California Department of Financial Institutions Money ... · 2011 CSBS Legal Seminar ... California Department of Financial Institutions 45FremontStreet,17th Floor San Francisco,

California Department of Financial Institutions Money Transmitter Division

Developments and Issues in MSB Supervision

2011 CSBS Legal Seminar Raleigh, North Carolina August 23 – 26, 2011

• State Regulatory UpdateState Regulatory Update – CSBS, MTRA, California

• Legal Issues• Legal Issues – what is a money transmitter in the age of technological innovationtechnological innovation

– back to basics• Follo the mone• Follow the money• Who is liable to the sender/buyer/consumer • Examiners need legal helpExaminers need legal help

8/25/2011 CSBS Legal Seminar, Raleigh, NC 2

• CSBSCSBS– More active in non‐depository industries (mortgage arena and NMLS)(mortgage arena and NMLS)

– MSB Protocol – coordinated and joint exams– MSB Cooperative and Information Sharing– MSB Cooperative and Information Sharing Agreement

– CommitteesCommittees • MSB Examination Processes Working Group • Comment Letters


MTRA ‐Money Transmitter Regulators Associationy g

ACCOMPLISHMENTS• State• Joint examination manual & procedures, including Lead State criteria• Cooperative Agreement and Protocol (multi‐state examinations) • Examiner training• Examiner training

– 166 examiners from 36 states at various MTRA schools• Developed criteria for examiner certification with CSBS• Core exam report and ratings system in developmentCore exam report and ratings system in development• 44 state members

• Federal Agencies• Partnered in development of BSA Exam (with CSBS) and Manual with IRS

and FinCEN• Joint training on BSA manual with IRS & FinCEN

J i t i ti fi ld t t ith IRS


• Joint examination field tests with IRS

MTRA ‐Money Transmitter Regulators Associationy g

MTRA Joint Exams

47

40

45

50

26

30

25

30

35

1715

20

25

7 8

0

5

10

2005 2006 2007 2008 2009 2010


2005 2006 2007 2008 2009 2010

• CaliforniaCalifornia– New modernized Money Transmission Act effective 1/1/11effective 1/1/11

• Covered domestic money transmission• Non‐depository stored valuep y• Covers any company anywhere that does business with a person in CA

– Electronic Call Report and Database• http://www.dfi.ca.gov/forms/tma/callreport.asp


WHAT IS A MONEY TRANSMITTER IN THE AGE OF TECHNOLOGICAL INNOVATION?

• Emerging Payment TechnologiesEmerging Payment Technologies– Internet – Mobile phones/smart phonesp / p– Email and texts (SMS/MMS)– Stored value, gift cards and prepaid cards (open, semi‐open, closed), chits

– POS (manned and unmanned), ATMs, KiosksB d RFID ( di f ID) d NFC ( fi ld– Bar codes, RFID (radio frequency ID) and NFC (near field communications)

– CITBN (chip in the back of the neck)( p )


• Emerging Payment ApplicationsEmerging Payment Applications• P to P, B to B, etc.• International remittanceE l ll b fit d i ti ( il )• Employee payroll, benefits and incentives (miles)

• Buying goods (“merchant processing”)• Bill PayE ll t• E‐wallet

• Prepaid, stored value, gift cards• PrisonersC ll / h l/ d• College/school/student

• Social network (Facebook Credits, Twitter)• Virtual world, gamers (Zynga offer prepaid cards)


• How can a regulator make sense of this?How can a regulator make sense of this?

h i i d d l ?• What activity do we need to regulate?

• What entities in the payments system need a license?


• Back to basics: What is a money transmitter?y

• Do you take funds/value from A and agree to pay them to B; and/orand/or

• Do you take funds/value from A, and store it so that A can make purchases from third parties or take cash out at a later date.p p

• What doesn’t matter?• The purpose of the transactions (P to P, bill pay, to pay a merchant)• How the transmission was funded (credit card, debit, cash, check)


• Three dimensions to consider:

– Settlement – follow the money– Does the sender/buyer/holder of value have “credit risk” if the companyDoes the sender/buyer/holder of value have credit risk if the company

holding the money fails or skips town?

