to Fragile Countries Continue to Flow

Money transmitters serving Haiti, Liberia, Nepal, and especially Somalia  reported losing bank accounts or having restrictions placed on them,  which some banks confirmed. As a result, some money transmitters have  relied on non-banking channels, such as cash couriers, to transfer  remittances. All of the 12 money transmitters we interviewed reported  losing some banking relationships in the last 10 years. Some money  transmitters, including all 4 that served Somalia, said they relied on non- banking channels, such as moving cash, to transfer funds, which  increased their operational costs and exposure to risks. Further, in our  interviews some banks reported that they had closed the accounts of  money transmitters because of the high cost of due diligence actions they  considered necessary to minimize the risk of fines under BSA/AML  regulations. Treasury officials noted that despite information that some  money transmitters have lost banking accounts, Treasury sees no  evidence that the volume of remittances is falling or that costs of sending  remittances are rising. In addition, U.S.-based remittance senders who  send money to our case-study countries reported no significant difficulties  in using money transmitters to remit funds.

All Money Transmitters We Interviewed Had Lost Bank Accounts, Which for Many Resulted in Higher Costs and a Shift to Non- Banking Channels

All 12 money transmitters we interviewed reported that they or their  agents had lost accounts with banks during the last 10 years. All 4 Somali  money transmitters and many agents of the 2 Haitian money transmitters  we spoke with had lost bank accounts and were facilitating remittance  transfers without using bank accounts. Additionally, all 4 large money  transmitters that process transfers globally (including to our case-study  countries of Haiti, Liberia, and Nepal) also reported that their agents had  lost accounts. Almost all of the money transmitters said they also faced  difficulties in getting new accounts. Somali money transmitters were most  affected by the loss of bank accounts, as 2 of the 4 Somali money  transmitters had lost all corporate accounts. While some money  transmitters said the banks that closed their accounts did not provide a  reason, in other cases, money transmitters said the banks told them that  they had received pressure from regulators to terminate money  transmitter accounts.

As a result of losing access to bank accounts, several money  transmitters, including all of the Somali money transmitters, reported that  they were using non-banking channels to transfer funds. In some cases  the money transmitter was forced to conduct operations in cash, which  has increased the risk of theft and forfeitures, and led to increased risk for  agents and couriers. Nine of the money transmitters that we interviewed,  including 3 of the 4 Somali money transmitters, some agents of one  Haitian money transmitter, and some agents of the 4 larger money  transmitters, rely on couriers or armored trucks to transport cash  domestically (to the money transmitter’s main offices or bank) or  internationally (see fig. 5). Money transmitters use cash couriers either  because the money transmitter or their agents had lost bank accounts or  because it was cheaper to use armored trucks than banks to move funds.  In addition to the safety risks money transmitters face when they only  accept cash, customers who remit large sums of money also face safety  risks because they must transport cash to the money transmitter. For  example, in our interviews with remittance senders to Somalia, some of  them shared concerns about having to carry cash to money transmitters.

Money transmitters we interviewed reported increased costs associated  with moving cash and bank fees. For example, one Haitian money  transmitter reported that use of couriers and trucks has increased its cost  of moving money from its agents to its primary bank account by about  $75,000 per month (increasing from approximately $15,000 per month  using bank transfers to move funds, to $90,000 per month with the  addition of couriers and trucks). Two of the money transmitters we spoke  to stated that they did not have options other than to pay any fees the  bank required due to the difficulty in finding new bank accounts. Money  transmitters with access to bank accounts reported that bank charges for  services such as cash counting, wire transfers, and monthly compliance  fees had in some cases doubled or tripled, or were so high that it was  less expensive to use a cash courier. For example, some money  transmitters stated that their banks charged a monthly fee for compliance  related costs that ranged from $100 a month to several thousand dollars  a month.

Over half of the money transmitters we interviewed said the loss of bank  accounts limits their growth potential. The 4 larger money transmitters  reported that in some cases, the relationship between the agent and  money transmitter was terminated, either by the agent or the money  transmitter, if the agent no longer had a bank account. In other cases,  some large money transmitters compensated for their agents’ lost bank  accounts by using armored vehicles to transfer cash from the agents’  locations to the bank. However, the agents need to have a high volume of  transactions in order to make the expense of a cash courier worthwhile.

The money transmitters that we spoke with said that they have not  passed their increased operational and banking costs on to remittance  senders. Most said that they have not increased their fees for sending  remittances or have increased fees only slightly. Some of the money  transmitters said that they have compensated for higher costs by finding  cost-savings in other areas or that they have reduced their profit margin.

Some Banks Reported Closing or Denying Accounts for Money Transmitters and Foreign Correspondent Banks, Citing Insufficient Profit to Offset Risks and Costs

Most of the banks we interviewed expressed concerns regarding account  holders who are money transmitters because they tend to be low-profit,  high-risk clients. Some banks in our survey reported that constraints in  accessing domestic and foreign correspondent banks were also a reason  for restricting the number or percentage of money transmitter accounts.

Banks have closed accounts of money transmitters serving our case- study countries. Some banks we surveyed reported terminating  accounts of money transmitters who transfer funds to Haiti, Nepal,  and Somalia. While 7 of the 193 banks that responded to our survey  noted that during the 3-year period from 2014 to 2016 they provided  services to money transmitters that facilitated transfers to at least one  of our case-study countries, 3 of these 7 banks also reported closing  at least one account of a money transmitter serving at least one of the  case-study countries. Risks associated with the countries or regions  that the money transmitter served was given as one reason (among  others) for the closure of the account by 2 out of the 3 banks.

Money transmitters are generally low-profit clients for banks. Most of  the banks we interviewed that currently offer money transmitter  services stated that BSA/AML compliance costs have significantly  increased in the last 10 years due to the need to hire additional staff  and upgrade information systems to conduct electronic monitoring of  all transactions that are processed through their system. Some banks  indicated in our survey and interviews that the revenue from money  transmitter accounts was at times not sufficient to offset the costs of  BSA/AML compliance, leading to terminations and restrictions on  money transmitter accounts. A few banks we interviewed stated that  they do not allow money transmitters to open accounts because of the  BSA/AML compliance resources they require. Moreover, according to  one credit union we interviewed, money transmitters require labor- intensive banking services—such as counting cash and processing  checks—that are more expensive for the banks than providing basic  services to businesses that are not cash intensive.

