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On January 7, the Conference of State Bank Supervisors (CSBS) released a report by its Fintech Industry Advisory Panel outlining progress made on several initiatives to streamline state licensing and supervision of financial technology companies. As previously covered by InfoBytes, the panel was convened in 2017 as part of Vision 2020—a state regulator initiative to modernize the regulation of fintech companies and other non-banks by creating an integrated, 50-state system of licensing and supervision. The Accountability Report charts progress on initiatives identified by the panel, which, according to the announcement, fit into four focus areas: (i) the use of CSBS regtech for licensing and exams, including expanding the use of NMLS among states across all license types for nonbank financial services, developing “state licensing requirements for multi-state consistency,” and launching a new state examination system; (ii) improved consistency among states, including 26 states signing on to the Multistate Money Service Business (MSB) Licensing Agreement, which is intended to streamline the MSB licensing process; (iii) the creation of uniform definitions and practices and the development of a 50-state MSB model law and state accreditation programs for MSBs, which will encourage greater consistency among states; and (iv) increased regulatory transparency, including online resources for state guidance and exemptions, as well as information sessions with regulators and industry to discuss fintech developments.
On December 4, FinCEN announced the release of a Financial Trend Analysis titled, “Elders Face Increased Financial Threat from Domestic and Foreign Actors.” In compiling the report, FinCEN reviewed Bank Secrecy Act (BSA) elder financial exploitation suspicious activity reports (SARs) from 2013 to 2019 to detect patterns and trends. Among other things, the study found that (i) elder financial exploitation filings nearly tripled during the study period, from around 2,000 per month in 2013 to nearly 7,500 in 2019, the majority of which were filed by money services businesses (MSBs) and depository institutions; (ii) while the amount of SARs filed by MSBs ebbed and flowed from 2013 to 2019, those of depository institutions steadily increased; (iii) MSBs filed nearly 80 percent of all SARs describing financial scams, while securities and futures firms filed just over 70 percent of all SARs describing theft; (iv) financial theft from elders is most frequently perpetrated by family members or caregivers; (v) SARs indicated that the most common scams included lottery, person-in-need, and romance scams, the majority of which saw elder victims transferring funds through MSBs; and (vi) money transfer scam SARs were most commonly filed by MSBs who transferred money to a receiver located outside the U.S.
On November 15, Financial Crimes Enforcement Network (FinCEN) Director Kenneth Blanco delivered remarks at the Chainalysis Blockchain Symposium to discuss, among other things, the agency’s focus on convertible virtual currency (CVC) and remind attendees—particularly financial institutions—of their compliance obligations. Specifically, Blanco emphasized that FinCEN applies a “technology-neutral regulatory framework to any activity that provides the same functionality at the same level of risk, regardless of its label.” As such, money transmissions denominated in CVC, Blanco stated, are money transmissions. Blanco discussed guidance issued by FinCEN in May (previously covered by InfoBytes here) that reminded persons subject to the Bank Secrecy Act (BSA) how FinCEN regulations relating to money services businesses apply to certain business models involving money transmissions denominated in CVC. Blanco also highlighted the agency’s recent collaboration with the CFTC and the SEC to issue joint guidance on digital asset compliance obligations. (Previous InfoBytes coverage here.) Highlights of Blanco’s remarks include (i) suspicious activity reporting related to CVC has increased, including “filings from exchanges identifying potential unregistered, foreign-located money services businesses”; (ii) compliance with the “Funds Travel Rule” is mandatory and applies to CVC; (iii) for anti-money laundering/combating the funding of terrorism purposes, accepting and transmitting activity denominated in stablecoins falls within FinCEN's definition of “money transmission services” under the BSA; and (iv) administrators of stablecoins must register as money services businesses with FinCEN.
