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On September 9, the Conference of State Bank Supervisors (CSBS) released the Uniform Money Transmission Modernization Act as part of states’ broader effort for modernizing the state financial regulatory system. The act, also referred to as the Money Transmitter Model Law, is intended to replace 50 sets of state-specific money transmitter laws and rules with a single set of nationwide standards and requirements designed by state and industry experts. According to CSBS, the law is a result of continuing discussion among state regulators and industry that began under CSBS’ “Vision 2020”, which convened a Fintech Industry Advisory Panel to determine pain points in the state system (previously covered by InfoBytes here). Among other things, the law: (i) “[p]rovides regulators with the tools needed to regulate money transmitters of all sizes, including those that operate globally or small businesses operating locally”; (ii) standardizes definitions, exemptions, the licensing process, the change in control process, and requirements regarding safety and soundness; (iii) enables multistate licensing and multi state supervision; and (iv) “[f]acilitates the development of technology and data analytics necessary to supervise at scale with local accountability.” CSBS also notes that the law will benefit customers of companies that offer digital wallets, prepaid cards, money orders and cash or virtual currency transmissions by establishing a common regulatory floor and standardized and risk-based requirements. In addition to the law, CSBS released Money Transmitter Model Law FAQs and Fintech Industry Advisory Panel Recommendations.
Recently, the California Department of Financial Protection and Innovation (DFPI) released several new opinion letters covering aspects of the California Money Transmission Act (MTA) related to virtual currency and agent of payee rules. Highlights from the redacted letters include:
- Agent of Payee – Fund Transfers in Connection with Real Estate Closing Transactions. The redacted opinion letter reviewed whether a company—licensed as a money transmitter in several states, including California, and registered with FinCEN as a money services business—is eligible for the agent-of-payee exemption under the MTA. The company proposes to “facilitate fund transfers in connection with real estate closing transactions” during which it “will be authorized to receive real estate closing funds on behalf of its customer (the seller of real estate).” The payment funds will first flow from the buyer of real estate to the company via the buyer’s lawyer or title company, and then from the company to the seller after the company converts the funds from U.S. dollars to another currency. By providing these services, the company, as the seller’s agent, will receive money from the buyer pursuant to a preexisting written contract between the company and the seller. DFPI concluded that “[t]o the extent these fund transfers take place in California or are with, to, or from persons located in California, [the company’s] services constitute “receiving money for transmission” because [the company] receives money from the buyer for transfer to the seller.” However, DFPI noted that a provision in the written contract, which appoints the company as the agent of the seller when the seller is located in California, allows the company’s services to satisfy the requirements of the agent-of-payee exemption in Financial Code section 2010, subdivision (l). The agent-of-payee exemption, DFPI stressed though, does not apply to sellers outside of California.
- Bitcoin ATM Kiosk. Two redacted opinion letters (see here and here) examined whether the sale and purchase of bitcoin through ATMs/kiosks described by the companies is subject to licensure under the MTA. In each instance, the transaction will only be between the consumer using the ATM/kiosk and the company, the transaction will be completed instantly without involving third parties, and any bitcoin sold will be provided from the company’s own inventory. Moreover, the letters state that the companies do not hold virtual currency on behalf of customers nor do they act in a fiduciary capacity. Because the companies’ activities are limited to selling bitcoin, DFPI determined that an MTA license is not required because the activities “do not involve the sale or issuance of a payment instrument, the sale or issuance of stored value, or receiving money for transmission.” DFPI reminded the companies that its determination is limited to the activities specified in the letters and does not relieve them from any FinCEN, federal, or state regulatory obligations.
On June 1, the U.S. Court of Appeals for the Fifth Circuit determined that a “global payment services company” does not qualify as a bank under U.S. tax code, 26 U.S.C. § 581. According to the opinion, the company described its activities to the IRS in 2008 as “banking” while referring to its products as “financial services” despite making no meaningful changes to its business from prior years when it described itself as a “nondepository credit intermediation” business and its services as “money/wire transfers.” Because companies who claim bank status receive certain significant tax benefits, the company—which had invested billions of dollars in asset-backed securities, including mortgage-backed securities—deducted losses it incurred during the Great Recession against ordinary income. However, according to the opinion, nonbanks are only permitted “to deduct losses on securities to the extent they offset capital gains, which [the company] did not have during the relevant years.” The IRS disagreed with the company’s deductions, determined it was not a bank, and assessed tens of millions of dollars in tax deficiencies. The company unsuccessfully challenged the IRS in tax court, and, following a first appeal resulting in a remand, the tax court again concluded that the company was not a bank “because it neither accepts deposits nor makes loans.”