Banks expressed concerns over the adequacy of money transmitters’  ability to conduct due diligence on the money transmitter’s customers.  In our survey, one bank stated that being unable to verify the identity  of beneficiaries, the source of the funds, or the subsequent use of the  funds was a challenge the bank faced in managing accounts for  money transmitters that remit to fragile countries such as Haiti,  Liberia, Nepal, and Somalia. Another bank in our survey noted that it  closed some money transmitter accounts because it was unable to  get any detail on the purpose of individual remittances. In addition,  another bank noted that unlike bank clients, money transmitters’  customers may not have ongoing relationships with them, so money  transmitters tend to know less about their customers than banks know  about theirs. A few banks we interviewed expressed concern that they  would be held responsible if, despite the bank carrying out due  diligence, authorities detect an illicit transaction has been processed  through the bank on behalf of a money transmitter. In addition, one  extra-large bank indicated that differences in state regulators’  assessments of money transmitters are a challenge for the bank.

Banks we surveyed reported reduced access to correspondent banks.

Banks responding to our survey cited reduced access to  correspondent banks as a reason for restricting the number of money  transmitter accounts. Out of the 193 banks that answered our survey,  30 indicated they have relied on a correspondent bank to transfer  funds to our case-study countries (25 to Haiti, 16 to Liberia, 23 to  Nepal, and 9 to Somalia). While not specific to our case-study  countries, of the 29 banks in our survey that said they had restricted  the number or percentage of money transmitter accounts, 8 said that  they did so because of difficulty in maintaining correspondent banking  relationships, while 3 said they did so due to loss of a correspondent  banking relationship.

The absence of direct relations with foreign banks can cause electronic  money transfers to take longer to process or in some cases to be  rejected. One bank official told us that the reduction in correspondent  banking relations may not stop funds from being transferred but may  increase the cost or time to process the transfer. However, one bank that  responded to our survey identified multiple transactions with our case- study countries in recent years that were terminated because a  correspondent bank could not be located or had closed.

Customer due diligence is a challenge for correspondent banks.

Some banks told us that exposure to risk related to the customers of  banks they serve was a key challenge to providing foreign  correspondent banking services. Some banks expressed concern that  violations of anti-money laundering and terrorism financing guidelines  by a customer’s customer may result in fines for the bank even when  the bank has conducted enhanced due diligence and monitoring of  transactions. Two extra-large banks that do not provide foreign  correspondent banking services cited due diligence concerns as one  reason they choose not to offer such services. Some of the banks that  provide correspondent banking services said they conduct more due  diligence on the customers of the banks they serve than regulatory  guidance requires. Several of the correspondent banks noted that this  additional due diligence was challenging to conduct due to the  distance between the correspondent bank and the customers of the  banks they serve. For example, one bank told us that the farther  removed a customer is from being its direct customer, the greater the  risk to the bank due to a lack of confidence in the originating  institution’s procedures to conduct due diligence on its customers.

Banks identified country-level risk as a factor. For banks that  responded to our survey, country-level risk was noted as a factor in  account closures. Two out of the three banks that had closed  accounts for money transmitters serving at least one of our case- study countries noted that risks associated with the countries or  regions that the money transmitter served was a contributing reason  for the account closures.

Additionally, in our interviews with extra-large banks that serve as a  correspondent bank for foreign banks all said that they consider risk  related to the country served by a foreign bank when deciding whether to  allow the foreign bank to open and maintain accounts. However, most of  these extra-large banks also said that the country or region where a  foreign bank is located is only one of several factors in determining  whether the foreign bank is considered high risk. One of the extra-large  banks noted that Somalia was an exception because the lack of a  banking infrastructure, which compounded concerns that money  transmitters serving Somalia pose a higher risk to the bank.

While banks in general told us that they did not make exit decisions  regarding correspondent banking at the country level, seven of the eight  extra-large banks we interviewed did not currently have correspondent  banking relationships with any of our case-study countries, and the one  remaining bank served only one country (Haiti). Two of the extra-large  banks mentioned closing correspondent banking relationships during the  last 10 years in Haiti, Nepal, or Somalia. One extra-large bank indicated  that, with the exception of Somalia, funds can still be sent to foreign  countries with limited correspondent banking access through banking  channels; however, the transaction may need to be routed through  multiple banks in order to be processed.

According to Treasury Officials, Remittance Flows to Fragile Countries Have Not Declined; U.S.- Based Remittance Senders Report Being Generally Satisfied with Their Ability to Remit

Treasury officials reported that remittances continue to flow to fragile  countries even though money transmitters face challenges, including  some evidence of money transmitter bank account closures. Furthermore,  U.S.-based individuals we interviewed who send remittances to Haiti,  Liberia, Nepal, and Somalia told us that they are still able to send funds to  these countries using money transmitters.

Treasury reported money transmitters’ banking access difficulties  have not affected the estimated volume of remittance flows to fragile  countries. Treasury has collected information through engagement  with money transmitters and banks about closures of money  transmitter bank accounts and foreign correspondent banking  relationships. Treasury officials indicated that remittance flows to  fragile countries have not been impacted by such account closures.  According to Treasury officials, World Bank estimates of remittance  flows show that the volume of international transfers from the United  States has continued to increase. At the same time, World Bank  data indicate that the global average cost of sending remittances has  continued to decrease. In regards to our case study countries,  Treasury officials noted that they were not aware of any decrease in  remittance volume to any of these fragile countries. Citing these  trends, and anecdotal evidence from Treasury’s engagement with  banks, the officials stated that there are no clear systemic impacts on  the flow of remittances from closures of money transmitter bank  accounts and correspondent banking relations.

Treasury officials added that the scope of money transmitter bank  account closures is largely unknown, but they acknowledged that such  closures can be a significant challenge for money transmitters that serve  certain regions or countries, including Somalia. Regarding a possible  reduction in the number of correspondent banks, which can make it more  challenging to transfer remittances, Treasury officials noted that to the  extent there has been consolidation in this sector, it could be a natural  process unrelated to correspondent banking risk management processes.  Moreover, if consolidation results in stronger banking institutions and  lower compliance costs, that would be a positive development for the  sector, according to these officials.