On October 1, the Conference of State Bank Supervisors (CSBS) issued a request for comments on its Draft Model Law Language for money services businesses (MSBs). According to CSBS, state regulation of MSBs is a primary part of Vision 2020—a state regulator initiative to modernize the regulation of fintech companies and other non-banks by creating an integrated, 50-state system of licensing and supervision. (Previously covered by InfoBytes here.) The model MSB law draft addresses recommendations made by the Payments Subgroup of the Fintech Industry Advisory Panel, and “is based on and overlays the Uniform Money Services Act.” In addition, the draft amends definitions and interpretations that vary between states, and consists of three primary policies: (i) regulations “must sufficiently protect consumers from harm, including all forms of loss”; (ii) regulations “must enable the states’ ability to prevent bad actors from entering the money services industry”; and (iii) regulations “must preserve public confidence in the financial services sector, including the states’ ability to coordinate.” According to the Fintech Industry Advisory Panel, differences in standards and procedures for change in control have created significant administrative burdens, which the working group addressed by standardizing change of control triggers and the definition of control persons. The draft also includes implementation language designed to provide the legal framework to facilitate interstate coordination and the adoption of consistent standards and processes. The proposed language is adapted from current state laws, which focus “on permitting interstate supervision and creating parity between national and state chartered banks.” CSBS notes that using these models will grant states the legal authority to adjust to new products, risks, processes, and technological capabilities in a coordinated manner.
Comment are due November 1.
On June 24, the Conference of State Bank Supervisors (CSBS) announced that financial regulators from 23 states have now agreed to a multi-state compact that will offer a streamlined licensing process for money services businesses (MSB), including fintech firms. As previously covered by InfoBytes, in February 2018, the original agreement included seven states. According to the announcement, 15 companies are currently involved in the initiative, and as of June 20, they have received 72 licenses. The 23 states participating in the MSB licensing agreement are: California, Connecticut, Georgia, Iowa, Idaho, Illinois, Kansas, Kentucky, Louisiana, Massachusetts, Mississippi. North Carolina, North Dakota, Nebraska, Ohio, Rhode Island, South Dakota, Texas, Tennessee, Utah, Vermont, Washington, and Wyoming.
On May 30, the Commonwealth Court of Pennsylvania reversed an order by the Pennsylvania Department of Banking and Securities Commission (Commission) issued against a mobile giving app and two of its executives (petitioner), holding that the petitioner was not required to be licensed by the Commission because it was not transmitting money under the court’s interpretation of the Pennsylvania Money Transmitter Act (Act). In 2016 the Compliance Office of the Department of Banking and Securities (Department) issued an order to cease and desist against the petitioner for transmitting money in the state without a license as required under the Act. At issue was whether petitioner’s activities constituted “transmitting money” under the Act, or merely involved collecting and supplying information. The Department claimed the petitioner’s app was “an indispensable part of a chain of events through which money was transferred from the donors to the recipients of the donations.” However, the petitioner argued that the app simply connected donors to the recipients, and that the actual transmission of money was outsourced to a payment processor who conducted the actual transactions.
The six-judge majority stated that the Commission’s interpretation of the Act was too broad, holding that “[o]n a basic and critical level, the Commission erroneously interpreted the terminology ‘engage in the business’ in an overly expansive manner and essentially read it as prohibiting any conduct that contributes toward—or has a tangential involvement with—the concrete and real act of ‘transmitting money.’” Moreover, “the key term in ascertaining the defining characteristic of the conduct that is proscribed by the statute is ‘transmitting,’” and while the petitioner’s “software application can be deemed to have acquired and ‘transmitted’ information vital to the donative transactions to [the payment processor], by no means was [the petitioner] ‘transmitting money’ itself, or transmitting some other ‘method for the payment’ of the donation, ‘from one person or place to another.’”
On May 9, the Financial Crimes Enforcement Network (FinCEN) issued new guidance designed to consolidate and clarify current FinCEN regulations, guidance, and administrative rulings related to money transmissions involving virtual currency. FinCEN noted that the guidance, “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (CVC),” serves to “remind persons subject to the Bank Secrecy Act (BSA) how FinCEN regulations relating to money services businesses (MSBs) apply to certain business models involving money transmission denominated in value that substitutes for currency, specifically, convertible virtual currencies (CVCs).” The guidance does not create any new expectations but instead “applies the same interpretive criteria to other common business models involving CVC.” These business models include peer-to-peer exchangers, CVC wallets, CVC money transmission services through electronic terminals (CVC kiosks), decentralized (or distributed) applications (DApp), anonymity-enhanced CVC transactions, CVC payment processors, and internet casinos. Finally, the guidance also specifies specific business models that may be exempt from the definition of a money transmitter. The same day, FinCEN also issued an “Advisory on Illicit Activity Involving Convertible Virtual Currency” to highlight threats posed by the criminal exploitation of CVCs for money laundering, sanctions evasion, and other illicit financing purposes, and to provide identification and reporting guidance for financial institutions.
