PaymentsCompliance: U.S. Money Transmission: Stitching Together The Patchwork Of State Regulations

16TH SEP 2016 | WRITTEN BY: CHRIS SIEROTY IN WASHINGTON, D.C.

Three years ago, Illinois told eight start-up financial companies to stop doing business in the state, arguing the companies were engaged in money transmission and so required a license.

Today, Square, a payments company with a card-reader that plugs into a tablet or smart phone, is doing business once again in the state.

A senior assistant attorney general said the incident highlights how broad the state’s statute that regulates the payment industry is.

“Any person who sells or issues a payment instrument needs to be licensed,” Thomas James, senior assistant attorney general with the Consumer Counsel-Consumer Fraud Bureau in the Illinois Attorney General’s office, said Thursday during a panel discussion at the 13th National Forum on Emerging Payment Systems in Washington, D.C.

“We have pretty broad statute,” Thomas said. “Illinois is also pretty draconian when it comes to penalties.

“The penalty for unlicensed money transfers equals four times the value. That’s bankruptcy for most businesses.”

Thomas reiterated that the agency has gone after anyone who they think is operating without a license, including new online companies.

At the time, Square was new in the emerging payments sector, where companies did what other banks and financial institutions did but using the Internet.

Square allows anyone to take a credit card payment without the fees associated with partnering with a bank.

Thomas said the state issued cease and desist orders to Square and other financial companies in 2013, but that “like the federal government, states go through regime change and one regime may not go after this as did the old regime”.

In New Hampshire, the state’s merchant payment process recognizes the Financial Crimes Enforcement Network (FinCEN) model, which regulates the receiving or sending of money or the selling or issuing of cards with a shared value.

Authorities said they generally attempt to adopt a business-friendly approach.

“If we deal with fraud with a cease and desist letter it is to protect the consumer,” said Maryam Torben Desfosses, hearings examiner with the New Hampshire Banking Department.

Desfosses said the state “likes to be fair” with its orders, especially with unlicensed activity, carrying a fine of $1,500 to $2,500 per transaction.

“I don’t want to bankrupt your company,” Desfosses said.

But she said New Hampshire has identified payment processing companies doing business unlicensed for six months, and even companies doing business for five years without a license.

She did not identify the companies.

Desfosses and Thomas took part in a panel discussion with three other regulators and attorneys titled “Ensuring Compliance with the Increasingly Aggressive State Regulatory and Enforcement Framework Governing Emerging Payment Systems.”

Desfosses cited the example of one company, which was subject to a consent order after illegal payments were discovered, but insisted the door is open for the company to re-apply once it is ready.

“We’ll resolve the issues of [know your customer] or [anti-money laundering] policy,” Desfosses said.

“We don’t want to ding the license. We want your company to come back. They were a young company and we liked them.”

Illinois and New Hampshire are two of the 49 states that regulate money transmissions; the only state that does not is Montana, according to Donald Mosher, a partner with the law firm Schulte Roth & Zabel.

Mosher said Massachusetts has a law that regulates international money transmission, but while a bill to regulate state transmission is introduced every year, it repeatedly falls short of passage.

Both South Carolina and New Mexico recently passed new laws regulating money transmitters, both of which take effect in 2017.

Money transmission is defined as “selling or issuing payment instruments, stored value, or receiving money or monetary value for transmission”.

“These laws are there to protect consumers,” Mosher said.

James agreed, saying businesses need to be extremely cautious when wiring money.

He described many of the unlicensed money transmitters as “thieves”, with a tremendous opportunity to make lots of money.

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