Treasury officials noted unique challenges in remitting funds to  Somalia. Officials acknowledged that U.S.-based money transmitters  transferring funds to Somalia have lost accounts with U.S.-based  banks. According to Treasury, Somalia’s financial system is uniquely  underdeveloped, as the country has not had a functioning government  for about 20 years, and the terrorist financing threat is pronounced.  Officials said that some Somali money transmitters have in the past  moved money to assist al-Shabaab, a terrorist organization,  increasing the need for stringent controls specific to anti-money  laundering and combating terrorist financing efforts. As a result of  these and other factors, Treasury officials stated that difficulties  remitting to Somalia are not generalizable to other countries.

Further, Treasury officials said they were aware that some Somali money  transmitters have resorted to non-banking channels by carrying cash  overseas. They noted that although physically moving cash is risky, it is  not unlawful. Additionally, Treasury officials stated that the use of cash  couriers to remit funds has not been a concern for regulators because this  practice has not increased the remittance fees that money transmitters  charge their consumers.

Reasons Senders Reported General  Satisfaction with Money Transmitters  The remittance senders for Haiti, Liberia,  Nepal, and Somalia told us that they are  generally satisfied using money transmitters  over other methods to transfer money abroad  because money transmitters quickly deliver the funds to recipients;  are cheaper than banks;  can be used even if the recipient lacks a  bank account; and  tend to have more locations in recipient  countries compared to banks.  specialized Somali money transmitters  cost less than transmitters that serve  many countries, and  overseas agents of the Somali money  transmitters are knowledgeable about  the communities where they operate and  have earned the trust of the community  members.

U.S.-based remittance senders we interviewed are generally satisfied  with their money transmitters. The U.S.-based remittance senders we  spoke with from each of our case-study countries reported that they  frequently use money transmitters and have not encountered major  difficulties in sending remittances. In general, these senders  expressed satisfaction with their money transmitters and stated that  they had not experienced major problems in sending money via  money transmitters. Senders told us that they generally preferred  using money transmitters because money transmitters were cheaper  than banks and were quicker in delivering the funds. In addition,  money transmitters were often more accessible for recipients  collecting the remittances because the money transmitters had more  locations than banks in recipient countries. However, some remittance  senders told us that they experienced delays or were unable to send  large amounts of money through money transmitters. In addition,  some Somali senders told us that they were dissatisfied with being  unable to use personal checks or online methods due to a  requirement to pay in cash.

U.S. agencies, including Treasury, Federal Deposit Insurance  Corporation (FDIC), the Federal Reserve, and National Credit Union  Administration (NCUA), have issued guidance to the financial institutions  they regulate to clarify expectations for providing banking services to  money transmitters. In addition, Treasury’s Office of Technical Assistance  (OTA) is engaged in long-term capacity building efforts in Haiti, Liberia,  and Somalia to improve those countries’ weak financial institutions and  regulatory mechanisms, factors that may cause banks to consider money  transmitters remitting to these countries to be more risky clients.  However, agency officials disagreed with some suggestions for  government action proposed by banks and others because such actions  would contravene agencies’ Bank Secrecy Act anti-money laundering  (BSA/AML) compliance goals.

Agencies Have Taken Certain Steps That May Address Money Transmitters’ Difficulties in Maintaining Banking Access

Treasury and Other Agencies Have Issued Guidance Intended to Prevent Widespread Termination of Banking Services for Money Transmitters, Among Other Goals

Treasury, including FinCEN and OCC, as well as FDIC, the Federal  Reserve, and NCUA have issued various guidance documents intended  to ensure BSA/AML compliance while mitigating negative impacts on  money transmitter banking access. Since 2011, Group of Twenty (G20)  leaders, including the U.S. government, have committed to increasing  financial inclusion through actions aimed at reducing the global average  cost of sending remittances to 5 percent. According to Treasury officials,  financial inclusion and BSA/AML compliance are complementary goals. In published statements, Treasury has affirmed that money transmitters  provide essential financial services, including to low-income people who  are less likely or unable to make use of traditional banking services to  support family members abroad. Treasury has also acknowledged that  leaving money transmitters without access to banking channels can lead  to an overall reduction in financial sector transparency to the extent that  money transmitters resort to non-banking channels for transferring funds.

Nonetheless, Treasury officials we spoke to noted that in implementing  BSA/AML regulations, banks retain the flexibility to make business  decisions such as which clients to accept, since banks are in the best  position to know whether they are able to implement controls to manage  the risk associated with any given client. These officials indicated that  Treasury pursues market-driven solutions and cannot order banks to  open or maintain accounts. Treasury officials noted that Treasury works  through existing multilateral bodies to promote policies that will support  market driven solutions to banking access challenges and deepen  financial inclusion globally.

To clarify how banks assess BSA/AML risks posed by money transmitters  and foreign banks, Treasury and other regulators have issued various  guidance documents that, among other things, describe best practices for  assessing such risks (see table 1). Some of the guidance emphasizes  that risk should be assessed on a case-by-case basis and should not be  applied broadly to a class of customers when making decisions to open or  close accounts.

The agencies issuing these guidance documents have taken some steps  to assess the impact of guidance on bank behavior. For example,  Treasury officials told us that Treasury periodically engages with banks  and money transmitters on an ad hoc basis to learn their views and gain  insight into their concerns. According to Federal Reserve officials,  anecdotal information suggests that some money transmitters lost bank  accounts after issuance of the 2005 joint guidance summarized above in  table 1, and that outcome was contrary to the regulators’ intent. To  address concerns about the guidance, according to these officials,  Treasury held several public discussions on money transmitter account  terminations. OCC officials stated that they have not conducted a  separate assessment of the effects of their October 2016 correspondent  banking guidance on banks’ risk assessment practices. However, they  noted that OCC examiners evaluate banks’ policies, procedures, and  processes for risk reevaluation, including processes for assessing  individual foreign correspondent bank customer risks, as a part of OCC’s  regular bank examination process.

