What Is A MSB?
A money service business is a company that provides financial services such as:
- Money transfers
- Currency exchange
- Buy now, pay later services
- Digital asset transactions
Whether you're in Canada or the US, you must follow anti-money laundering (AML) compliance rules. These MSB regulations prevent fintech companies from committing financial fraud.
Remember, the main goal of these regulations is the same, but the overseeing authority in both countries is different. So always check the rules relevant to your country to avoid non-compliance issues.
Overview Of MSB Regulations In Canada
A MSB in Canada is regulated under the Proceeds of Crime and Terrorist Financing Act.
These businesses must also comply with the rules set by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).
Here are the key elements of registering your MSB in Canada with this organization:
● FINTRAC MSB License – All MSBs operating in Canada or providing services to Canadian clients must register with FINTRAC before commencing operations.
● AML/CTF Compliance Program – Every MSB in Canada must implement a risk-based compliance program, including policies, procedures, and employee training.
● Know Your Customer (KYC) Requirements – Businesses must verify client identities and conduct due diligence, especially for high-risk transactions.
● Record-Keeping – Companies must maintain detailed transaction records for at least five years.
Any money service business that does not meet FINTRAC’s KYC requirements and other rules will face penalties.
Overview Of MSB Regulations In The US
In the US, MSB regulations are performed at both the federal and state level. The key federal regulatory body overseeing MSBs is the Financial Crimes Enforcement Network (FinCEN).
FinCen follows the Bank Secrecy Act (BSA) in the US. This is why state-specific MSB regulations in licensing and compliance vary here.
Let's take a look at the primary requirements of operating a money service business in the US:
● FinCEN MSB License – Every money service business must register with FinCEN within 180 days of starting operations.
● State Licensing – Unlike Canada, where MSBs register federally with FINTRAC, US MSBs must obtain a money transmitter license (MTL) from individual states where they operate.
● AML Compliance Program – Businesses must establish and maintain a BSA-compliant AML program, including risk assessment and transaction monitoring.
● Record-Keeping – MSBs in the US also have to keep transaction records for at least five years.
Key Differences Between US And Canadian MSB Regulations
The US and Canadian MSB regulations share the same goal of preventing financial fraud. However, there are key differences between licensing, reporting, and other requirements. Take a look below for a better understanding:
1. MSB Regulations Oversight Vary In Both Countries
MSB regulations in Canada fall under the purview of FINTRAC. The organization prevents these businesses from committing money laundering and other financial crimes.
If a MSB in Canada does not comply with regulations, FINTRAC will be the organization punishing them through fines or other penalties.
Meanwhile, MSBs in the US are regulated by FinCEN at the federal level. However, framework regulations differ at state-level.
2. The US Has More Complex Licensing Requirements
Every MSB in Canada only has to get a single FINTRAC MSB license to start their operations. However, MSBs in the US have to file for a few different licenses, depending on their needs.
For example, a money service business must register with FinCEN for a federal-level license. The same business will also have to get a state-level license in the US.
As you can see, the licensing requirements are more complex in the US compared to Canada.
3. Different Transaction Reporting Requirements
Canadian law requires MSBs to report any suspicious transactions that a client may want them to conduct. A large cash report also has to be submitted for all transactions exceeding $10,000 in cash.
Similarly, the US law also requires a transaction report for transfers exceeding $10,000. However, MSB regulations have made this report submission more complex by adding a timeline to it; MSBs in the US must report large cash transactions within 15 days to avoid penalties. Currency exchanges in the US are also required to keep records for exchanges above $1,000.
4. Violation And Penalties
If a Canadian MSB violates administrative monetary policy regulations, they can face a financial penalty of $1 to $500,000 per violation. The maximum amount varies from minor to very serious violations.
Meanwhile, FinCEN has set a civil penalty of up to $5,000 per violation for non-compliance.
The organization can also apply a criminal penalty of up to 5 years of imprisonment if a US MSB fails to comply with MSB regulations continuously.
Challenges For Fintech Companies Expanding Across Borders
Operating In Canada
For fintech firms looking to operate a MSB in Canada, the streamlined federal registration process makes it relatively easier to comply with MSB regulations. However, businesses must stay up to date with provincial requirements and ensure robust AML measures are in place.
Operating In The US
In contrast, US MSB regulations pose significant compliance challenges due to state-by-state licensing requirements. This creates a high barrier to entry for fintech companies, often requiring legal expertise and substantial financial resources to maintain compliance.
Costs And Compliance Burdens
US MSBs often face significantly higher compliance costs compared to their Canadian counterparts. Things adding to cost burdens in the US include:
- Licensing fees
- Legal counsel charges
- Ongoing state-specific registration fees
The cost burden of a MSB in Canada is relatively low because they only have to register with FINTRAC.
Cryptocurrency And Emerging Payment Technologies
Both Canada and the US are adapting their MSB regulations to accommodate cryptocurrency and digital assets.
However, the US has been more aggressive in regulating crypto-related MSBs through frameworks like New York’s BitLicense.
In Canada, cryptocurrency exchanges must register with FINTRAC and comply with AML regulations, but the process is more uniform than in the US.
Strategies For MSB Compliance
- Legal Consultation
Meeting a fintech expert legal advisor can help you learn more about MSB regulations. Such skilled lawyers can also develop a framework to help you set up your MSB in Canada or the US easily.
- Automated Compliance Solutions
Technology has advanced a lot over the years. This is why you can use various digital solutions to streamline your MSB’s compliance requirements.
For example, RegTech solutions are beneficial for making KYC and AML compliance a breeze. You can also use various tools to monitor your money service business transactions and report specific transfers.
- Strategic Expansion
Whether you’re expanding to Canada from the US or vice versa, you must fulfill compliance requirements. You must also apply for a proper FINTRAC MSB license.
For example, if you’re a business registering as a Canadian MSB without a location in the country, you will have to apply for a foreign FINTRAC MSB license.
You must view the requirements related to expansion for a seamless process.
- Ongoing Monitoring
MSB regulations and compliance requirements change often in the financial sector. This is why you must always keep yourself updated with the current rules. Otherwise, you may violate various legal acts.
- Early Planning For State Licensing
Planning for federal and state licensing is necessary when setting up or buying a MSB. FINTRAC has set a specific waiting period before a money service business can resume its operations after registration.
MSBs in the US also have to wait for licensing approval before starting operations. The difficult part is that the registration timeline is longer in the US because of federal and state-level requirements.
US MSBs should anticipate long approval timelines and prepare compliance measures well in advance to avoid delays in operations.
Connect With Renno & Co. Fintech For FINTRAC MSB License In Canada
Canada and the US both have strict MSB licensing and compliance regulations. This is why meeting with legal counsel can help you develop a centralized MSB framework and register easily.
If you’re looking for a fintech expert in Canada, look no further than Renno & Co. Fintech. Our legal advisors and compliance experts will make navigating MSB regulations a breeze for you, so connect with us now.
