On April 29 2014 the Financial Crimes Enforcement Network (FinCEN) published five administrative rulings,(1) providing additional information on how exemptions from money transmitter status may or may not apply to certain business models under the regulations promulgated by FinCEN under the Bank Secrecy Act. This update focuses on three of the rulings in the context of the exemption for transmission of funds only integral to the sale of goods or the provision of non-money transmission services.
Under the Bank Secrecy Act regulations, a person or entity that is engaged in certain types of activity is considered a money services business (MSB).(2) MSBs are subject to certain requirements under the regulations, which generally include an obligation to maintain an anti-money laundering programme, as well as registration, reporting and record-keeping requirements.
A 'money transmitter' is a type of MSB and includes a person that "provides money transmission services, or any other person engaged in the transfer of funds".(3) The term 'money transmission services' means "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".(4)The regulations also stipulate that whether a person is a 'money transmitter' depends on certain facts and circumstances and provide six carve-outs from the foregoing definition.(5) Among these carve-outs is an exemption for a person that "[a]ccepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services".(6)
FinCEN examined three business models upon request of each respective company to determine whether such a company would be required to register as an MSB under the regulations.
In the escrow ruling and secured transaction ruling, the company providing the money transmission services received funds from the buyer in connection with internet transactions, held such funds in escrow, notified the seller to deliver the products or services to the buyer and, upon acceptance of the products or services by the buyer, released the funds to the seller. To use the money transmission services, each party to an internet transaction had to register online with the relevant company and agree to specific transaction terms, such as the product to be purchased, the purchase price, the length of the buyer's inspection period, the party responsible for paying the escrow fees, the shipping method, the shipping fees, freight and insurance specifications, warranties and performance deadlines. In both cases, FinCEN found that the respective business model qualified for the exemption because each company performing money transmission services had to take possession of the buyer's funds to provide assurances to both the buyer and the seller that the buyer had enough resources to pay for the goods and services and that those resources would not be released until the respective transaction was completed in accordance with the agreed terms. The acceptance and transmission of funds were not found to constitute a separate and discrete service provided in addition to the underlying service of transaction management, and thus were a necessary and integral part of the escrow service or the secure transaction service, as the case may be.
In the payment service ruling, the money transmission company operated a platform that enabled clients to send and receive online payments, typically in connection with real estate transactions, auction items and other significant commercial purchases. The company also claimed that its service could be used by buyers to pay sellers directly, replacing the need for a traditional escrow account. In anticipation of a transaction, the buyer would fund its account and notify the seller that the transaction was ready for completion. Once the seller agreed to the transaction, a request for payment was sent and the buyer released the funds, with settlements occurring in real time within the company's processing system. FinCEN determined that the payment and transmission services were not necessary or integral to any other service and did not qualify for the exemption. This decision can be distinguished from the escrow and secured transaction rulings because the company did not assert that it was providing any type of traditional escrow services, and FinCEN found that the company did not provide any verification or validation of the conditions to the transactions or any protection of the interests of the parties.
The differing outcomes in the rulings can be explained by the specific facts and circumstances, and it is important to note that FinCEN rulings are limited to those facts and circumstances. Nonetheless, the subtle differences between the escrow ruling and secured transaction ruling on the one hand and the payment service ruling on the other are instructive for a wide range of companies that act as commercial intermediaries in internet or mobile transactions and struggle to understand the dividing line between processing payments as an incident to other services and processing payments as a primary activity. Even companies that think that they fall within the exemption, however, should also examine the applicable state money transmission laws, since the state positions do not always parallel those of FinCEN.
Joel D Feinberg, David E Teitelbaum or Stanley J Boris
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