Fundamentals and Best Practices for Applying for and Maintaining Multi-State Money Transmitter License Portfolios

Becoming a Licensed Entity

The variety of organizations subject to state money transmitter licensing has been steadily growing over recent years to encompass a wide range of organizations, including those without a physical presence or headquartered overseas. Today, Google, Facebook, Amazon, Square, and ADP are examples of companies traditionally considered outside the realm of supervised entities which are now licensed.  Many companies, particularly from abroad where payments licenses can be passported from one country to another, find the licensing process burdensome and time-consuming. This article will help demystify this regulatory hall of mirrors by providing an overview of the fundamentals of becoming a licensed entity and best practices for applying for and maintaining your state licenses in good standing.

To determine if one needs to be licensed, regulators evaluate whether a business and its specific product line requires a license by reviewing the entity’s role in the flow of funds between a sender and beneficiary.

States have a variety of structures in their organizations, such as separate Licensing, Examinations, and Enforcement departments.  These units work together in many aspects of the application as well as the maintenance of the license.  Many states do not have separate units. In some states, Examiners also complete new application review and licensing.

License applications generally require a few months for approval from the original submission date, although some states with more rigorous vetting may take up to a year or longer. It may take a few months to bring together all of the documentation you need. The main expenses involved in the application submission include application fees to the state; surety bond premiums; professional services fees to a consultant or attorney; third party background check and fingerprint charges; travel for any meetings with regulators ahead of submission; and Secretary of State and registered agent fees.  Typical documentation required includes but is not limited to: a comprehensive business plan and financial pro formas; historical financial statements; a description of business model, products and services, with flow of funds diagrams; copies of sample receipts with disclosures; a BSA/AML compliance manual and risk assessment; an agent management program; personal and corporate disclosures and background checks; proof of good standing; articles of incorporation; a list of authorized delegates and copies of contracts; proof of FinCEN registration; and a copy of a surety bond or proof of coverage therein.

Most states require licensees to maintain a minimum level of net worth in addition to having surety bonds. The amount needed above the minimums is often a function of projected number of locations and agents. States also have guidelines on permissible investments and segregation of customer funds from operating funds. States will want the licensee to maintain an effective BSA/AML program, stay in good standing with the Secretary of State, have a reasonable system of governance and report material developments in the company.

Terms that might be used loosely in other contexts can be technical terms of art with precise meanings and regulatory implications in the money transfer industry. For example, an “agent” or “authorized delegate,” is a party contractually designated by a money transmitter licensee to provide services of the licensee and act in compliance with state and federal laws dealing with know your customer; customer disclosures; complaints; anti-money laundering; and so forth.

Certain key people are required by many states to provide personal background information to assess the fitness and character of control persons. These individuals often include officers; directors; shareholders with greater than 5 – 10% ownership; key executives; general managers; branch managers; and the compliance officer. The people required to submit information can often be negotiated (e.g. “all shareholders” can usually exclude those with less than 5% ownership and “vice presidents” doesn’t necessarily entail submissions from all VPs). Material commonly requested includes personal financial and biographical disclosures; fingerprints; reference letters; and, in a few states, third party background checks. Some states have background check requirements specifically for individuals who do not or have not resided in the US for at least 5 years, and for non-U.S. citizens. Key people who are not U.S. citizens should allow extra time to complete the background checks.

Companies that form new subsidiaries to apply for the money transmitter licenses can reasonably expect that the parent company will need to provide substantial information about itself and its key people.

Corollary Requirements of Licensing

Beyond simply filling out a form applying for a Certificate of Authority to conduct business operations in a particular state, a company needs to make sure that the corporate trade name they wish to use is available and file a “doing business as” (dba) registration if the name is different from their formal corporate name. In addition, the company needs to make sure to complete any franchise tax forms, as appropriate, or register with the Department of Revenue, as required.

Each money services business (MSB) must register with the Department of the Treasury, Financial Crimes Enforcement Network (FinCEN). All filings must be made through the BSA E-Filing System. Registration of an MSB is the responsibility of the owner or controlling person of the company and must be filed within 180 days after the date on which the MSB is established.  The most difficult element of the registration is entering the primary transaction account and the name of the financial institution. Obtaining a commercial bank account for money transmission is difficult for a new MSB. If the registrant has more than one primary transaction account, then the applicant needs to enter information about the account with the greatest money service activity transaction volume as measured by value in dollars.

Some states will also require evidence of a relationship with a bank that is aware that the account in question is being used for money transmission purposes.

