Money transmitter license compliance webinar questions and answers

Money transmitters have become a modern necessity—but operating a money transmitter business requires complicated business license compliance at both the federal and state levels.

After our recent webinar titled “Money Transmitter License Compliance Explained,” we received several inquiries. Our knowledgeable team member, Hans Howk, who serves as the Manager of Content Management at CT Corporation, has addressed those questions. We are pleased to share his insightful responses with you.

Q: How does one determine the territory a license has to cover? If a company operates as a marketplace facilitator (provides the platform and facilitates the sales of 3rd party products), receives the funds from payment service providers (like credit card processors, etc.) and is a money transmitter, would such a company need to be licensed in each state where (i) consumers are located or only in the states where (ii) sellers and payment service providers are located?

A: Usually it comes down to both where the consumer is located and where the transmission is occurring.  For instance, under Arkansas statute, those receiving compensation or expecting to receive compensation, directly or indirectly, for conducting money transmission for persons located in Arkansas or conducting money transmission from a physical location in Arkansas for persons located outside Arkansas must obtain a money transmitter license with the state.  So the answer is usually, yes, both!

Q: How many states are on NMLS (Nationwide Multistate Licensing System)?

A: At most recent count, 55 various state agencies utilize the NMLS system for non-mortgage related licensing, and by my count about 44 states use it specifically for Money Transmitter licensing.  That doesn’t mean that all of the states that utilize NMLS also participate in the multi-state licensing application which collects documentation and applies it across the board for all participating states – those states can be viewed here: https://mortgage.nationwidelicensingsystem.org/slr/Pages/Multistate-MSB-Licensing-Agreement-Program.aspx

Related article: NMLS and mortgage lending licensing

Q: Alabama and Alaska require a minimum net worth for each state as $25,000. While applying through NML, will I require showing net worth of $25,000 or $50,000?

A: As it stands, Alabama still maintains the $25,000 net worth requirement.  If they adopt one or more provisions from the Money Transmitter Modernization Act, then that could increase, but as I stated in my presentation, states are by no means mandated to adopt the model law.  At the moment I don’t see any pending legislation for Alabama, so I don’t expect it to increase anytime soon. 

As for Alaska, $25,000 is the rule at the moment; HOWEVER, there is pending legislation working its way through the state senate which would increase the threshold.  Specifically, the bill states the following:

Sec. 06.55.510. Net worth. (a) A licensee shall maintain at all times a tangible 
        net worth of 
  
(1)  the greater of $35,000 or three percent of total assets for the first
        
$100,000,000;
  
(2)  two percent of additional assets for $100,000,001 to 
        
$1,000,000,000; and 
                
(3)  0.5 percent of additional assets for over $1,000,000,001. 
  
(b)  Tangible net worth must be demonstrated at initial application by the 
         
applicant’s most recent audited or unaudited financial statements.
        
https://www.akleg.gov/basis/Bill/Detail/33?Root=sb84#tab1_4

So, if this bill ends up passing as Alaska legislature, you could see the above threshold amounts take effect. 

Q: Where would we find the new threshold for AZ?

A: The best place to follow pending and enacted state legislative changes related to money transmitters is the CSBS website, specifically here: https://www.csbs.org/csbs-model-money-transmission-modernization-act

For Arizona’s adopted bill specifically, check out this article which summarizes and links to the bill: https://www.jdsupra.com/legalnews/arizona-embraces-csbs-model-money-5339466/

Q: Can you give an example of an exemption?

A: There are several published exemptions to money transmitter registration requirements – the most obvious exemption being banks – they are already extremely regulated in their own regard. The same goes for stock traders and persons registered with the SEC or futures traders – these are typically exempted from the MT definition and thus the requirement to register.

Another bit of wiggle room is that generally, the law allows you to move around money for clients as a business without registering as a money transmitter as long as you partner with someone who is licensed and registered as a money transmitter. Or if you do so on an “infrequent basis” and not as a standalone service for an obvious business gain or profit.

Subsequent rulings have also exempted creators and developers of money transmitter software or applications, as long as they themselves aren’t engaging in the ongoing business of money transmission.  Also, businesses that operate exclusively as “payment facilitators” can sometimes qualify for an exemption – and a payment facilitator is basically a person or business who acts as a payment processor to facilitate the purchase of a good or service through some sort of payment system by agreement with the creditor or seller.

For the codified definition and exemptions at the federal level: https://www.ecfr.gov/current/title-31/subtitle-B/chapter-X/part-1010/subpart-A/section-1010.100

Q: Where can I find the information for the exceptions for registering as Money Service Business?

A: For federal definitions and exemptions: https://www.ecfr.gov/current/title-31/subtitle-B/chapter-X/part-1010/subpart-A/section-1010.100

For additional guidance specific to report exemptions: https://www.fincen.gov/resources/statutes-regulations/guidance/guidance-determining-eligibility-exemption-currency

As for state exemption guidance, you’ll have to review the relevant section of each state’s code to determine if your activity is exempt.

Q: What is the typical best practice to figure out if our business model is exempted from federal & state money transmitter licenses?

A: Yes, reviewing state and federal exemptions with legal counsel or partnering with a license compliance firm is the best way to ensure that you’re complying with the laws on the books. As I mentioned in the webinar, assuming that a majority of states do adopt the Money Transmitter Modernization Act model, compliance should become easier, but for now, we really need to be good about knowing what each state considers to be exempt and not exempt.

Q: Do certain states consider payroll processing businesses as money transmitters?

A: In my experience, PEOs and payroll providers do not typically need to register with FinCEN as money services businesses; in fact, I’ve never come across one that has, but that’s not ironclad legal advice.  Most payroll providers seem to fall into one or more categories of an exempted business type.  See this page for more guidance: https://www.fincen.gov/resources/statutes-regulations/guidance/guidance-determining-eligibility-exemption-currency

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