Principal MSB

A principal MSB is the money services business that holds the registration and licenses on which a network of agents or authorized delegates relies. The agent serves the customer at the counter or on the app, but the transaction is carried out under the principal's authority, and regulators hold the principal responsible for what happens in its name: the agent's customer identification, its record keeping, its reporting and its compliance with the limits of its appointment.

The term is used mainly in the United States, where both federal anti-money laundering rules and state money transmission laws distinguish between the entity that is licensed and the outlets that act for it. Similar structures exist elsewhere, for example the relationship between a payment institution and its payment services agents in Europe, or between an e-money issuer and an e-money distributor.

A typical remittance company, check casher or prepaid program does not open its own storefront in every town. It signs agreements with grocery stores, pharmacies, travel agencies and check cashers that accept cash and send instructions through the principal's platform. Money collected by the agent belongs to the principal, or is held in trust for it, and is swept to the principal's accounts on an agreed schedule. The principal then settles the transfer with its payout partners, often through a payment corridor it has built with banks or cash pickup networks abroad.

Because the agent acts on behalf of the principal, the agent usually does not need its own money transmitter license in states that recognize authorized delegates. That saving is the commercial reason the model exists, and it is also why regulators look so closely at how principals supervise their networks.

Under the Bank Secrecy Act and the implementing regulations at 31 CFR Chapter X, every MSB must register with FinCEN, but an entity that is an MSB solely because it acts as an agent of another MSB is generally not required to register. The principal, by contrast, must register and must prepare and maintain a list of its agents, update it at least annually, and make it available to FinCEN and examiners on request.

The principal's AML program is expected to extend to its agents. FinCEN guidance issued in 2016 set out that a principal should conduct risk-based due diligence before appointing an agent, monitor agent activity for signs of complicity in money laundering or fraud, and take corrective action, including termination, when an agent fails to comply. Agents themselves also carry obligations, such as filing currency transaction reports and suspicious activity reports, but in practice the principal usually performs much of that reporting from its central systems.

State money transmission statutes typically make the licensee liable for the payment obligations its authorized delegates incur. If an agent collects a customer's cash and fails to remit it, the customer's claim runs against the licensed principal, and the principal's surety bond and permissible investments are meant to cover that loss. The Money Transmission Modernization Act, the model law promoted by the Conference of State Bank Supervisors, keeps this structure: a licensee must have written contracts with its delegates, establish oversight policies, and ensure delegates hold collected funds in trust for the licensee.

Principals also report agent lists and changes through the NMLS in states that use it, and examiners routinely sample agent locations during exams.

• Principal: holds the license and registration, owns the customer relationship in law, carries regulatory capital and bonding, and is responsible for the compliance program.
• Agent or authorized delegate: conducts transactions on the principal's behalf within the scope of its contract, and must follow the principal's procedures.
• Sub-agent or sub-delegate: many statutes prohibit an authorized delegate from appointing further delegates without the licensee's consent, because each extra layer weakens control.

The main exposure is agent misconduct. Enforcement cases against large remittance companies have centered on agents who structured transactions, ignored obvious fraud or processed payments for criminal groups, with the principal penalized for failing to detect and stop them. A principal that grows its network faster than its monitoring capacity can find that its whole license is put at risk by a handful of outlets. Sound practice includes onboarding reviews, transaction monitoring by agent location, mystery shopping, training records and a documented process for suspending agents.

There is also a funding risk. Agents may hold the principal's money for a day or more before settlement, so a principal needs controls that limit how much cash any agent can hold, regular reconciliation of agent remittances against transaction records, and procedures for recovering money if the agent fails.

• Financial Crimes Enforcement Network (FinCEN)
• Conference of State Bank Supervisors (CSBS)