On May 12 2009 the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) released a proposed rule to revise FinCEN's regulations regarding money services businesses under the Bank Secrecy Act.(1) Through the proposed rulemaking, FinCEN intends to revise the existing definitions to clarify the scope of entities subject to regulation as money services businesses, but in so doing raises significant issues for the delineation of entities subject to the rule.
Among other things, the rulemaking proposes to amend the current money services business regulations by:
- eliminating requirements that entities do business in certain areas in order to be considered money services businesses;
- ensuring that foreign-located money services businesses are subject to the Bank Secrecy Act when they have certain minimal contact with the United States;
- broadening the definition of 'currency dealer' or 'exchanger';
- eliminating the concept of redemption of monetary instruments separate from cheque cashing;
- providing that stored value cards are 'other instruments' for the purposes of the act;
- combining all stored value into one category without substantively changing the existing definition so that issuers, sellers and redeemers of stored value fall into the same category; and
- otherwise updating money services business definitions to reflect:
- past guidance and rulings;
- current business operations;
- evolving technologies; and
- merging lines of business.
The rulemaking also poses a series of questions in order to obtain input into further, more significant revisions of the rules regarding stored value products. Companies involved in the payments industry, particularly in relation to stored value, should carefully re-evaluate their activities to determine the risk of triggering money services business registration and related requirements under the proposed revised definitions, and to consider whether to comment on the questions that may lead to further rulemaking. Comments on the proposed rule are due by September 9 2009.
The current regulatory definition of a 'money services business' includes "[e]ach agent, agency, branch or office within the United States of any person doing business, whether or not on a regular basis or as an organized business concern", as:
- a currency dealer or exchanger;
- a cheque casher;
- an issuer of traveller's cheques, money orders or stored value;
- a seller or redeemer of traveller's cheques, money orders or stored value; or
- a money transmitter.(2)
In an effort to focus on activities performed by an entity instead of an entity's status, the proposed rule replaces the 'doing business' language in the definition with 'engaged in activities' language. Although FinCEN states that the changes are not intended to broaden the current scope of the definition, some companies may have taken the position that a 'doing business' requirement is narrower than simply engaging in an activity.
FinCEN's proposal amends the money services business regulations to ensure that foreign-located entities engaged in money services business activities in the United States are subject to the requirements of the Bank Secrecy Act. The proposed rule revises the definition to state as follows:
"The term 'money services business' shall include a person wherever located engaged in the activities that take place wholly or in substantial part within the United States, in one or more of the capacities listed in paragraphs (uu)(1) through (uu)(6) of this section, whether or not on a regular basis or as an organized business concern. This includes but is not limited to maintenance of any agent, agency, branch, or office within the United States."
The proposed new language is designed to ensure that the Bank Secrecy Act's regulations reach all money services business-type participants in the US financial system, whether domestic or foreign, in recognition of the borderless nature of financial services. For example, FinCEN indicates that an entity would be deemed to have a presence in the United States by means of the Internet or an account with a US financial institution through which the entity is transmitting money to US customers or recipients. The proposed rule also requires foreign-located money services businesses to designate an agent to accept service of legal process in the United States. FinCEN is seeking comment on the proposed text changes, as well as the effectiveness of examining and enforcing foreign entities' compliance with the Bank Secrecy Act's requirements.
The proposed rule changes the term 'currency dealer or exchanger' to 'dealer in foreign exchange' and revises 31 CFR 103.11(uu)(1) to define this as:
"[a] person who accepts the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more countries in exchange for the currency, or other monetary instruments, funds, or other instruments denominated in the currency, of one or more other countries in an amount greater than $1,000 for any other person on any day in one or more transactions, whether or not for same-day delivery."
The proposed rule makes clear that businesses meet the definition by exchanging not only currency, but also other monetary instruments, funds or other instruments. It also clarifies that any exchange that occurs in the United States could be covered, even if it does not involve US dollars; but that only exchanges from one currency to another are covered, not exchanges denominated in the same currency (eg, a traveller's cheque denominated in Mexican pesos exchanged for Mexican pesos would not be covered). FinCEN is seeking comment on the proposed text changes, as well as whether all categories of money services business should be required to maintain and retain additional records on customers similar to those of currency dealers and exchangers.
The proposed rule revises the meaning of the term 'cheque cashing' by splitting the existing regulatory definition into two subsections – one defining cheque cashing activity and one excluding certain activity from that definition. The proposed definition of 'cheque casher' is:
"A person that accepts [cheques] (as defined in the Uniform 2 31 CFR § 103.11(uu). Commercial Code [UCCArticle 3—Negotiable Instruments § 3–104]), or monetary instruments (as defined at § 103.11(u)(1)(ii), (iii), (iv), and (v)) in return for currency or a combination of currency and other monetary instruments or other instruments, in an amount greater than $1,000."
