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Disclaimer: This post does not constitute legal advice. Please consult a qualified legal counsel to determine how your business model should comply with both State and Federal money transmission regulations.

Customers choose Modern Treasury because it’s a faster, easier, and more flexible way to manage payment initiation, approvals, and reconciliation. Since we don’t sit in the flow of funds, our customers work directly with their bank partners to ensure their use case is compliant with State and Federal money transmission laws. Over the years, we’ve observed that navigating these laws can be intimidating, especially for startups building money movement into their product for the first time.

This post is the first in a three-part series on money transmission laws in the United States. It provides an overview of the current legal requirements for money transmission, the rationale behind existing laws and regulations, and the well-understood exemptions to requiring a money transmitter license at both Federal and State levels. Part Two discusses how you can become compliant through an appropriately-structured FBO account with your bank. Part Three focuses on the process for acquiring money transmission licenses at the Federal and State levels. Our hope is this series helps you understand how to start the compliance conversation with your legal counsel, bank partners and other stakeholders.

However, this post and series is not intended as legal advice and is for informational purposes only. In practice, complying with relevant laws and regulations depends entirely on the details of your business model. You should work with a qualified legal counsel to identify the best approach for your company, whether that means seeking exemptions or acquiring a money transmission license.

The Origins of Money Transmission Laws in the US

Money transmission is generally defined as the act of receiving currency or other value that substitutes for currency from one party for the purpose of sending it to another party. Examples of currency substitutes in this definition could include money orders, stored value cards, and cryptocurrency. Money transmitters are required to register with the FinCEN and acquire licenses in every US state (except Montana) in which residents are able to use the business’ money transmission service.

Historically, money transmitters were businesses like remittance providers. Western Union and Moneygram are classic examples, with money transmission regulations in the US being originally written with businesses like them in mind. [1] However these regulations have not caught up to today’s reality where payments, financial services, and money movement in general is becoming a feature in all kinds of products and services. Regulations are also very broad in nature, potentially impacting a variety of businesses like online marketplaces, bill payment software, and P2P payment apps.

Any business looking to move money through its products or services needs to consider how laws and regulations, including those applicable to money transmission might apply to their business model. This can be challenging, especially for startups serving the entire US market, since money transmission laws vary significantly between Federal and State jurisdictions, and between different States. The objective of these laws and regulation also differs, making it notoriously tricky to apply existing guidelines to new business models and technologies.

Primary vs Incidental Money Transmission

It can be useful to classify business models into two categories to understand the implications of Federal and State money transmission laws.

  1. Primary transmission involves moving money as your primary business activity. Payment processors, P2P payment apps, and cryptocurrency exchanges are notable examples. Companies like Square, Venmo, and Coinbase are all engaged in primary transmission.
  2. Incidental transmission involves moving money as part of your business model without it being your primary business activity, like e-commerce companies and marketplaces. Companies like Etsy, Airbnb, and Uber that facilitate payments solely for the delivery of goods and services sold on their platforms are examples of incidental transmission.

In practice, the distinction between primary and incidental transmission may not be so clearcut. Knowing which category your startup falls into ultimately depends on the details of your business model.

Federal Money Transmission Regulations

The Bank Secrecy Act (BSA) of 1970 governs money transmission at the Federal level, with the Financial Crimes Enforcement Network (FinCEN) being tasked with enforcing compliance. [2] FinCEN defines money transmission as the “acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means." The primary objective of the BSA is to prevent money laundering and terrorist financing by requiring financial transactions to be tracked and attributed to known entities.

Money transmitters are a type of ‘money services businesses’ as defined by FinCEN. [3] Other types of money services businesses include currency exchangers and issuers of money orders, stored value cards, or traveler’s checks. Banks and regulated financial institutions and entities regulated by the Securities and Exchange Commission (SEC) or Commodities and Futures Trading Commission (CFTC) are not classified as money services businesses even though they might be engaged in money transmission, and are exempt from registering as a money transmitter with FinCEN.

Given the broad nature of this definition, any business in the flow of funds could be considered a money transmitter and required to register, regardless of whether it qualifies as primary or incidental transmission. Fortunately, FinCEN has issued a number of guidelines over the years that have led to well-understood exemptions for certain types of businesses.

FinCEN Exemptions from Money Transmission

There are three common exemptions from registering as a money transmitter at the Federal level.

Payment processor exemption

Companies that process payments as their primary business activity can avail the payment processor exemption provided they use regulated payment networks like ACH and Fedwire. Since these networks only admit entities like banks and other financial institutions that are already required to comply with the Bank Secrecy Act, payment processors that partner with banks or financial institutions to move money don’t need a money transmitter license. Additionally, the payment processor must have a formal agreement with the seller or merchant to facilitate payments on their behalf for the goods or services they provide. For example, payment processors like Square and Braintree, and bill aggregators like Bill.com, qualify for this exemption when they process ACH payments for their merchants on account of their partnerships with banks and financial institutions.

Agent of the payee exemption

Similar to the payment processor exemption, the agent of the payee exemption applies to companies handling payments on behalf of a provider of goods or services. They generally fall into the incidental transmission category. It also requires these companies have a formal agreement with the payee to handle payments. Marketplaces like Uber and Airbnb are prime examples of such businesses. Airbnb collects payments from guests with the sole purpose of sending them to hosts over regulated payment networks like ACH.