Bank officials we spoke to noted that while the guidance from regulators  provides broad direction for banks’ risk assessments of foreign banks and  money transmitter clients, the guidance does not provide specific details  to clarify how banks can ensure BSA/AML compliance for specific higher- risk clients.

Treasury Is Providing Technical Assistance to Build Financial Capacity in Haiti, Liberia, and Somalia

According to Treasury officials, there is no feasible short-term solution to  address the loss of banking services facing money transmitters involved  in transferring funds to certain fragile countries, especially Somalia.  These officials explained that U.S. banks may be reluctant to transfer  funds to fragile countries because key governmental and financial  institutions in these countries have weak oversight and therefore may  face difficulties in detecting and preventing money laundering and  terrorism financing. As of September 2017, Treasury’s OTA is providing  capacity building support to fragile countries, including Haiti, Liberia,  and Somalia, with some of its efforts aimed at addressing long-term  factors affecting these countries’ BSA/AML supervisory capability.

Table 2 identifies and describes the status of OTA projects in our case- study countries of Haiti, Liberia, and Somalia. OTA does not currently  have a project in Nepal.

U.S. Agency Officials Disagreed with Several Actions Proposed by Banks and Others, for Reasons Including Agencies’ BSA/AML Compliance Goals

Banks, money transmitters, trade associations, and state regulators we  interviewed, as well as third parties such as the World Bank and Center  for Global Development, have proposed several actions to address  banking access challenges money transmitters face in transferring funds  through banks from the United States to fragile countries.

Use of public sector transfer methods. Most banks we spoke to  mentioned regulatory risk as a challenge to creating or maintaining  money transmitter accounts. These banks stated that the ultimate risk  for conducting transactions for money transmitter accounts falls on the  bank, and that banks face substantial risk of regulatory action for such  transactions. Therefore, one extra-large bank and one credit union we  spoke to suggested using public sector transfer methods such as the  Fedwire Funds Service (Fedwire) or FedGlobal Automated Clearing  House Payments (FedGlobal) to process remittances to fragile  countries, thereby mitigating the regulatory risk posed to banks that  transfer such funds.

Providing regulatory immunity, given appropriate oversight. To  mitigate the regulatory risk to banks posed by money transmitter  clients that send remittances to fragile countries, one extra-large  bank, one credit union, and several money transmitters we spoke to  suggested that regulators provide forms of regulatory immunity or  regulator assurances that banks would not face enforcement actions if  they carried out a specified level of due diligence to process  remittances to fragile countries.

Issuing more specific guidance. About half of the banks we spoke to  mentioned fear of regulatory scrutiny due to ambiguities in regulatory  agencies’ guidance or examiner practices. This fear of regulatory  scrutiny served as a disincentive for these banks to maintain money  transmitter accounts. While officials from about half of the banks we  spoke to stated that additional guidance issued by Treasury and other  agencies was helpful to clarify regulatory expectations and that  examiner practices were consistent with guidance, others stated that  they were uncertain about how much due diligence constituted  enough for regulatory purposes, because regulations incorporated  ambiguous language or because examiner practices exceeded  regulations. These bank officials suggested that regulators could  provide more specific guidance for banks on risk management, for  instance, by including example scenarios and answers to frequently  asked questions. The World Bank recommended in 2015 that  regulators provide banks with additional guidance on assessing the  risk of different money transmitter clients.

U.S. agency officials stated that they disagreed with implementing these  proposals for reasons specific to each one, as discussed below.

Use of public sector transfer methods. Treasury officials told us that  they prefer market-based solutions to the challenges of transferring  remittances to fragile countries, rather than a solution in which the  U.S. government assumes the risk in transferring these remittances,  such as using the Federal Reserve to directly transfer payments from  money transmitters. Federal Reserve officials told us that Fedwire is  reserved for domestic wire transfers, and while the Federal Reserve  continues to evaluate the scope of the FedGlobal service, no  decisions have been made to expand the service to additional  countries at this time. Federal Reserve officials told us they seek to  increase remittance flows to the countries the program already  serves.

Providing regulatory immunity, given appropriate oversight. Treasury  officials told us that while they would need to see the suggested  duration and conditions pertaining to any proposal for regulatory  immunity or exemptions in order to judge its feasibility, implementing  this suggestion could raise a number of legal and policy concerns.  Officials told us that while Treasury has the authority to provide  regulatory exemptions, creating particular conditions for regulatory  immunity would stray from Treasury’s intended risk-based approach  to BSA/AML compliance, and bad actors might take advantage of any  such exemptions for criminal activity.

Issuing more specific guidance. OCC informed us that it is not  currently considering implementing more specific guidance. Treasury  officials told us that existing guidance clarifies that Treasury does not  have a zero tolerance approach to BSA/AML compliance and that  Treasury does not expect banks to know their customers’ customers.  These officials told us that they prefer not to issue further amplifying  guidance with very specific examples as to what constitutes  “compliance” by financial institutions, because Treasury does not wish  to institute a “check the boxes” approach to regulatory compliance.

Existing U.S. Agency Information on Remittances Does Not Allow Treasury to Assess the Effects of Money Transmitters’ Loss of Banking Access on Remittance Flows to Fragile Countries

Treasury cannot assess the effects of money transmitters’ loss of banking  access on remittance flows because existing data do not allow Treasury  to identify remittances transferred through banking and non-banking  channels. Recent efforts to collect international remittance data from  banks and credit unions do not include transfers these institutions make  on behalf of money transmitters. Since these data collection efforts are  designed to protect U.S. consumers, the remittance data that banks and  credit unions report are limited to remittances individual consumers send  directly through these institutions. Additionally, a few state regulators  recently began requiring money transmitters to report remittance data by  destination country, but these data do not distinguish money transmitters’  use of banking and non-banking channels to transfer funds. Finally, while  Treasury has a long-standing effort to collect information on travelers  transporting cash from U.S. ports of exit, this information does not to  identify cash transported for remittances. Without information on  remittances sent through banking and non-banking channels, Treasury  cannot assess the effects of money transmitter and foreign bank account  closures on remittances, especially shifts in remittance transfers from  banking to non-banking channels for fragile countries. Non-banking  channels are generally less transparent than banking channels and thus  more susceptible to the risk of money laundering and other illicit financial  transactions.

