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FinCEN Issues Two Administrative Rulings on a Money Services Business

November 15, 2013

Author: Cari N. Stinebower.

FinCEN issued two administrative rulings on Wednesday relating to the definition of a money services business (MSB).

Effect of a Secondary Market for Closed Loop Prepaid Access on Regulatory Exemptions

The first ruling addressed the status of so-called “closed loop prepaid access”--which includes products like retailer-specific gift cards and prepaid public transit fee cards--when such prepaid access is sold on the secondary market. Closed loop prepaid access products of small denominations are generally seen as low-risk.

When these products are issued in high denominations or can be easily and repeatedly reloaded, though, they pose a money-laundering risk. In 2011, FinCEN published a final rule regarding prepaid access establishing a comprehensive regulatory regime for these products. This final rule exempted certain low-risk prepaid access from having the compliance responsibilities of a MSB. For example, providing closed loop prepaid access to funds not exceeding $2,000 per day is exempt.

In Wednesday’s ruling, FinCEN responded to an applicant who asked whether the creation of a secondary market for prepaid access whereby consumers could sell and purchase such products via a web-based service would change the exempt status of those products under the regulations. FinCEN said that it would not because the “[s]econdary market activity cannot and does not alter the intrinsic status of the prepaid device or vehicle.”

Payable-Through Drafts and “Money Transmitters”
The second ruling addressed the issue of whether a payment mechanism based on “payable-through drafts” would make the user a “money transmitter” under the regulations and therefore subject to the applicable recordkeeping and reporting requirements under the Bank Secrecy Act (BSA).

FinCEN responded to an applicant who asked whether its payment system makes it a money transmitter. The payment system would allow customers to make payments for goods or services, or to obtain cash, from merchants who have signed up with the applicant to accept certain “payable-through drafts.” In order to use the payment system, the customer would have to open an account with the applicant, and the customer would receive paper “drafts.”

The merchants would not accept drafts as payment until the applicant authorized their use by confirming that there were sufficient funds in the customer’s account. FinCEN said that the payment system envisioned by the applicant would be money transmission, and therefore it is a money transmitter subject to the BSA’s recordkeeping and reporting requirements. The applicant argued that the payment system does not make it a “money transmitter” because the payments are “integral parts of the execution and settlement of transactions other than the funds transmissions themselves.”

FinCEN disagreed with the applicant and said the fund transfers in question were “not integral to the execution and settlement of any transaction other than the funds transmission[s]” themselves. FinCEN explained that there is an exception for “payment processors” but noted that all three administrative rulings that relied on this exception involved arrangements through a clearance and settlement system solely between BSA regulated financial institutions.
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Cari N. Stinebower
Partner – Washington, D.C.
Phone: +1 202.624.2757
Email: cstinebower@crowell.com