Alert May 13, 2014

FinCEN Issues Five Advisory Rulings Concerning the Application of the Bank Secrecy Act’s Definition of “Money Transmitter” to Various Business Models

The Financial Crimes Enforcement Network (“FinCEN”) published five administrative rulings (collectively, the “Rulings,” and each a “Ruling”) concerning the applicability of certain exemptions from money transmitter status to various business models.  The Rulings reflect modifications, adopted in 2011, to FinCEN’s regulations under the Bank Secrecy Act’s (“BSA”) definition of “money transmitter.”

FIN-2014-R008 (“Ruling 8”).  FinCEN responded to an inquiry as to whether:  (1) a company’s (“Company A”) armored car coin and currency exchange service (the “Service”) would make Company A a “money transmitter” for BSA purposes; and (2) if needed, whether the armored car service exemption to the definition of “money transmission” would apply to the Service.

Company A stated that the purpose of the Service is to provide retail customers (each a “Customer”) of Company A with smaller or higher denominations of cash or coins needed to meet the operational needs of the Customer.  Deliveries of cash or coins to the Customer are made at the location of the Customer by armored car.  The Customer then pays for the Service by giving the armored car driver the required amount of the payment, and the armored car returning the payment to Company A.  FinCEN characterizes the arrangement as Company A’s “armored cars effectively act[ing] as remote teller counters for its Service.”  FinCEN concludes that Company A is not a “money transmitter” because

“the transportation of currency and/or coin of certain denominations from [Company A’s] vault to the [C]ustomer’s location and the return transportation of currency and/or coin in the exact same amount of the change provided to [Company A’s] own vault does not constitute the acceptance of value from one person and the transportation of such value to another person or location…”

FinCEN also concluded in the Ruling that, had Company A been deemed a “money transmitter,” the armored car exemption would not have applied to the Service

“as the Service is not limited to the physical transportation of coin and/or currency…, but consists of the additional activity of changing larger denominations of currency for smaller denominations of currency for [C]ustomers.”

FIN-2014-R007 (“Ruling 7”).  FinCEN responded to an inquiry as to whether the rental of computer systems for mining virtual currency would make the company making the inquiry (“Company B”) an “administrator” of virtual currency or a “money transmitter” under the BSA.   Company B developed a computer system (the “System”) that mines cryptocurrencies.  Company B rents the System to third parties for rental periods of from 24 hours to 30 days in exchange for a payment based upon the length of the rental period.  Company B receives limited information about the third party.  All virtual currency mined by the third party remains the property of the third party, and Company B has no access to the third party’s wallet.  In Ruling 7, FinCEN concludes that, under these facts, Company B is not an “administrator” of virtual currency because Company B is not engaging as a business “in issuing (putting into circulation) a virtual currency, and [does not have] the authority to redeem (to withdraw from circulation) such virtual currency.”  Moreover, FinCEN concludes that Company B is not a “money transmitter” because it is only supplying rental services, and FinCEN’s regulations

“specifically exempt from money transmitter status a person that only provides the delivery, communication, or network data access services used by a money transmitter to supply money transmission services.”

FIN-2014-R006 (“Ruling 6”).  FinCEN responded to an inquiry from a company (“Company C”) that acknowledges that it is a money services business (“MSB”) and that has registered with FinCEN as a “money transmitter.”  Company C seeks confirmation from FinCEN that it is a money transmitter rather than a “provider of prepaid access” under FinCEN’s regulations.

Company C states that it operates a payments platform that enables consumers and businesses to send and receive online payments.  Company C’s platform is typically used for business real estate transactions, auction items, and other significant commercial purchases.  Each of a buyer and seller must open its own account with Company C, and a buyer can pay a seller directly using Company C’s platform “thus replacing the need for a traditional ‘escrow account’.”  A buyer can fund its account with Company C through Automated Clearing House transactions, credit and debit card transactions, checks or wire transfers.  Transactions are generally effected as follows:

  1. The buyer transfers funds to its account at Company C;
  2. The seller is notified by Company C that the transaction is ready for completion;
  3. The seller agrees to the transaction;
  4. A request for payment is sent to the buyer; and
  5. The buyer releases the funds.

