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The Green Sheet Online Edition

May 26, 2014 • Issue 14:05:02

Legal ease:
Becoming a money transmitter

By Adam Atlas
Attorney at Law

With every bit of innovation in payments, the line between regulated entities, like money transmitters, currency exchanges and check cashers, and less regulated entities, like sales offices and marketing companies, blurs ever more. To their credit, ISOs are getting more creative in competing for merchant business.

Some of that creativity goes into added products and services. ISOs should be aware that some activities require federal registration and state licensing. If you operate as a money transmitter without the required state licenses and federal registration, for example, you could find yourself in jail.

MSB Law 101

The money services business (MSB) is the broadest category of nonbank regulated payment businesses. MSBs include money transmitters, like Western Union affiliates, currency exchange services, check cashers and a handful of other nonbank financial service providers.

While the Federal Bank Secrecy Act and the banking laws of each state have their own autonomous definition of money transmission, the term usually means taking value from one person and promising to deliver that value to another person or another place. Classic money transmission involves an international remittance provider who specializes in sending money to a customer's family overseas.

In this example, a U.S. resident gives $1,000 to a money transmitter to be sent to a family member in a foreign country. The money transmitter then gives the sender a receipt and the sender hopes the money will go to its intended recipient.

Senders thus take the risk that dishonest money transmitters will not actually send the money to the recipient. As a result of this risk, and others like it, and also to prevent criminals from abusing MSBs for criminal purposes, MSBs are required to obtain state licenses and also register with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN).

FinCEN collects information on MSBs and on the transactions they find to be suspicious. FinCEN is then able to assist law enforcement in solving crimes by way of clues in financial transactions.

I'm an ISO, not an international money transmitter

The international money transmitter model is the easiest example of money transmission. There are, however, a number other businesses that may or may not be categorized as money transmitters, depending on how they work. These can include providers of bill payments, rent payments, mortgage payment management, loan payment processing, debt consolidation, peer-to-peer payments or credits, crowd-funding, e-wallets, mobile wallets, mobile prepaid services, and online credit.

New businesses like these are popping up every day, and some of them intersect with ISOs. ISOs should therefore be very sensitive to new business models that involve, for example, any of the following, as they might constitute money transmission, depending on how they work:

  • Holding payment funds for a merchant's customer
  • Exchanging virtual currency, like bitcoin, for real currency
  • Using a trust account to accumulate merchant payments
  • Automated clearing house payment processing by ISOs
  • Assuming control over merchant or customer funds
  • Using models that expose consumers to risk of loss of funds
  • Exploiting dubious business opportunities related to virtual currency

When done properly and with clearance from federal and state regulators, many innovative models can operate without licensing or registration. The point here is to know what you don't know. Specifically, you want to know if the model you are operating or being asked to sell is, in fact, legal.

As we all know, technology and innovation far outpace the law. So an ISO could be offered an amazing product at a tradeshow to include in its offerings to merchants. The product could be, for example, a prepaid mobile wallet that consumers can use to spend funds at a variety of retailers.

Naturally, the ISO is not expected to be able to divine the legal status of the new model right there on the tradeshow floor. Instead, the ISO should know to ask whether the new model has been vetted by legal experts. There is no point in an ISO selling a product that will, at some point down the road, be closed down for lack of MSB compliance.

Where do ISOs add value to new business models?

If ISOs need to avoid business models that have compliance issues, and they aren't especially adept at knowing what is legal and what is not, where can they add value to a new MSB model? Sales, of course.

A number of the new MSB startups have great ideas, smart management and even deep pockets from investors. What they usually lack is the ability to sell. They also often lack the knowledge that sales is a necessary part of payment business growth.

Coming from the Facebook "Like me" generation, many payment startups hope to simply catch a wave of interest on the Internet that will result in massive popularity. While this has been the case for a handful of well known players, it is not true of most startups. Here is where real sales, rather than basically gambling, comes in to add value.

Most new merchant accounts are created because of sales by ISOs. The same reasoning could apply to a new MSB payment model. If payment startups saw the true value of the veteran sales channels and those sales channels took more time to integrate innovative offerings, we would see more sales throughout the industry.

Niche that MSB

Hopefully, you will take from this article a sense of both the seriousness of MSB compliance and the niche value ISOs can bring to the many new payment businesses that are all too eager to engage with merchants.

Note that MSB regulations differ in each state. To understand how your business model would operate on a national level, take a look at the laws of all 50 states, as well as applicable federal law. Although dipping into the MSB realm is an enormous undertaking, and the consequences of getting it wrong are dire, it can be well worth the time and expense in the long run. end of article

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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