Remittance Data from Financial Institutions Do Not Capture Money Transmitters’ Use of Banking Channels to Transfer Funds

Banks and Credit Unions Do Not Report on Remittances They Transfer for Money Transmitters

Federal regulators recently began collecting data on international  remittances from banks and credit unions by requiring these institutions to  provide more information in pre-existing routine reports. However, these  reports do not require banks and credit unions to include information on  remittance transfers these institutions make on behalf of money  transmitters, among other business clients. According to officials from the  Office of the Comptroller of the Currency (OCC) and from the Consumer  Financial Protection Bureau, the additional reporting requirements for  remittances were intended to help regulators monitor compliance with  rules aimed at protecting U.S. consumers who use remittance services  offered by banks and credit unions. Furthermore, banks and credit unions  are not required to report on destination countries for remittance flows.  Specifically:

Beginning in 2014, Federal banking regulators—FDIC, the Federal  Reserve, and OCC— required banks to provide data on international  remittances in regular reporting known as the Consolidated Reports of  Condition and Income (Call Reports). These reports, which are  required on a quarterly basis from FDIC-insured banks, generally  include banks’ financial information such as assets and liabilities, and  are submitted through the Federal Financial Institutions Examination  Council, a coordinating body. Specifically, the agencies required  banks to indicate whether they offered consumers mechanisms,  including international wire transfers, international automated  clearinghouse transactions, or other propriety services, to send  international remittances. The Consumer Financial Protection Bureau  uses the remittance data in Call Reports to better understand the  effects of its rules regarding remittance transfers including its rules on  disclosure, error resolution, and cancellation rights. Additionally,  according to bureau officials, they also use the data for other  purposes, for example, to monitor markets and to identify banks for  remittance exams and, if needed, additional supervision.

The Call Reports do not require a bank to report remittances for which the  bank is providing such service to business customers, including money  transmitters. According to OCC officials, because the remittance  regulation that the Consumer Protection Financial Bureau enforces  originated in response to consumer-focused legislation, a bank is required  to report only those remittances for which the bank is the direct service  provider to the individual consumer. Consequently, remittances reported  in the Call Reports do not include remittances for which the banks served  as a correspondent bank or as a provider for a money transmitter.  Furthermore, banks are not required to report remittance data by  destination country.

In 2013, the National Credit Union Administration (NCUA) began  requiring credit unions to provide data on the number of remittance  transactions, but not data on the dollar amount transferred, in their  Call Reports to NCUA. Similarly, and consistent with its treatment of  banks, the Consumer Financial Protection Bureau uses the remittance  data submitted by credit unions in Call Reports, for example, to better  understand the effects of its rules and for market monitoring. The  credit unions are also not required to include transactions they  process on behalf of business clients, such as money transmitters,  and do not provide remittance data by destination country.

Money Transmitters Are Not Required to Report Whether the Remittances they Transfer are Through Banking or Other Channels

In 2017 some states began collecting remittance data from money  transmitters by state and destination country through the Money Services  Business Call Report. The purpose of these reports is to enhance and  standardize the information available to state financial regulators  concerning the activities of their Money Services Business licensees to  effectively supervise these organizations. However, money transmitters  are not required to distinguish whether the remittances they transferred  were sent through banking or other channels. Additionally, while these  reports collect remittance data by destination country, these data are not  comprehensive because, according to the Nationwide Multistate Listing  System, as of the first quarter of 2018, about half the states (24) had  adopted the reports for money transmitters and of these 12 states had  made it mandatory to report the remittances by destination country.

Due to a lack of reporting on money transmitters’ use of banking channels  to transfer remittances, Treasury cannot assess the extent of the decline  in money transmitters’ use of banking channels to transfer remittances to  fragile countries, including the four we selected as case-study countries:  Haiti, Liberia, Nepal, and Somalia.

U.S. Agency Efforts to Collect Data on Physical Transportation of Cash Are Not Designed to Track Flow of Remittances through Non-Banking Channels

While Treasury has a long-standing effort to collect information on  travelers transporting cash from U.S. ports of exit, this information is not  designed to enable Treasury to identify cash transported for remittances  or the intended final destination of the cash. For financial transfers  through non-banking channels, Treasury requires persons or businesses  to report the export of currency and monetary instruments at ports of exit,  which include remittances sent through money transmitters carried out in  cash. Specifically, Treasury requires persons or businesses, including  money transmitters, who physically transport currency or other monetary  instruments exceeding $10,000 at one time, from the United States to any  place outside of the United States, to file a Report of International  Transportation of Currency or Monetary Instruments (CMIR) with U.S.  Customs and Border Protection at the port of departure. The CMIR  collects information such as the name of the person or business on  whose behalf the importation or exportation of funds was conducted, the  date, the amount of currency, U.S. port or city of arrival or departure, and  country of origin or destination, among other information. The forms are  filled out manually by individuals carrying cash. U.S. Customs and Border  Protection officers collect the forms at ports of exit, and that agency’s  contractors manually enter the data reported on these forms into a central  database.

Money transmitters and their agents who carry cash in excess of $10,000  from the United States are required to submit the CMIR to U.S. Customs  and Border Protection upon departure. Thus, to some extent, CMIR data  include data on remittances transferred by money transmitters in cash;  however, the CMIR is not intended to capture information specific to  remittances, and thus its usefulness is limited for agencies in tracking the  flow of remittances through non-banking channels. First, the destination  country reported on the CMIR may not be the final destination of the cash  or other monetary instrument being transported. For example, money  transmitters we interviewed told us that they use cash couriers to transfer  funds to Somalia via the United Arab Emirates, where the funds may  enter a clearinghouse that can transfer the funds to Somalia. While the  ultimate destination of the remittances is Somalia, the CMIR may list the  United Arab Emirates as the destination because it is the first destination  out of the United States. Second, FinCEN officials acknowledged they do  not know the extent of underreporting in general with regard to the CMIR;  however, money transmitters we interviewed indicated that they have  incentives to file CMIR for their own protection in case they have to file an  insurance claim. Finally, CMIR does not ask if the currency or monetary  instruments are remittances, which makes it difficult if not impossible to  separate out the data on remittances from the overall data.

