By Adam Atlas
Attorney at Law
For better or for worse, financial services are ever more regulated. Examples of a considerable increase in regulation of bank and nonbank financial services include: an expansion of Bank Secrecy Act (BSA) regulations into prepaid issuing, enforced by the Financial Crimes Enforcement Network (FinCEN); the creation of the Consumer Financial Protection Bureau (CFPB); and state laws concerning escheatment and early termination fees.
Important public policy reasons prompted these new regulations, such as combating terrorism and money laundering, as well as protecting consumers from misleading service providers. The regulations, however, create increased costs of compliance for payment services.
ISOs, as agents of banks, have traditionally been exempt from the more onerous portions of these legal compliance requirements, such as registration with FinCEN, maintenance of an anti money-laundering (AML) program, and reporting of suspicious activity or large currency transactions to FinCEN.
ISOs have not been actively involved in these compliance requirements because the banks that process for them have carried the regulatory burden. For example, before a merchant is accepted for processing with a given bank, the bank's underwriting department makes sure the merchant is not listed on the Specially Designated Nationals (SDN) list of the U.S. Treasury Department's Office of Foreign Assets Control (OFAC).
Even when a full-liability ISO places a merchant, the bank still puts the merchant through a BSA underwriting process over and above the financial underwriting with which ISOs are usually most concerned. As financial institutions, banks are held accountable by FinCEN and state regulators to statutes that require rigorous compliance programs in order to prevent the financial system from being abused by terrorists and money launderers.
The purpose of this article is to give ISOs sensitivity to AML compliance, as well as identify a handful of rules that may already be applicable to ISOs.
On a tangential point, I highly recommend that ISOs question their acquiring processors as to their readiness for the potential of the Marketplace Fairness Act (also known as the Amazon tax) to become law within days or months. This federal law, if passed, would require online retailers to collect state sales tax.
This law may present revenue opportunities for acquiring banks, processors and ISOs that they may lose if they do not collaborate prior to the proposed law taking effect. Specifically, they have an opportunity to work with a tax lookup and remittance intermediary that may be able to share in basis points on the taxes collected. It's been a long time since ISOs have heard of new basis-point line items of revenue.
Each payment business is unique. Between two seemingly identical ISOs, considerable variations will exist in compliance requirements. ISOs should proceed with caution in taking on new roles in the payments industry in order to make sure they are not unwittingly running against the grain of the many rules regulating payment services.
For additional basic compliance information, please visit www.moneyservicesbusinesslaw.com.
The following excerpt from the FinCEN website explains the agency's mission and some of the actions it takes to carry out its duties. For the complete description, please visit www.fincen.gov/about_fincen/wwd/index.html.
"FinCEN is a bureau of the U.S. Department of the Treasury. ... FinCEN's mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.
"FinCEN carries out its mission by receiving and maintaining financial transactions data; analyzing and disseminating that data for law enforcement purposes; and building global cooperation with counterpart organizations in other countries and with international bodies. FinCEN serves as the FIU [financial intelligence unit] for the United States and is one of more than 100 FIUs making up the Egmont Group, an international entity focused on information sharing and cooperation among FIUs. ... As one of the world's leading FIUs, FinCEN exchanges financial information with FIU counterparts around the world in support of U.S. and foreign financial crime investigations.
"The basic concept underlying FinCEN's core activities is 'follow the money.' The primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN partners with law enforcement at all levels of government and supports the nation's foreign policy and national security objectives."
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law, at firstname.lastname@example.org, or at 514-842-0886.
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