On appeal, the 5th Circuit affirmed the tax court’s decision, stating that it only needed to address the “deposit” requirement and holding that because customers do not deposit money with the company for safekeeping “the most basic feature of a bank is missing.” The appellate court explained that therefore, under the tax code, the company was not entitled to deduct from its taxes “large losses it incurred in writing off mortgage-backed securities during the Great Recession.”
On May 26, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced the release of a joint statement by the Counter ISIS Finance Group (CIFG) of the Global Coalition to Defeat ISIS, which coordinates efforts to isolate the Islamic State of Iraq and Syria (ISIS) from the international financial system and eliminate revenue sources. The CIFG held its fourteenth meeting on May 17 to discuss ongoing efforts to combat ISIS financing worldwide, which coincided with sanctions against three individuals and one entity connected to ISIS for allegedly helping ISIS access the financial system in the Middle East through a network of international donors (covered by InfoBytes here).
Among other things, the statement highlighted ISIS’s “reliance on regional money services businesses (MSBs) to transfer funds internationally,” its focus on funding “the release of its detained operatives and family members, and its extortion and looting of Syrian and Iraqi populations.” CIFG members and observers also noted the significance of “information-sharing, increased oversight over financial institutions, and coordinated disruptive actions to deter ISIS financial supporters from accessing the regional financial system.” CIFG members and observers were also briefed on ISIS supporters’ abuse of the charitable sector and madrassa networks in Asia, in addition to “discussions on how ISIS branches and networks in Africa utilize informal funds transfer mechanisms and participate in looting to support their extremist affairs.” Delegates also “presented case studies on security operations against Europe-based ISIS supporters who raise and transfer funds online, in some cases via virtual currencies.” The statement concludes: “The work of the CIFG is critical to the global fight to defeat ISIS in all corners of the world and we will continue to engage global partners to deprive ISIS of its sources of revenue and prevent it from accessing the international financial system. We will continue learning from each other’s successes and challenges, and empowering partners in the most vulnerable jurisdictions to strengthen their anti-money laundering and combating the financing of terrorism regimes.”
On May 24, the Conference of State Bank Supervisors (CSBS) announced a request for feedback on proposed national licensing requirements for money service businesses (MSBs). According to CSBS President and CEO John W. Ryan, the purpose of the proposal is to set “a national standard that allows the state system to operate as a single network while retaining local accountability and local control.” The proposal is based on a set of nationwide requirements reviewed by a lead state agency. According to the CSBS, the remaining state-specific requirements would be limited to items not covered by the national standards. Key aspects of the proposal include an overview of MSB-specific requirements and how they apply to companies, key individuals (the new name for what was previously referred to as “control persons”), and business location, in addition to proposed changes to the license application process for the MSB industry. The national standards for MSBs include core requirements for all applicants in all industries and MSB industry-specific requirements. The new requirements are expected to notably streamline the licensing process as part of efforts by state regulators to expand uniformity in state regulation through a strategy called Networked Supervision, which incorporates technology, data, and uniform practices to strengthen regulation.
Comments on the proposal must be submitted by July 23.
On April 28, the DOJ announced the arrest of a dual Russian-Swedish national on criminal charges related to his alleged operation of a bitcoin money laundering service on the darknet. The DOJ referred to the individual’s money-laundering service as the “longest-running cryptocurrency ‘mixer,’” stating that it moved over 1.2 million bitcoin valued at approximately $335 million at the time of transactions over the course of 10 years. According to the DOJ, the majority of the cryptocurrency came from darknet marketplaces tied to illegal narcotics, computer fraud, and abuse activities. The individual is charged with (i) money laundering; (ii) operating an unlicensed money transmitting business; and (iii) money transmission without obtaining a license in the District of Columbia.