Existing data do not enable Treasury to identify remittances transferred  by money transmitters through banking and non-banking channels. Non- banking channels are generally less transparent than banking channels  and thus more susceptible to the risk of money laundering and terrorist  financing. FinCEN’s mission is to safeguard the financial system from  illicit use, combat money laundering, and promote national security by,  among other things, receiving and maintaining financial transactions data  and analyzing that data for law enforcement purposes. Additionally,  federal standards for internal control state that agency managers should  comprehensively identify risks and analyze them for their possible  effects.

A lack of data on remittances sent through banking and non-banking  channels limits the ability of Treasury to assess the effects of money  transmitter and foreign bank account closures on remittances, in  particular shifts of remittances to non-banking channels for fragile  countries. The risks associated with shifts of remittances to non-banking  channels may vary by country and are likely greater for fragile countries  such as Somalia where the United States has concerns about terrorism  financing.

Remittances continue to flow to fragile countries, but the loss of banking  services for money transmitters, as well as a decline in foreign banking  relationships, has likely resulted in shifts to non-banking channels for  remittances to some of these countries. While money transmitters who  have lost bank accounts may adapt by moving remittances in cash or  other non-banking channels, the lack of a bank account presents  operational risks for these organizations. Moreover, the flow of funds such  as remittances from banking to non-banking channels decreases the  transparency of these transactions. While U.S. regulators have issued  guidance to banks indicating that they should not terminate accounts of  money transmitters without a case-by-case assessment, several banks  we contacted remain apprehensive and are reluctant to incur additional  costs for low-profit customers such as money transmitters. At the same  time, senders of remittances still prefer to use money transmitters to send  funds, which the senders regard as a critical lifeline for family and friends  in fragile countries. Although federal and state regulators have  undertaken recent efforts to obtain remittance data from financial  institutions such as banks and money transmitters, these efforts are  designed for consumer protection and the regulatory supervision of  financial institutions, rather than to track remittances sent by money  transmitters using banking channels. As a result, the available data are  not sufficient for the purposes of tracking changes in money transmitters’  use of banks to transfer funds. Similarly, while Treasury has a long- standing effort to collect information on large amounts of cash physically  transported by travelers at U.S. ports of exit, this information collection is  not intended to track the flow of remittances through non-banking  channels. Consequently, to the extent money transmitters losing banking  access switch to non-bank methods to transport remittances, Treasury  may not be able to monitor these remittance flows. This, in turn could  increase the risk of terrorism financing or money laundering, especially for  remittances to fragile countries where risks related to illicit use of funds  are considered higher.

We are making one recommendation to Treasury.

The Secretary of Treasury should assess the extent to which shifts in  remittance flows from banking to non-banking channels for fragile  countries may affect Treasury’s ability to monitor for money laundering  and terrorist financing and, if necessary, should identify corrective  actions.

We provided a draft of this product for comment to Treasury, FDIC, the  Federal Reserve, CFPB, U.S. Customs and Border Protection,  Commerce, NCUA, State, and USAID. Treasury, FDIC, the Federal  Reserve, CFPB, and U.S. Customs and Border Protection, provided  technical comments, which we have incorporated, as appropriate. We  requested that Treasury provide a response to our recommendation, but  Treasury declined to do so. Commerce, NCUA, State, and USAID, did not  provide comments on the draft of this report.

We are sending copies of this report to the appropriate congressional  committees; the Secretary of the Treasury; the Chairman of the Federal  Deposit Insurance Corporation; the Chair of the Board of Governors of  the Federal Reserve System; the Acting Director of the Consumer  Financial Protection Bureau; the Secretaries of Commerce, Homeland  Security, and State; the Administrators of the U.S. Agency for  International Development and the National Credit Union Administration;  and other interested parties. In addition, the report is available at no  charge on the GAO website at http://www.gao.gov.

If you or your staff have questions about this report, please contact me at  (202) 512-9601, or melitot@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

This report examines (1) what stakeholders believe are the challenges  facing money transmitters in remitting funds from the United States to  selected fragile countries, (2) what actions U.S. agencies have taken to  address identified challenges, and (3) U.S. efforts to assess the effects of  such challenges on remittance flows from the United States to fragile  countries.

To address the objectives, we identified four case-study countries: Haiti,  Liberia, Nepal, and Somalia. We selected these countries based on their  inclusion in the Organisation for Economic Co-operation and  Development’s States of Fragility reports from 2013 to 2015. In addition,  we limited our selection to countries that have a foreign-born population  of 50,000 or more living in the United States. Finally, we considered the  size of estimated total remittances from the United States relative to the  recipient countries’ gross domestic products (GDP). We rank ordered the  17 countries that met these criteria and selected the top four.

For our first objective, to understand the challenges that stakeholders  believe money transmitters face in remitting funds from the United States  to fragile countries, we surveyed banks and interviewed U.S. agency  officials, money transmitters, banks, credit unions, and remittance  senders. To obtain insights from U.S agency officials, we interviewed and  received written responses from officials of the Department of the  Treasury (Treasury)—including the Office of Technical Assistance (OTA),  the Financial Crimes Enforcement Network (FinCEN), the Office of  Terrorism and Financial Intelligence, and the Office of the Comptroller of  the Currency (OCC).

To obtain insights from money transmitters, we used the World Bank’s  Remittance Prices Worldwide database to select U.S.-based money  transmitters serving our case-study countries. The World Bank database  includes a sample of money transmitters, which the World Bank reported  it selected to cover the maximum remittance market share possible and  survey a minimum aggregated market share of 80 percent for each  country. We attempted to contact the 18 money transmitters that the  World Bank identified as the major service providers for our case-study  countries. We interviewed 12 of these 18 money transmitters, of which 8  provided services to only one of our case-study countries (2 money  transmitters provided services to Haiti, 4 provided services to Somalia,  and 2 provided services to Nepal) and 4 provided remittance services  from the United States to at least three of our case-study countries.