On April 18, the Financial Crimes Enforcement Network (FinCEN) announced a civil money penalty against a California-based individual operating as peer-to-peer exchanger for willful violations of Bank Secrecy Act (BSA) money service business (MSB) requirements. According to FinCEN, the exchanger engaged in activities such as (i) advertising his intentions to purchase and sell bitcoin; and (ii) completing transactions using in-person cash payments, currency sent or received in the mail, or wire transfers through the use of a depository institution. These activities, FinCEN claimed, qualified him as a virtual currency exchanger, MSB, and a financial institution under the BSA. As such, the exchanger was required to register as a MSB with FinCEN, establish and implement an effective written anti-money laundering program, detect and file suspicious activity reports, and report currency transactions, which he failed to do. The order requires the exchanger to pay a $35,350 civil money penalty and permanently prohibits him from engaging in any activity that would qualify him as a MSB.
On April 10, NYDFS announced that it denied a company’s applications to engage in virtual currency business and money transmission activity in New York due to the company’s alleged deficiencies in BSA/AML and Office of Foreign Assets Control (OFAC) compliance requirements, capital requirements, and token and product launches. According to the denial letter, the company applied for a virtual currency business activity license in August 2015, and had been operating under NYDFS’ virtual currency “safe harbor” ever since. Additionally, in July 2018, the company applied to engage in money transmission activity with the state. According to NYDFS, the state’s licensing law requires an applicant to demonstrate the ability to comply with the provisions of the licensing requirements, including “implementing an effective BSA/AML/OFAC compliance program as well as other measures to protect customers and the integrity of the virtual currency markets.” Based on NYDFS’ four-week on-site review of the company’s operations, NYDFS concluded, among other things, that the company’s BSA/AML/OFAC compliance program lacked (i) adequate internal policies, procedures and controls; (ii) a qualified, effective compliance officer; (iii) adequate employee training; (iv) adequate independent program testing; and (v) adequate customer due diligence. The company is required to immediately cease operating in New York State and doing business with New York residents and has 60 days to wind down or transfer its positions and transactions.
On April 2, the New Mexico governor signed HB 584, which amends the Collection Agency Regulatory Act and the Motor Vehicle Sales Finance Act to, among other things, require sales finance companies obtain a license to conduct business in the state. The bill outlines licensing requirements for such companies. State and national banks authorized to do business in the state are not required to obtain a license under the Motor Vehicle Sales Finance Act, “but shall comply with all of its other provisions.” Under HB 584, the Director of the Financial Institutions Division of the Regulation and Licensing Department may utilize the Nationwide Multistate Licensing System and Registry (NMLS) or other entities designated by the NMLS in order to receive and process licensing applications. The Director is also granted the authority to issue and deny licenses.
HB 584 also amends definitions used within the state’s Mortgage Loan Originator Licensing Act, and outlines provisions related to (i) licensing, registration, renewal, and testing requirements; (ii) certain exemptions; (iii) the issuance of temporary licenses to out-of-state mortgage loan originators who are both licensed through the NMLS and complete the mandatory education and testing requirements; and (iv) continuing education requirements. HB 584 also grants the Director the authority to establish rules for licensing challenges; “deny, suspend, revoke or decline to renew a licenses for a violation of the New Mexico Mortgage Loan Originator Licensing Act”; and impose civil penalties for violations.
Furthermore, HB 584 also amends the definitions used within the state’s Uniform Money Services Act and the Collection Agency Regulatory Act by listing licensing application requirements, and granting the Director the same authorities provided above.
The amendments take effect July 1, 2019.
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- Daniel P. Stipano to discuss "A 20/20 view on 2020’s legislative and regulatory outlook" at the ACAMS Anti-Financial Crime and Public Policy Conference
- Kari K. Hall and Michelle L. Rogers to discuss "Overdrafts and regulatory trends" at the CLE Alabama Banking Law Update
- Kathryn L. Ryan to discuss "Industry open forum session on NMLS usage" at the NMLS Annual Conference & Training
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