On April 14, the DOJ unsealed an indictment charging two defendants with allegedly failing to maintain anti-money laundering (AML) controls, failing to file suspicious activity reports (SARs) with the Department of Treasury, and owning and operating an unlicensed, unregistered money transmitting business in violation of the Bank Secrecy Act (BSA). According to the DOJ, the defendants allegedly conducted high-risk transactions through their unlicensed money transmitting and money service business via a New York credit union, “caus[ing] the transfer of more than $1 billion in high-risk transactions, including hundreds of millions of dollars originating from foreign jurisdictions.” The DOJ alleged that while the defendants represented to financial institutions that they were aware of the risks associated with the high-risk business and would conduct the required, appropriate BSA/AML oversight, one of the defendants “willfully failed to implement and maintain the requisite [AML] programs or conduct oversight required to detect, identify, and report suspicious transactions.” The defendants have been charged with failure to maintain an AML program, failure to file SARs, and operating an unlicensed money transmitting business. The indictment seeks forfeiture of any property constituting, or derived from, proceeds obtained directly or indirectly as a result of the alleged offenses.
On March 17, the Nebraska governor signed LB 363, which amends certain licensing requirements for installment lenders and money transmitters. Among other things, LB 363 amends provisions of the Nebraska Installment Loan Act related to installment loan licenses and surety bonds to require “any person that holds or acquires any rights of ownership, servicing, or other forms of participation in a loan under the Nebraska Installment Loan Act or that engages with, or conducts loan activity with, an installment loan borrower in connection with a loan under the act” to obtain a license from the department. Additionally, licensees will be required to increase their surety bonds by $50,000 for each branch office licensed under the Nebraska Installment Sales Act. The act also provides that certain licensed persons that operate in the state as a collection agency, credit services organization, or that engage in debt management business are not required to be licensed under the Nebraska Money Transmitters Act. Additional amendments further address the expanded definition of a person engaged in money transmission, as well as investigation and examination authorities. The act takes effect immediately.
On January 11, the Colorado governor extended previous executive orders permitting numerous state regulatory agencies to issue emergency rules for extending the expiration of certificates and licenses (previous coverage here). Among other things, the extension permits the Division of Banking to extend the expiration date of licenses issued to money transmitters, and the Division of Real Estate to extend licenses issued to real estate brokers, for an addition 30 days.
Recently, California’s Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the Money Transmission Act (MTA) related to the registered clearing house and payment processing service exemptions.
The redacted opinion letter concluded that the company, a Delaware Corporation, is required to apply for and receive an MTA license to engage in the proposed activities in California, absent receiving an exemption. According to the letter, the company proposes to offer automated clearing house (ACH) services to merchants through an “integrated payment gateway” in order to “aid merchants with online and offline stores in collecting cross-border payments.” The ACH services would be a five-step process in which (i) a foreign customer purchases goods or services from a U.S.-based merchant; (ii) the merchant scans a quick response code using the company’s payment software; (iii) the company “withdraws a USD equivalent amount of payment in Chinese Renminbi (RMB) from the foreign customer’s” digital wallet; (iv) the company uses foreign exchange services “to convert the RMB amount into the correct corresponding USD amount” and remits the amount into the company’s U.S. bank account; and lastly (v) the company distributes the payment from its account to the merchant’s account. The company sought a clearing agency exemption and/or an excluded persons processing exemption, however, the DFPI concluded that the company did not supply evidence to show it qualified for either exemption. Thus, the company would need an MTA license to engage in the stated processing activity in California.
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- APPROVED Webcast: California debt collection license requirement: Overview and analysis
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting
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- Jeffrey P. Naimon to discuss "Truth in lending” at the American Bar Association National Institute on Consumer Financial Services Basics
- John R. Coleman and Amanda R. Lawrence to discuss “Consumer financial services government enforcement actions – The CFPB and beyond” at the Government Investigations & Civil Litigation Institute Annual Meeting
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Jonice Gray Tucker to discuss “Regulators always ring twice: Responding to a government request” at ALM Legalweek