The proposed definition excludes a number of activities, such as selling closed-loop stored value purchased with a cheque or redeeming one's own cheques, and holding a customer's cheque as collateral for repayment of a loan. However, the exception for closed-loop stored value cards gives rise to ambiguity regarding the scope of the definition because it refers to such cards purchased by cheque, monetary instrument or other instrument, and the definition itself does not include the acceptance of other instruments. In addition, the proposed rule combines redeemers of monetary instruments into the definition of 'cheque cashers'. FinCEN is seeking comment on the proposed text changes, as well as whether there should be an exemption for certain types of lower risk cheque or other exemptions, and whether cheque cashers should be subject to suspicious activity report requirements.
The proposal indicates that stored value cards should be considered 'other instruments' for purpose of the Bank Secrecy Act. Until now, many companies have understood that stored value was regulated by the provisions that expressly govern the sale, issuance and redemption of stored value. One consequence of this new position is that non-bank automated teller machine (ATM) operators may inadvertently become dealers in foreign exchange. For example, if a stored value card is used at an ATM in the United States to obtain over $1,000 in one day and the funds associated with the card are denominated in a foreign currency, it appears that the ATM operator could be a foreign exchange dealer. In addition, a business that sells an open-loop stored value card that is purchased with a cheque and provides cashback on the transaction may inadvertently be a cheque casher if the total transaction value exceeds $1,000.
Potentially further complicating matters, the recently enacted Credit Card Accounting Responsibility and Disclosure Act of 2009 includes a provision that requires the Treasury Department to issue new regulations (within nine months) regarding the sale, issuance, redemption and international transportation of stored value. It remains to be seen whether the new regulations will raise additional questions regarding FinCEN's 'money services business' definition.
The proposed rule reorganizes the definitions concerning issuers, sellers and redeemers of traveller's cheques, money orders and stored value.
A single definition now covers issuers and sellers of traveller's cheques or money orders. The proposed rule also defines an issuer or seller by the amount for which its monetary instruments are sold (which includes issuance fees), rather than the amounts for which they are issued.The proposal eliminates the 'redeemer' language.
The proposed rule also consolidates issuers, sellers and redeemers of stored value into a separate category. The proposed new section is intended not to change the regulatory definition, but simply to group such providers of stored value together in one category. FinCEN is reviewing the current status of the stored value regulatory regime and considering possible future revisions. Therefore, it has deferred the proposal of a new rulemaking regarding stored value at the present time.
However, FinCEN has set forth a number of categories and subcategories where it is seeking comment on stored value, including:
- the definition of 'stored value';
- the treatment of stored value as the transmission of money; and
- the treatment of stored value industry participants and products.
The proposed rule makes clarifying amendments to the definition of 'money transmitter' and includes new concise exceptions. Under the proposed rule, a money transmitter is defined simply as a "person that provides money transmission services". 'Money transmission services' means:
"the acceptance of currency, funds or other value that substitutes for currency from one person AND the transmission of such currency, funds or the value to another location or person by any means."
Informal value transfer systems (eg, hawalas) are money transmitters under both the current and proposed regulatory definitions.
The proposed revisions delete the phrases 'engages as a business' to avoid confusion and 'whether or not licensed or required to be licensed', because FinCEN found they were unnecessary. The proposed rule also replaces the current general exception with an enumerated list of activities that do not fall under the definition of a money transmitter. These enumerated exceptions are based on prior interpretations released by FinCEN and include:
- providing the delivery, communication or network access services to support money transmission services;
- acting as a payment processor to facilitate the purchase or payment of a bill for goods or services through a clearance and settlement system by agreement with the creditor or seller;
- operating a clearance and settlement system solely between Bank Secrecy Act-regulated institutions;
- providing closed-loop stored value;
- physically transporting currency, other monetary instruments, other commercial paper or other value that substitutes for currency from one person to the same person at another location without more than a custodial interest; and
- accepting and transmitting funds integral to the sale of goods or services by the person who is accepting and transmitting the funds.
Notably, the exception for facilitating the purchase or payment of a bill for goods or services applies only in situations where the payment processor has an agreement for such service with the seller of the goods or services or a creditor because of the perceived low money laundering risk associated with such arrangements. On this point, FinCEN notes that the exception does not apply if the funds are transmitted to a third party. In addition, the treatment of stored value under the 'money transmitter' definition is unclear. FinCEN indicates that it included the phrase 'or other value that substitutes for currency' to cover businesses that accept stored value as a funding source and transmit that value. Read narrowly, this seems to refer to a business that permits a traditional funds transfer transaction to be initiated with a stored value card. However, read broadly, this could cover various arrangements, including several involving multicard stored value accounts or mailing or otherwise shipping a stored value card.
The current regulations include an activity threshold of $1,000 for any person in one day for all money services business categories, except money transmitters, which do not have an activity threshold. Although FinCEN does not propose amending the current threshold, it is seeking comment on higher or lower adjustments to the dollar threshold. FinCEN is also seeking comment on whether transactions involving multiple money services business services should be aggregated for the purposes of determining whether definitional thresholds have been met.
For further information on this topic please contact Joel D Feinberg, David E Teitelbaum or Ming-Hsuan Elders at Sidley Austin LLP's Washington DC office by telephone (+1 202 736 8000) or by fax (+1 202 736 8711) or by email (firstname.lastname@example.org or email@example.com or firstname.lastname@example.org).
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