To obtain insights from individuals that remit to fragile states, we  conducted six small-group interviews, and one additional interview, of  individuals that remit to our selected case-study countries. From 3 to 6  individuals participated in our small group interviews. We interviewed one  Haitian small group, one Liberian small group, one Nepali small group,  and three Somali small groups.

To set up these interviews, we identified community-based organizations  (CBOs) and other groups that work with remittance senders to these  countries and obtained contact information for these groups. We identified  the CBOs through searching Internal Revenue Service (IRS) lists of tax- exempt community organizations for the names of our case-study  countries or their populations. To focus our search efforts, we  concentrated on the five areas in the United States with the largest  populations of immigrants from each case-study country. The five areas  were identified using information on immigrant populations from the U.S.  Census Bureau’s 2015 American Community Survey 1-year Public Use  Microdata Samples. We sent emails outlining our research goals and  soliciting interest in participating in interviews to 287 CBOs and related  groups and obtained positive responses from 46. Of the 46 that  responded positively, we were able to schedule meetings with seven  CBOs covering the four case-study countries. The groups that agreed to  participate in our interviews cannot be considered representative of all  CBOs and remittance senders to the four selected countries, and their  views and insights are not generalizable to those of all individuals that  remit to these four countries. We asked the CBO points-of-contact to  invite individuals with experience remitting funds to the case-study  countries to participate in telephone interviews.

We pre-tested our methodology by emailing contacts at the CBOs and  requesting they provide feedback on the questions. We also pre-tested  the questions with a group located in Virginia because the location was  close to the GAO headquarters and allowed for in-person testing. In the  interviews, we asked semi-structured questions about the ease or  difficulty of remitting funds to the participants’ home countries, the costs  of remitting, and any recent changes they had noticed. We asked the  participants to provide us with their personal experiences rather than to  speak for their CBO, group, or community.

We used two methods—a web-based survey of a nationally  representative sample of banks and semi-structured interviews of bank  officials—to examine what banks identify as challenges, if any, in offering  bank accounts for money transmitters and correspondent banks serving  fragile countries. In the survey, we asked banks about limitations and  terminations of accounts related to BSA/AML risk, the types of customer  categories being limited or terminated, and the factors influencing these  decisions. We administered the survey from July 2017 to September  2017, and collected information for the 3-year time period of January 1,  2014 to December 31, 2016. Aggregate responses for the close-ended  survey questions that are related to this report are included in appendix II.  The survey also collected information for two additional GAO reports: one  reviewing closure of bank branches along the southwest border of the  United States, and another assessing the causes of bank account  terminations involving money transmitters.

To identify the universe of banks, we used the bank asset data from  FDIC’s Statistics on Depository Institutions database. Our initial  population list contained 5,922 banks downloaded from FDIC’s Statistics  on Depository Institutions database as of December 31, 2016. We  stratified the population into five sampling strata, and used a stratified  random sample. In order to meet the sampling needs of related reviews,  we used a hybrid stratification scheme. First, banks that did not operate  in the Southwest border region were stratified into four asset sizes (small,  medium, large, and extra-large). Next, by using FDIC’s Summary of  Deposit database we identified 115 Southwest border banks as of June  30, 2016.

Our initial sample size allocation was designed to achieve a stratum-level  margin of error no greater than plus or minus 10 percentage points for an  attribute level at the 95 percent level of confidence. Based upon prior  surveys of financial institutions, we assumed a response rate of 75  percent to determine the sample size for the asset size strata. Because  there are only 17 extra-large banks in the population, we included all of  them in the sample. We also included the entire population of 115  Southwest border banks as a separate certainty stratum. We reviewed  the initial population list of banks in order to identify nontraditional banks  not eligible for this survey. We treated nontraditional banks as out-of- scope. In addition, during the administration of our survey, we identified  27 banks that were either no longer in business or that had been bought  and acquired by another bank, as well as 2 additional banks that were  nontraditional banks and, therefore, not eligible for this survey. We  treated these sample cases as out-of-scope; this adjusted our population  of banks to 5,805 and reduced our sample size to 406. We obtained a  weighted survey response rate of 46.5 percent.

Because we followed a probability procedure based on random  selections, our sample is only one of a large number of samples that we  might have drawn. Since each sample could have provided different  estimates, we express our confidence in the precision of our particular  sample’s results as a 95 percent confidence interval (for example, plus or  minus 7 percentage points). This is the interval that would contain the  actual population value for 95 percent of the samples we could have  drawn. Confidence intervals are provided along with each sample  estimate in the report. For survey questions that are not statistically  reliable, we present only the number of responses to each survey  question and the results are not generalizable to the population of banks.

The practical difficulties of conducting any survey may introduce errors,  commonly referred to as nonsampling errors. For example, difficulties in  interpreting a particular question or sources of information available to  respondents can introduce unwanted variability into the survey results.  We took steps in developing the questionnaire, collecting the data, and  analyzing the results to minimize such nonsampling error. We conducted  pretests with four banks. We selected these banks to achieve variation in  geographic location and asset size (small, medium, large, extra-large).  The pretests of the survey were conducted to ensure that the survey  questions were clear, to obtain any suggestions for clarification, and to  determine whether representatives would be able to provide responses to  questions with minimal burden.

To supplement the results of the survey, we conducted interviews with  eight extra-large banks regarding correspondent banking and money  transmitter accounts and with two credit unions regarding money  transmitter accounts. We selected the eight banks to interview using the  following criteria: (1) the bank was in the extra-large asset size group  (banks with greater than $50 billion in assets), and (2) the bank was  mentioned by at least one of the money transmitters that we interviewed  as terminating accounts with them or the bank was listed in an internal  Treasury study on correspondent banking. Of the banks in the extra- large asset size group, 7 were mentioned in our interviews with money  transmitters as having closed accounts with them. Nearly all of these  banks, plus one additional bank were also mentioned as correspondent  banks in the Treasury study. In addition, we selected two credit unions to  interview based on information from our interviews with money  transmitters. Money transmitters identified four credit unions in our  interviews; of these, we selected for interviews two that were mentioned  as closing accounts with money transmitters. We did not contact the other  two credit unions that currently have money transmitter accounts. The  results of the survey and the interviews only provide illustrative examples  and are not generalizable to all banks or credit unions.

