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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 an 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.
On March 25, the West Virginia governor signed SB 603, which adds exemptions from the currency exchange licensing requirements. Among other things, the bill exempts from the state’s currency exchange licensing requirements a person or persons operating a payment system that provides processing, clearing, or settlement services in connection with wire transfers, debit/credit card transactions, ACH transfers, or similar fund transfers. Additionally, the bill also exempts from licensing requirements a person or persons that facilitate payment for goods or services (not including currency or money transmission) pursuant to a contract and the payment obligation is satisfied or extinguished. The bill is effective June 7.
On March 19, the Virginia governor signed HB 2690, which requires money transmitters to be licensed through the National Multistate Licensing System and Registry (NMLS). The bill also (i) amends the definition of a “member” subject to the law’s requirements to include a person who owns or controls ten percent (previously it was five) of a limited liability company; (ii) allows for reports and other filings to be submitted to the Commissioner through the NMLS; and (iii) changes the due date for the annual licensing fee from September 1 to December 31. Additionally, on March 21, the governor signed HB 2251, which repeals provisions of the state’s mortgage licensing law related to the issuance of transitional mortgage loan originator licenses and replaces them with provisions granting temporary authority to act as a mortgage loan originator. Both bills are effective July 1.
On March 8, the Virginia governor signed HB 2284, which amends Title 6.2 Chapter 20 of the Code of Virginia to exempt banks, savings institutions, credit unions, and individuals licensed to practice law in the state from the licensing requirements applicable to persons that provide debt management plans. Additionally, persons licensed under the amended chapter are not required to obtain a money transmitter license under Chapter 19, provided the “money transmission activities are limited to providing debt pooling and distribution services in accordance with [Chapter 20].” The amendment is effective July 1.
On February 21, the Conference of State Bank Supervisors (CSBS) issued a request for information (RFI) on issues related to state money transmission and payments regulation as state regulators begin coordinating model legislation for all 50 states to adopt in whole or in part. CSBS’ RFI is based upon recommendations made by the Fintech Industry Advisory Panel (a part of CSBS’ Vision 2020 previously covered by InfoBytes here) and seeks feedback on several areas of law and regulation to help states create harmonized definitions and interpretations on a national level. According to the Advisory Panel, “despite the general similarity of state money transmission laws, each state defines and interprets money transmission and its exemptions differently.” The RFI solicits comments framed towards outlined policy standards and risks on the following issues:
(i) The scope of covered money transmission activities and applicable exemptions; (ii) the change in control process, including the personal vetting requirements for individuals deemed new control persons; (iii) prudential regulations—in particular, permissible investment, net worth, and surety bond requirements; (iv) supervision processes; and (v) coordination—in particular, how states can ensure the areas outlined above are implemented consistently without state-by-state policy diversion or needless duplication of effort.
Comments on the RFI are due April 20 and will be made publically available here.
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