Authorized delegate exemption

The authorized delegate exemption allows a company to move money without registering as a money transmitter by partnering with an entity that is either already licensed as a money transmitter or exempt from registration. The most common arrangement involves a company operating under the money transmission exemption of the bank they partner with to handle payments via an FBO account. For example, a startup operating a marketplace for construction equipment rentals would set up a FBO account solely for the purpose of facilitating payments between renters and equipment owners.

Whether your business qualifies for any of these exemptions depends entirely on your business model. We highly recommend consulting your lawyer to determine if any of these exemptions apply.

Registering as a money transmitter

Businesses unable to avail an exemption must register as a money service business with FinCEN within 180 days of starting money transmission operations [4], and must renew their registration every two years. They need to have processes in place for ongoing compliance, such as suspicious activity reporting [5], ensuring that suspect transactions on their platforms are immediately made aware to FinCEN. They must also must maintain a list of agents [6] that covers other entities reselling or distributing money transmission services on their behalf.

Registering as a MSB with FinCEN is free of cost and relatively straightforward through an online registration system. We highly recommend working with a qualified legal counsel if you need to register as a money transmitter.

State Money Transmission Regulations

Businesses must be compliant with money transmission regulations in every state where residents of that state use the product or service, regardless of where they are headquartered. State money transmission laws apply the moment you offer products or services to an individual or business that is a resident of the state.

Navigating State regulations is the most difficult part of figuring out your compliance strategy. They are different from Federal regulations, and also differ significantly between states. While the primary focus of regulation at the Federal level is to prevent money laundering, it is hard to ascribe a singular motivation to regulation at the state level. Because each state is trying to achieve a different set of objectives with their regulations—whether that’s consumer protection, attracting the financial services industry, or preventing money laundering—money transmission regulations lack a uniform structure across states.

For example, California regulates money transmission with a view to “protect the interests of consumers of money transmission businesses in this state and to maintain public confidence in financial institutions doing business in this state,” while New York’s objectives involve “fostering the growth of the financial industry” and “eliminating financial fraud.” [7] On the opposite end of the spectrum is Montana, which has no state regulations for money transmission whatsoever.

The Federal exemptions outlined above are also not consistently available between states. For example, Illinois and Florida do not appear to offer the agent-of-the-payee exemption, while it was recently introduced by California in 2014. The authorized delegate exemption appears to be available in Texas and New York only [8]. Even when the same exemptions are available, states can impose very different requirements to qualify for them.

This lack of consistency between states in available exemptions is particularly challenging to companies engaged in incidental money transmission. While acquiring separate money transmission licenses in each state makes business sense for companies like Coinbase and Square, or even startups where money transmission is the primary business, it can be completely unfeasible for the same construction equipment rental startup that’s only moving money as part of providing rental services.  

Efforts are currently underway to standardize money transmission regulations and exemptions across states, most notably through the Money Transmitter Regulator Association and the Uniform Money Services Act, a model law developed as a template for states to pass consistent money transmission regulations. However, progress has been slow, with only seven states — Alaska, Arkansas, Iowa, New Mexico, Texas, Vermont, and Washington—and two territories, Puerto Rico and the U.S. Virgin Islands, having enacted the Act so far.

Another helpful resource is the Nationwide Multistate Licensing System, or NMLS, which was set up in 2008 to make it easier for companies to apply, amend, renew, and surrender various state licenses, including money transmission licenses, in multiple states. The NMLS does not play any role in defining state laws or granting licenses. Its objective is to streamline the multistate licensing process through better information sharing and coordination between companies and state regulators.

Conclusion

Money transmission regulations in the US are so complicated in large part because they are not designed to accommodate consumer demand for faster, cheaper, and more accessible financial products and services. But the emergence of successful fintechs like Stripe, Square and Coinbase over the last decade has led to more guidelines and clarification from agencies about who needs to obtain licensing, and as a result, has also led to a honing in on exemptions.

Our hope is this post has provided you with enough information to have productive conversations about your compliance strategy with your legal counsel, customers, and other stakeholders. In Part 2 of this series, we’ll discuss how an appropriately structured For Benefit Of (FBO) Account with your banking partner can be used to achieve compliance for certain money movement use cases. Subscribe to the Journal to be notified when it’s published.

Get in touch

If you’re looking to add payments to your product or service for the first time, or are exploring alternatives to your existing solution, we’d love to hear about your use case. Get in touch with us here.

Special thanks to Michelle Jun at Payments Law and Dave Lundeen at Scale LLP for their help with reviewing this series.

References

1.

Yale Journal of Law and Technology, Vol. 18 [2017], Iss. 1, Art. 4

2.

https://www.fincen.gov/resources/statutes-regulations

3.

https://www.fincen.gov/money-services-business-definition

4.

https://www.fincen.gov/money-services-business-msb-registration

5.

https://www.fincen.gov/money-services-business-msb-suspicious-activity-reporting

6.

https://www.fincen.gov/money-services-business-msb-agent-list

7.

Yale Journal of Law and Technology, Vol. 18 [2017], Iss. 1, Art. 4

8.

Yale Journal of Law and Technology, Vol. 18 [2017], Iss. 1, Art. 4

9.
10.