Common Compliance Mistakes MSBs Make & How to Avoid Them

Money Service Businesses (MSBs) such as money remittance services, currency exchanges, and cheque cashers operate in a highly regulated environment under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), overseen by HM Revenue & Customs (HMRC). Given their exposure to risks like money laundering and terrorist financing, MSBs are rated as "high risk" in the UK’s National Risk Assessment. Non-compliance can lead to hefty fines, license suspensions, or reputational damage. At the MSB Association UK, we aim to support our members in navigating these challenges. Below, we outline five common compliance mistakes MSBs make, based on HMRC guidance and industry trends, and provide practical steps to avoid them.

1. Weak AML/CFT Policies and Risk Assessments

Many MSBs treat Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) programs as a one-time task, resulting in generic or outdated policies that don’t reflect their specific risks, such as high-value cash transactions or cross-border transfers. HMRC frequently flags incomplete risk assessments, particularly for high-risk jurisdictions, leaving businesses vulnerable to exploitation and unable to provide a clear audit trail during inspections.

How to Avoid It:

• Create a tailored AML/CFT policy that reflects your business model and is reviewed annually or when operations change (e.g., entering new markets). Use HMRC’s risk assessment templates to evaluate customer, product, and geographic risks.
• Document risk assessments thoroughly, including mitigation measures, to demonstrate compliance. Consider software tools for automated risk scoring to stay proactive.
• Train all staff, including agents, on the policy, with documented evidence of training sessions and regular refreshers to ensure understanding.

2. Inadequate Customer Due Diligence (CDD) and Onboarding

Insufficient Know Your Customer (KYC) processes are a major issue, with some MSBs relying on basic ID checks or neglecting enhanced due diligence (EDD) for high-risk clients, such as politically exposed persons (PEPs) or those from high-risk countries. In principal-agent setups, failing to vet agents properly (“know your agent”) can also lead to breaches of MLR Reg. 27-28, exposing businesses to risks like identity fraud or illicit fund transfers.

How to Avoid It:

• Use advanced KYC tools with biometric verification, real-time PEP/sanctions screening, and source-of-funds checks for large or unusual transactions to comply with MLR and FCA standards.
• For agents, conduct fit-and-proper checks during onboarding, including site visits to verify premises and financial stability. Reassess if ownership changes occur.
• Maintain detailed CDD/EDD records for at least five years, ensuring staff are trained to spot red flags like mismatched transaction patterns.

3. Ineffective Transaction Monitoring and Record-Keeping

Many MSBs struggle with transaction monitoring, missing suspicious patterns like structuring (splitting transfers to avoid thresholds) or unusual volumes due to reliance on manual processes. Poor record-keeping, such as incomplete audit trails, violates MLR Reg. 40 and hinders HMRC inspections. This is particularly critical for cheque cashers, where lax records can enable tax evasion.

How to Avoid It:

• Implement automated transaction monitoring systems to flag anomalies, such as rapid small transfers or activity outside normal hours, with rules tailored to your risk profile.
• Define policies for identifying linked transactions and prevent easy overrides. For agents in high-risk areas, increase monitoring frequency.
• Store comprehensive records—transaction details, customer IDs, and decision rationales—in secure, auditable digital systems for the required period, avoiding issues like weak IT security.

4. Inconsistent Sanctions Screening and SAR Reporting

Failing to screen all parties against sanctions lists (e.g., UN, OFSI) or using outdated databases is a common error, risking dealings with prohibited entities. Additionally, many MSBs lack clarity on Suspicious Activity Reporting (SAR), leading to under-reporting or failure to comply with the Proceeds of Crime Act 2002 and Terrorism Act 2000, which carry criminal penalties under POCA Section 330.

How to Avoid It:

• Integrate daily-updated sanctions screening into onboarding and transaction processes, covering all parties involved, using reliable sources like OFSI.
• Train staff on SAR triggers, such as third-party funding or transfers to high-risk regions, and use software to streamline submissions to the National Crime Agency (NCA).
• Keep detailed records of screenings and SAR decisions to ensure a robust compliance trail, with regular audits to verify consistency.

5. Insufficient Training for Staff and Agents

Training deficiencies, particularly among agents with limited AML knowledge or language barriers, lead to compliance gaps in areas like source-of-funds verification or transaction monitoring. Principals often fail to verify training effectiveness, breaching MLR Reg. 24 and risking network-wide issues, such as misuse of customer identification documents or structuring of transfers to avoid reporting thresholds in money remittance services.

How to Avoid It:

• Provide regular, role-specific training for staff and agents, covering MLRs, SARs, and risk-based approaches. Use multilingual materials and test comprehension with practical scenarios.
• Principals should enforce training requirements in agent contracts and monitor compliance through regular reviews of transaction patterns.
• Engage external consultants for gap analyses, but maintain accountability in-house. The MSB Association UK offers training resources and webinars to support members.

Final Thoughts

Compliance is an ongoing journey, with risks evolving alongside criminal tactics and regulatory updates. By addressing these common mistakes, MSBs can strengthen operations, build trust with banks, and contribute to a safer financial system. Proactive compliance isn’t just about avoiding penalties, it’s about fostering long-term success.