– Legal obligations – who has privity of contract with the d /b /h ld f lsender/buyer/holder of value

– Who can the sender/buyer/holder of value sue? Do they know who that person is?

– Communication – how is information delivered and stored? This is where the innovation is

taking place.


• Facts needed to answer these questions:Facts needed to answer these questions:• Flow chart showing how money goes from the sender/buyer/holder of value (point A) to the entity you’re analyzing to the receiver/merchant/beneficiary (point B)analyzing to the receiver/merchant/beneficiary (point B)

– Ask for the exact names that appear on the banks accounts in the flow chart

• Balance sheet of the entity – does it recognize an asset and a alance sheet of the entity does it recogni e an asset and aliability on it balance sheet

– FBO accounts

• All contracts and receipts that the sender/buyer/holder of valueAll contracts and receipts that the sender/buyer/holder of value gets when it enters the transaction

– Cardholder agreement, terms and conditions

• All contracts with intermediary entities in the flow charty


Standard OTC TransactionStandard OTC Transaction

Standard OTC TransactionStandard OTC Transaction

• Easy to see where the money goes• that is the asset on the balance sheet.

• Where does the liability start?• Where does the liability end?Where does the liability end?• Who is legally liable to the sender to deliver funds?funds?

• That person needs to be licensed or exempt.

• Who is a credit risk to the sender?


Online/Mobile TransactionOnline/Mobile Transaction• Can’t fund with cash (typically…) • 3 sources of funding:

– Credit card– Debit cardDebit card– ACH to from linked bank account

• Credit cards, debit cards and ACH transactions all involve third party processors, ISOs and IPSPs that are part of the payment processingprocessors, ISOs and IPSPs that are part of the payment processing system.

• Also, regulations E and Z, Card Association Regulations, NACHA regulationsregulations

• FDIC manual http://www.fdic.gov/regulations/examinations/credit_card/pdf_version/ch19.pdfsion/ch 9.pdf


Online/Mobile TransactionOnline/Mobile Transaction

• What happens when you have multiple waysWhat happens when you have multiple ways to fund the transmission?

• OTC cash credit debit ATMs and kiosks through agentsOTC cash, credit, debit, ATMs and kiosks through agents and branches

• linked bank accounts (ACH)• Credit and debit cards

• Need to understand each funding channel and the intermediaries involved


Merchant ProcessingMerchant Processing• Nearly all companies that facilitate online payments from

t t h t t k th i th t thi ti it i tcustomers to merchants take the view that this activity is not subject to money transmission statutes (and also not subject to BSA)

• Reliance on FINCEN payments processing letters – FinCEN Ruling 2003‐4 (Definition of Money Transmitter/Stored Value (Gift Certificates/Gift Cards)

FinCEN Ruling 2003‐8 (Definition of Money Transmitter (Merchant Payment Processor) FIN‐2008‐R005 (Whether Certain Reloadable Card Operations are Money Services Businesses) FIN 2008 R006 (Whether an Authorized Agent for the Receipt of Utility Payments is a Money Transmitter)FIN‐2008‐R006 (Whether an Authorized Agent for the Receipt of Utility Payments is a Money Transmitter) FIN‐2009‐R001 (Whether Certain Operations of a Service Provider to Prepaid Stored Value Program Participants is a Money Services Business).