For our second objective, we analyzed U.S. agency information and  documentation about relevant projects and activities. We also interviewed  officials and obtained relevant guidance documents from Treasury,  including OCC, OTA, FinCEN, and Terrorism and Financial Intelligence;  the Federal Deposit Insurance Corporation (FDIC); the U.S. Department  of State; the U.S. Agency for International Development; the Board of  Governors of the Federal Reserve System (Federal Reserve); and the  National Credit Union Administration (NCUA). Additionally, we also  interviewed officials from the World Bank and International Monetary  Fund to understand the data, methodology, and findings contained within  reports by those organizations, as well as to understand the International  Monetary Fund’s role in technical assistance in our case-study countries.  To gather information on solutions proposed by banks and others to  address challenges money transmitters face in transferring funds through  banks from the United States to fragile countries, we interviewed banks  and credit unions as noted above. We also reviewed reports by the World  Bank, the Center for Global Development, and Oxfam to gather  recommendations addressing challenges in transferring remittances to  fragile countries. We interviewed officials from Treasury, FDIC, the  Federal Reserve, and the U.S. Agency for International Development to  gain their perspectives on these proposed solutions.

For our third objective on U.S. agencies’ efforts to assess the effects of  challenges facing U.S. money transmitters on remittance flows to fragile  countries, we interviewed agency officials and analyzed available data on  flows going through banking and non-banking channels. For available  data on flows through the banking channel, we analyzed the Consolidated  Reports of Condition and Income (Call Report) data from the Federal  Financial Institutions Examination Council, which started collecting these  data in 2014. These remittance data are reported on a semiannual basis.  We also reviewed Call Report data on remittances for credit unions,  which started to be collected in 2013, as well as data collected from  Money Service Businesses, which some states started collecting in 2017.  For data on remittance flows through non-banking channels, we obtained  and analyzed data on filings of FinCEN’s Form 105 – Report of  International Transportation of Currency or Monetary Instruments. This  report is required of individuals who physically transport currency or other  monetary instruments exceeding $10,000 at one time from the United  States to any place outside the United States, or into the United States  from any place outside the United States. The paper form is collected by  the Department of Homeland Security’s U.S. Customs and Border  Protection at the port of entry or departure. We obtained the tabulated  Form 105 data from FinCEN by arrival country, state of U.S. exit port, and  for calendar years 2006 through 2016. We also interviewed officials and  obtained written responses from FinCEN and the Federal Financial  Institutions Examination Council. We compared the results of our data  analysis and information from interviews with agency officials against  FinCEN’s mission to safeguard the financial system from illicit use by,  among other things, obtaining and analyzing financial transactions data.  Additionally, we also compared the results of our analysis and information  obtained from agencies against the federal standards for internal control,  which state that agency managers should comprehensively identify risks  and analyze them for their possible effects.

We conducted this performance audit from September 2016 to March  2018 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Selected Results from the GAO Survey of Banks on Money Transmitter Account Terminations

From July 2017 to September 2017, we administered a web-based  survey to a nationally representative sample of banks. In the survey, we  asked banks about the number of account terminations for reasons  related to Bank Secrecy Act anti-money laundering (BSA/AML) risk;  whether banks are terminating, limiting, or not offering accounts to certain  types of customer categories; and the factors influencing these decisions.  We collected information for the 3-year period from January 1, 2014, to  December 31, 2016. We obtained a weighted survey response rate of  46.5 percent. The survey included 44 questions, 16 of which were  directly applicable to the research objectives in this report.

Responses to the questions that were directly applicable to the research  objectives in this report are shown below (see tables 3 through 16).  When our estimates are from a generalizable sample, we express our  confidence in the precision of our particular estimates as 95 percent  confidence intervals. Survey results presented in this appendix are  aggregated for banks of all asset sizes, unless otherwise noted. Results  for some of the survey questions were not statistically reliable. In those  cases we present only the number of responses to each survey question.  These results are not generalizable to the population of banks. Our  survey included closed- and open-ended questions. We do not provide  information on responses provided to the open-ended questions. For a  more detailed discussion of our survey methodology, see appendix I.

The following open-ended question was only asked to banks that  responded “Yes” to question 33: Please provide any additional comments  or challenges the bank may face in managing accounts for money  transmitters that remit to fragile countries such as Haiti, Liberia, Nepal or  Somalia. (Question 36)

The following open-ended question was only asked to banks that  responded “Yes” to question 37: Please provide any additional comments  on how changes (increase or decrease) in correspondent banking  services facilitating the transfer of funds to Haiti, Liberia, Nepal or  Somalia has impacted your bank’s ability to provide services to money  transmitters. (Question 41)

The following open-ended question was only asked to banks that  responded “Yes” to using a correspondent bank to facilitate the transfer of  funds Somalia (question 38, response d): If your bank relied on a  respondent bank to facilitate the transfer of funds to Somalia, in what  country was the respondent bank located? (Question 39)

Appendix III: GAO Contact and Staff Acknowledgments

Thomas Melito, (202) 512-9601, or melitot@gao.gov.

In addition to the contact named above, Mona Sehgal (Assistant  Director), Kyerion Printup (Analyst-in-Charge), Sushmita Srikanth,  Madeline Messick, Ming Chen, Lilia Chaidez, Natarajan Subramanian,  Carl Barden, James Dalkin, David Dayton, Martin De Alteriis, Mark  Dowling, Rebecca Gambler, Tonita Gillich, Stefanie Jonkman,  Christopher Keblitis, Jill Lacey, Michael Moran, Verginie Tarpinian, and  Patricia Weng made key contributions to this report.

People who send money from the United States to their families—especially to those in poor countries—see these "remittances" as a lifeline. However, remittances and other global payments can be used to hide money laundering and other financial crimes.

Money transfer companies have used banks to transfer money worldwide. But some banks want to limit their exposure to the risk of financial crimes, and refuse or restrict transfer companies' accounts.

Now, some transfer companies are bypassing the bank by taking cash over borders. We recommended that Treasury assess the risks of these transfers, which are harder to monitor for criminal activity.