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Education

Navigating regulatory, A possible solution

financial MSB hurdles One potential route is to become an authorized delegate
(AD) of a properly licensed money transmitter MSB. In
this scenario, the AD may generally use its own brand and
board customers directly. However, the money must flow
through the MSB's bank account, and the AD must clearly
apprise customers that its services are being provided
under the MSB's license.

The MSB is liable for the AD's activities and must perform
transaction reporting, oversight and monitoring to
comply with regulatory requirements. In return, the AD
pays per transaction and monthly recurring fees to the
MSB in consideration of its regulatory obligations and the
associated risk.

This model does not work in all states. For example,
By Theodore F. Monroe the Texas Department of Banking issued a Supervisory
Attorney at Law Memorandum in October 2014, advising that Texas law
prohibits a licensed MSB from appointing an AD to offer
ew fintech and emerging payments entrepre- its own distinct line of money transmission products
neurs continue to push the envelope to make or services (as opposed to offering the license holder's
payments safer, faster and easier for consum- product or service). Under its view, the license holder
N ers. But many emerging payment companies rather than the AD should have a contractual relationship
hit the wall of government regulation before they ever get with the customers and should derive revenue primarily
off the ground. Federal and state money-transmitter laws from the transactions performed by the AD on its behalf
are perhaps the biggest obstacle. rather than from fees paid by the AD.

Federal regulations define a money transmitter as any Further scrutiny
person or entity that "provides money transmission
services, or any other person engaged in the transfer of Such arrangements are also subject to close scrutiny
by regulators in other states to ensure that they do not
funds." The term "money transmission services" means
"the acceptance of currency, funds, or other value constitute a rent-a-license relationship. This is particularly
true where the AD is offering a product or service the
that substitutes for currency from one person and the
transmission of currency, funds, or other value that license holder does not already provide, or where the
license holder contracts to offer an entirely new service
substitutes for currency to another location or person by
any means." through the AD.
Daunting requirements The AD model may also prove problematic in the state
of Washington, which requires an AD to be physically
Federal law requires any person who qualifies as a money located within the state unless the principal licensee
transmitter to be licensed by the Department of Treasury's obtains prior approval from the Division of Consumer
Financial Crimes Enforcement Network as a money Services to designate an AD physically located outside of
services business (MSB). Such businesses must also be the state.
separately licensed as a money transmitter in each state in
which they do business. Federally chartered banks are generally exempt from
money transmitter licensing requirements and may
Procuring the necessary licenses is onerous and expensive. designate agents to provide money transmitter services on
The process often takes two or more years to complete at a their behalf. Thus, another potential avenue is partnering
cost of $1 million to $2 million. In addition to application with a nationally chartered bank as the bank's agent to
and lawyer filing fees, licensing requires proof of minimum obtain an FBO (for benefit of) account relationship, where
net worth (from $50,000 to $1 million), surety bonding, all funds are held at the bank for the benefit of the agent's
and fully elaborated anti-money laundering (AML) and customers.
know-your-client compliance programs, including a full-
time AML compliance officer. The information contained in this article is for educational purposes
only. Please consult an attorney before relying upon it for your spe-
Moreover, it is a federal crime to do business as a money cific legal needs. Theodore F. Monroe is an Attorney whose practice
transmitter without having such licenses in place; state focuses on the electronic payment and direct marketing industries. For
penalties for such conduct may range from $10,000 to more information about this article or any other matter, e-mail him at
$2 million. The licensing time frame and costs alone often monroe@tfmlaw.com or call him at 213-233-2273.
sound a death knell for many startups. Yet there is hope.
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