Because of the security risks that movement of funds can pose if transacted with the wrong parties—like money laundering and financing illicit activities— money transmission is strictly regulated under federal and state laws.
What is a money transmitter?
A money transmitter is a service that transfers money for businesses. In the United States, they are a category within a larger group of Money Service Businesses, also known as MSBs. Any business that issues money orders, traveler’s checks, or other types of monetary value can be classified as an MSB. Payment services like Square, Venmo, and Paypal are all examples of licensed money transmitters.
Why are money transmission laws important?
Money transmission laws operate at federal and state levels. On a federal level, the Bank Secrecy Act requires money transmitters to register with the Financial Crimes Enforcement Network, or FinCEN. By enforcing registration and licensure, the BCA aims to prevent money laundering, trafficking, and in more extreme cases, terrorism.
State regulations vary widely, given that each state operates with its own interests in mind. This creates an inconsistent, unorganized array of regulation laws. Currently, 49 states with the exception of Montana have their own regulations.
Money transmission laws are complex because they are not a one-size-fits-all solution when it comes to regulation. MSBs must be knowledgeable about which state requirements and policies they need to comply with, depending on the types of money transfer services they provide.
Do I need a money transmission license?
If your business is involved in any form of money movement, it’s important to be acutely aware of both federal and state regulations. There are two approaches you can take: register for a money transmission license or get an exemption.
Registering for a federal money transmission license is fairly simple. Once your business is established as an MSB, you must complete a Registration of Money Services Business and register with FinCEN within 180 days. You must also renew registration every few years and make sure that your services are continuously compliant with money transmission laws. Acquiring a state-level license can be more complex, depending on your state’s regulations.
You can get an exemption at the federal level if your business falls into one of three categories: payment processor, agent of the payee, and authorized delegate exemption. Each exemption has its own rationale for which payments or money movement services do not need to be regulated under FinCEN.
For example, companies like Uber or Airbnb are not considered money transmitters at the federal level because they qualify for the agent of the payee exemption. While payment services act to transfer funds from one party to another, Uber and Airbnb transact money with the express purpose of paying drivers and hosts — not necessarily for ongoing transmission. It’s important to note that since these exemptions are not uniformly available at the state level, businesses of this type may still need to comply under different state laws.
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.