• Problem: • some states license “payment processors”• Other states have exemptions for payment processors – should ask states

directly if fall within an exemption• Exemption comes when stand between or behind licensed or exempt entitiesExemption comes when stand between or behind licensed or exempt entities


Merchant ProcessingMerchant Processing

• Claim that they do not have a contract withClaim that they do not have a contract with customers; they are only agents of the merchants

• (but see sample user agreement)

• Claim that they don’t take possession of funds/• (but have asset/liability on balance sheet and their

names on the bank accounts)

• Claim they are ISO/IPSP, so must be exempt • (but then they need agreements with another payment processor gain access to payments system)processor gain access to payments system)


Merchant ProcessingMerchant Processing

• Claim that no credit risk to buyer once payment y p yauthorized

• (but customer agreements and receipts do not make that clear – possible impact of network regulations and Regs. E and Z?)

• Claim they are virtual POS machine– the “Black Box” metaphormetaphor

• (but we know who they are, receipts identify them; they stand between the buyer and merchant, not behind the merchant)

• Claim they are “e‐wallet” and only hold information, not cash

• (but it sure looks like they do more than that)( y )


Sample User AgreementSample User Agreement• This Terms of Service is a legal agreement between you and ABC Corp. (ABC), that governs your access to and use

of ABC Service as a purchaser of merchandise, goods, or services. Please review this entire Terms of Service before you decide whether to accept it and continue with the registration process.

BY CLICKING ON THE "AGREE AND CONTINUE" BUTTON ON THE REGISTRATION PAGE, YOU AGREE TO BE BOUND BY THIS TERMS OF SERVICE.

• 1. Certain Defined Terms1. Certain Defined Terms

The following defined terms appear in this Terms of Service. • "You", “you” or "Buyer": A Customer that applies to, or registers to use, or uses, the Service to make Payment

Transactions.• Customer: A person that registers with the Service as a Buyer or a Seller.

ll h h i i f• Seller: A Customer that uses the Service to process Payment Transactions from Buyers. • Payment Instrument: The credit card or debit card that is registered by a Customer with the Service to facilitate

the processing of Payment Transactions. A Payment Instrument must be associated with a billing address in a country where the Service is made available.

• Payment Transaction: The processing of a payment through the Service that results in the debiting or charging of the Purchase Amount to a Buyer’s Payment Instrument and the crediting of funds to a Seller. t e u c ase ou t to a uye s ay e t st u e t a d t e c ed t g o u ds to a Se e .

• Product: Any merchandise, good or service that is listed for sale that a Buyer may pay for using the Service. • Purchase Amount: The dollar amount of a Payment Transaction to pay for a Product, and any related fees, taxes or

shipping charges, as applicable. • Service: The ABC Checkout service, described in this Terms of Service, that facilitates the processing of Payment

Transactions on behalf of a Seller. • “ABC”, “we”, or “us”: ABC Corp..


State Legal OpinionsState Legal Opinions• Similar concepts for bill payers and payment processors

– Is the company acting as the agent for the sender/buyer making payment or agent of the merchant/biller receiving the money; what if they are agents for both?

– Does the company ever take possession, custody, control of the funds (flow charts/balance sheets)W itt t d th li itl t t th t t t– Written agreements – do they explicitly state that payment to the company is the same as payment to the merchant/biller, and the company is an agent of the merchants/billers

– Do receipts also serve as conclusive evidence that paymentDo receipts also serve as conclusive evidence that payment made to merchant/biller

– Does the sender/buyer ever have credit risk if the company skips town or fails to pay the merchant/biller


• Coordination happening on exam andCoordination happening on exam and supervisory side.

• Do we need similar coordination on the legal• Do we need similar coordination on the legal side?R l f CSBS l ll• Role for CSBS – regular calls among attorneys to discuss MSB specific issues

• Examiners need legal support


Questions?Questions?

Robert VenchiaruttiDeputy CommissionerCalifornia Department of Financial Institutions

th45 Fremont Street, 17th FloorSan Francisco, CA 94105(415) 263 8511(415) 263‐[email protected]


Documents

California Department of Financial Institutions Money ... · 2011 CSBS Legal Seminar ... California Department of Financial Institutions 45FremontStreet,17th Floor San Francisco,