By Adam Atlas
Attorney at Law
Most ISOs don't have local or state licenses other than the registration of a dba with a local secretary of state. Traditionally, ISOs have not been subject to state licensing. Electronic wallet providers, money transmitters, check cashers, foreign exchange dealers and other money services businesses (MSBs), on the other hand, have had to register federally and also obtain state licenses. Failure to do so can lead to stiff penalties, including prison.
As the lines start to blur between acquirers, issuers, ISOs, gateways, shopping carts, e-wallets, marketplaces and everyone in between, it has become more important for all payments industry participants to pause and consider whether they need federal registration or state licenses.
ISOs need to be aware of this topic and learn how to navigate between unregulated and regulated payment models, because if they or their merchant clients find out they are an MSB, the consequences of not having the necessary licenses are extremely serious. Whether a business is an MSB is a legal question that should be answered by qualified legal counsel with input from the relevant federal and state regulators.
MSB is used in both federal and state law to refer to a broad group of regulated entities. These include, for example, money transmitters, check cashers, foreign exchange dealers, virtual currency exchanges and a number of other business models.
A classic MSB is a local corner-store money transmitter that helps new Americans send money to family members overseas. MSBs resemble banks, but they are not banks. They take on some of the functions of banks, such as wiring money to other places, but unlike banks, they do not take funds on deposit.
There are as many payment models as there are businesses these days. If you want to jog your imagination, have a look at a list of over 400 I put together at www.paymentsbusinessideas.com. Each model deserves its own review for MSB status by qualified, experienced legal counsel. (I don't usually emphasize the need for legal representation in this column, but the subject of MSB status should not be determined without input from counsel because of the serious negative outcomes of an incorrect determination.)
It often surprises new MSBs, but they have to comply with at least 51 sets of laws: federal law, primarily the Bank Secrecy Act and state banking laws in each of the 50 states. There is no way around the fact that this is a daunting task, in terms of time and expense.
Federal law concerning MSBs is directed primarily at the prevention of money laundering and the financing of terrorism. The federal Bank Secrecy Act requires MSBs to register (for free) with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN).
Federal law also requires MSBs to maintain an anti-money laundering program and report suspicious activity and other notable events to FinCEN. For example, if you walk into your local corner store money transmitter with a duffel bag with $100,000 in cash to be sent overseas, that money transmitter may see it fit to report that as suspicious activity to FinCEN.
State law for MSBs makes federal law look like a walk in the park. Most state banking laws require MSBs to obtain a state license. The state licensure process involves a lot of paperwork, application fees that can be as high as $10,000, and a surety bond that can range from $10,000 to $2,000,000. Applicants also have to be patient. The licensure process can take over a year.
Once a state license has been obtained, the MSB has to provide the state with quarterly reports so the state can be sure the MSB remains financially sound. State oversight of MSBs is primarily a consumer protection measure. With the mandate of protecting the general public, state banking regulators want to be sure that an MSB will not abscond with citizens' money.
For example, where a new American gives a hard-earned $1,000 to a money transmitter to be sent to family overseas, the state regulator wants to be sure that that money is actually sent to the person where the money transmitter has promised to send it. When the money transmitter fails to do that because the business is dishonest or negligent in managing the money, the bond placed with the state regulator and other requirements serve to assist the wronged consumers.
Business today is a bit like packaged snacks. They are easy to eat, tasty and made of ingredients you have never heard of and can't be bothered to figure out. Bringing the snack food analogy to payments, it becomes ever easier to make a payment and ever less clear to whom the payment is made.
For example, a merchant selling through an online marketplace and using a payment facilitator, such as Stripe, could present a consumer with as many as four distinct sets of applicable terms and conditions:
Depending on how these four sets of terms and conditions come together, the sum total of the model could either be unregulated payment processing or highly-regulated money transmission.
ISOs don't need to learn all of the complicated rules around MSB status; they should instead be sensitive to the existence of the issue, and reach out to counsel where there is doubt. Tempted by new high-volume merchant accounts, ISOs can be lured into overseeing these issues and inadvertently drawn into regulatory issues.
Even if you are not an MSB, there are lessons to be learned for ISOs from MSBs. Specifically, concern over money laundering and the financing of terrorism, which is central to the legal obligations of an MSB, is something that is also relevant to ISOs. All ISOs should consider having their own anti-money laundering programs even though this might not be a legal requirement for ISOs.
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 firstname.lastname@example.org or call him at 514-842-0886.
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