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The Significance for the Prepaid Industry of Fincen Ruling 2008-R005

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The Significance for the Prepaid Industry of Fincen Ruling 2008-R005 To: Clients and Friends May 28, 2008 The Significance for the Prepaid Industry of FinCEN Ruling 2008-R005: Whether Certain Reloadable Card Operations are Money Services Businesses (March 10, 2008) Yesterday FinCEN issued a ruling governing the money services business status treatment of certain reload agents involving a consortium of 5,700 bank, savings association, credit union, and bank or savings and loan holding company members that are all financial institutions subject to the requirements of the Bank Secrecy Act (BSA). In that ruling, FinCEN concluded that these reload agents --- member-sponsored merchants and retail operators of automated teller machines (ATMs) - -- were mere conduits of the consortium members and therefore were not deemed either as sellers of stored value nor as money transmitters for FinCEN’s money services business definitional purposes. Here’s how FinCEN got to its money services business status conclusions. FinCEN regulations define the term “money services business” to include in pertinent part, persons doing business as either issuers, sellers or redeemers of stored value or as money transmitters.1 A seller or redeemer of stored value is defined as a person who sells or redeems stored value in an amount greater than $1,000 in currency or monetary or other instruments per person per day in one or more transactions.2 Stored value is defined as “funds or monetary value represented in digital electronics format (whether or not specially encrypted) and stored or capable of storage on electronic media in such a way as o be retrievable and transferable electronically.”3 A money transmitter is defined as “any person … who engages as a business in accepting currency, or funds denominated in currency, and transmits the currency or funds or the value of the currency or funds, by any means through a financial agency or institution” or “[a]ny other person engaged as a business in the transfer of funds.”4 The money transmitter definition further provides that “the acceptance and transmission of funds as an integral part of the execution and settlement of a transaction other than the funds transmission itself … will not cause a person to be a money transmitter.”5 Under these definitions, the reload agents --- member-sponsored merchants and ATMs --- could fall within the MSB status definition as either sellers of stored value or as money transmitters. FinCEN, however, narrowed the scope of the seller of stored value definition by applying a “control test” in determining the MSB status of member-sponsored merchants and ATMs. FinCEN 1 31 CFR 103.11(uu)(3), (4), and (5). 2 31 CFR 103.11(uu)(4). 3 31 CFR 103.11(vv). 4 31 CFR 103.11(uu)(5)(i). 5 31 CFR 103.11(uu)(5)(ii)(emphasis added). Note: This Bulletin is intended solely for general informational purposes and should not be construed as, or used as a substitute for, legal advice with respect to specific transactions. Such advice requires a detailed analysis of applicable requirements and an evaluation of precise factual information. We do not undertake to keep recipients advised as to all relevant legal developments. This Bulletin may be construed as an advertisement or solicitation. © 2008 Bryan Cave LLP. All Rights Reserved. articulated that “[w]hile member-sponsored merchants and ATMs serve as the physical point in the reload process where the card is presented to transmit data to the consortium member, as well as the point where the customer presents funds for collection, the consortium member controls and conducts the actual transaction that results in the adding of value to the reloadable card. FinCEN further stated that it is the consortium member that controls all aspects of the transaction in that it (i) verifies the PIN; (ii) determines that the terms of use have not been exceeded; (iii) determines the acceptable forms of payment; and (iv) bears the risk of loss if the payment is not collected or forwarded. In fact, the member-sponsored merchants and ATMs could not complete a reload transaction if the consortium member rejects the request to add value. Thus, after applying the control test, FinCEN concluded that the member-sponsored merchants and ATMs were not sellers of stored value based on its participation in the prepaid reload card program. As for its money transmitter analysis, FinCEN relied on the often-used facts and circumstances definitional limitation. FinCEN pointed out that member-sponsored merchants and ATMs nominally accepted funds from customers and then transmitted those funds to the appropriate consortium member. As a consequence, the acceptance and transmission of funds was done to facilitate the execution and settlement of the sale of stored value, rather than for purposes of the funds transmission itself. Thus, FinCEN concluded that the member sponsored merchants and ATMs were not “money transmitters.” ( It is important to note, however, that FinCEN’s conclusion - that the reloading activity of member sponsored merchants and ATMs does not constitute “money transmission” -does not necessarily change the determination as to whether these activities constitute “money transmission” under state money transmitter licensing laws.)Perhaps critical to FinCEN’s conclusion, in excluding the member sponsored merchants and ATMs from the scope of its money services business definitions, was the consideration that the members in the consortium were already regulated as financial institutions for BSA purposes and would likely apply their AML programs to encompass the transactional activity in which member sponsored merchants and ATMs were engaged. More important in FinCEN’s conclusion was the understanding that member sponsors could see the transactional activity and then properly account for any BSA reporting and recordkeeping obligations flowing from that activity, and thus avoid fragmentation. To impose BSA reporting and recordkeeping obligations under these circumstances would be tantamount to regulatory duplication rather than simplification, which is one of Jim Freis’ articulated objectives of bringing regulatory efficiency and effectiveness to the way FinCEN discharges its responsibility as the agency of last resort in interpreting the BSA. __________________________________ Prepared by: Marilyn D. Barker Counsel Washington, DC (202) 508-6188 [email protected] 2 .
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