FinCEN notes in Ruling 6 that “[s]ettlements occur in real-time within [Company C’s] core processing system.”  Ruling 6 also is based on the facts that Company C “does not issue any credit, debit or prepaid cards and…the funds can only be transferred to one designated seller and not split among multiple sellers.”

FinCEN concludes that Company C is not a “provider of prepaid access” because, among other reasons, the funds that buyer places in its account with Company C may only be used to make a specific purchase from a specific seller, whereas prepaid access “operates more like a fungible payment instrument in traditional commerce, usable at any number of as-yet-unidentified merchants.”  FinCEN further concludes that Company C should remain registered as an MSB that is a “money transmitter” because: (1) Company C is not acting as a traditional escrow agent since Company C is not acting as an independent arbiter of whether the terms and conditions of a transaction have been satisfactorily completed by both parties; and (2) the services provided by Company C are not necessary or integral to any service other than money transmission.

FIN-2014-R005 (“Ruling 5”).  The representative of a company (“Company D”) asks FinCEN whether the secured transaction services that Company D offers to the buyer and the seller in a given sale of goods or services require Company D to register with FinCEN as a “money transmitter.”  Company D is an Internet-based facility that provides secure transaction management services (the “Services”) between buyers and sellers for goods and services.  The objective of the Services is to

“relieve the buyer of the risk of paying for an item or service that the buyer does not receive…[and to] relieve the seller of the risk of providing an item or service and not receiving valid payment for it.”

Key facts upon which Ruling 5 is based include the following:

  1. Both the buyer and the seller in a specific transaction register on Company D’s website;
  2. The website provides a platform for negotiation of the sale, including price, terms, freight, etc.;
  3. Both parties are able to monitor each step of the transaction and each party is notified when it is required to take further action;
  4. Both parties agree to the terms of the transaction;
  5. The buyer pays the purchase price to Company D;
  6. Company D instructs the seller to provide the goods or services;
  7. The buyer certifies that it is satisfied with the goods or services received; and
  8. Company D debits the buyer’s account for the purchase price and credits the seller’s account for an amount equal to the purchase price, less Company D’s transaction management fee.

FinCEN notes in Ruling 5 that Company D’s

“management services include assisting buyers and sellers in creating, negotiating, and managing their transactions; dispute resolution, including on-site visitations; item verification on merchandise shipped to [Company D’s] offices; and document handling.”

Under FinCEN’s regulations, a person is not deemed to be a money transmitter if the person “accepts and transmits funds ‘only integral to the sale of goods or the provision of services, other than money transmission services.’”  In Ruling 5, FinCEN concluded that Company D’s money transmission services are only integral to the provision of its transaction management services, and Company D’s “acceptance and transmission of funds do not constitute a separate and discrete service.”  Rather, said FinCEN, Company D’s acceptance and transmission of funds are a necessary and integral part of the transaction management (secured transaction) services.  Accordingly, FinCEN concluded in Ruling 5 that Company D is not a “money transmitter.”

FIN-2014-R004 (“Ruling 4”).  The representative of a company (“Company E”) asks FinCEN whether the escrow services that Company E offers to a buyer and a seller in a specific internet sale of goods or services requires Company E to register with FinCEN as a “money transmitter.”  The facts underlying Ruling 4 are that Company E provides escrow services to individuals and businesses.  Company E “receives funds from the buyer and holds the funds in escrow until releasing the funds to the seller, subject to the satisfaction of specified conditions precedent.”  The funds that Company E receives from the buyer are kept at a third-party depository institution and are segregated from Company E’s operating account.

After reviewing the facts, FinCEN found that the money transmission activities engaged in by Company E are necessary and integral to the provision of its escrow services and, accordingly, Company E need not register with FinCEN as a money transmitter.  FinCEN stated that Company E’s “acceptance and transmission of funds do not constitute a separate and discrete service provided in addition to the underlying service of transaction management [escrow services].”