Alert June 17, 2008

Financial Crimes Enforcement Network Issues Guidance on “Money Services Businesses” for Purposes of the Bank Secrecy Act

In the past month, the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issued two rulings as to whether different card-related entities constitute “money services businesses” (“MSB”) for purposes of the Bank Secrecy Act (“BSA”). 

Last week, FinCEN determined (in FIN-2008-R006) that a firm that has developed a virtual credit card product is an MSB.  As FinCEN explained, the firm issues a one-time-only “virtual” credit card to consumers who may use the card to effect a pre-set on-line transaction, after which the card reverts to a zero balance that cannot be re-loaded.  The virtual card allows a consumer to protect his or her personal and financial information from disclosure to on-line merchants. 

In analyzing whether the firm’s virtual card program fit within the definition of an MSB, FinCEN noted that the MSB definition does not encompass entities that transmit funds as an integral part of a transaction “other than the funds transmission itself.”  FinCEN found that the virtual card company’s financial privacy purposes do not constitute a transaction separate from the funds transmission itself because the need for protection of the consumer’s personal and financial information only arises in connection with the funds transmission.  FinCEN thus determined that the firm is engaged in the business of offering secure money transmission, “rather than security to which money transmission is ancillary,” which makes the firm an MSB.

In a separate ruling issued last month (FIN-2008-R005), FinCEN clarified that certain merchants and ATMs participating in a prepaid card re-load program are not MSBs for BSA purposes.  FinCEN reached this determination despite the fact that these merchants and ATMs would serve as locations where customers could add value to re-loadable cards.  In so holding, FinCEN cited numerous factors, including that the merchants and ATMs would serve only as the physical point in the reload process where the card is presented to transmit data to a bank.  By contrast, FinCEN observed, the banks involved in the card program “control and conduct the actual transaction that results in the adding of value to the re-loadable card.”  From FinCEN’s perspective, the acceptance and transmission of funds by merchants and ATMs is an integral part of the execution and settlement of a transaction other than the funds transmission itself, namely the sale and re-load of stored value cards.