To protect the owners of funds being transferred, MSBs are required by state regulators to obtain a surety bond. Some states offer the option of deposit accounts maintained at state chartered financial institutions in lieu of the required bonds. Surety bond requirements range from $10,000 to more than $1,000,000 for the principal office and generally increase with transaction volume or with each additional company location or agent/authorized delegate in the state. The bond is usually issued by a bonding company or insurance company authorized to do business in the state. The bonding and insurance companies’ pricing varies based on the company’s experience, credit, and financial condition of the client. Annual costs are typically less than two percent of the bond amount with preferred pricing decreasing to one percent or less.

States will require that the applicant be capitalized with a level of equity to meet their prescribed net worth requirements. Only a portion of the investment, in the view of at least one state, may be in the form of intra-corporate debt. Regulators will request internally produced or audited financial statements, if for no other purpose than to affirm the net worth requirement has been met. Larger states will look for a cogent business plan and pragmatic (not overly optimistic) financial pro formas.

An effective BSA/AML compliance program, risk assessment and qualified BSA/AML officer are preconditions for licensure in many states. One state requires an independent review of a compliance program even if the business does not have a prior organizational history.

Maintaining Licenses

Each regulatory agency will require that the licensee submit business data, transaction volume, and audited financial data on a quarterly, semi-annual or annual basis, depending on the state. The money transmitter licenses will need to be renewed every year, or in some states bi-annually. The main recurring costs associated with maintaining approved licenses include the license renewal fee, surety bond premiums, reimbursing expenses of regulators performing on-site exams, and personnel or professional service expenses for maintaining the licenses. Examinations can be expected by half or more states each year.

Enforcement Actions

The best way to deal with enforcement issues is to avoid them in the first place. The following are several tips to help stay in compliance and avoid enforcement action:

If you do find yourself in a position of having pending enforcement issues, provide requested information in a timely fashion. States will have different ways that they evaluate complaints and investigations, but they may have discretion when it comes to the amount of penalties or severity of enforcement action, based on the circumstances of a case.  In general, it is best to cooperate fully, exhibit professionalism, be able and willing to provide requested materials quickly, and disclose all pertinent information (avoid hiding information).

Also remember that enforcement actions can go well beyond the state.  It is a criminal violation of federal law to engage in unlicensed money transmission.  While many of the enforcement actions at the state level are not criminal offenses, federal agencies may have jurisdiction to bring both civil and criminal actions.

Trends

In recent years, FinCEN rulemaking and guidance on new payments products has often been a leading indicator for new areas that will be covered by state regulators. Most recently, FinCEN guidance about virtual currency administration and exchange was followed by cease and desist orders and subpoenas from various states against virtual currency companies operating without a license. In the past, FinCEN announcements about entities without a physical presence, or involved in prepaid access requiring money services business registration, have led to more states requiring licensure for those types of businesses.

Organizations seek exemptions and carve outs from licensure for different reasons, such as holding customer money in accounts marked with a “for benefit of” (FBO) designation, or serving as a third party payment processor facilitating the transfer of data but not money. At least one state excludes companies from licensure if they are only serving corporate entities and at least one other exempts transmitters which do not have a physical presence in the state.

Some companies involved in money transmission serve as an agent of a bank (as is usually the case with prepaid access) or as an agent of another licensed entity. Historically, agents of licensees have taken the form of simple storefront retail locations. However, in a relatively recent phenomenon, some Internet and mobile-based businesses have become an authorized delegate of another licensee; this practice has received mixed reviews from regulators.

Regulators have responded to licensees’ complaints about the inconvenience of having so many state examinations each year by instituting multi-state exams, as will be discussed later. This allows multiple states to examine a licensee at the same time, but is a double-edged sword since the states can share information with one another. Beyond exams, most states also have an information sharing memoranda of understanding among one another. For example, a state that sees unlicensed activity may share that with other states and suddenly the operator of the unlicensed business may receive cease and desist orders from widely disparate states.

NMLS (technically known as the Nationwide Mortgage Licensing System and Registry), though in this case having nothing to do with mortgages) is the system of record for non-depository financial services licensing for at least 27 participating state agencies and U.S. territories.  In these jurisdictions, NMLS is the official system for persons seeking to apply for, amend, renew and surrender licenses managed through NMLS. NMLS itself does not grant or deny license authority.

Larger licensees working in multiple states and regions find the NMLS system time and cost effective because they can manage all of their information, including licensing, renewal, and record changes, electronically, using streamlined processes. Necessary changes can be updated across all licenses and dual licenses within a state, e.g., money transmitter and check casher licenses can be maintained across several states using one main company record in NMLS. Small and medium-size businesses also find license application submission and the transition process cost effective because the main license application can be submitted to several states. The companies need to submit some state-specific materials; however, the main NMLS record template itself can be used for multiple states.

Money transmitters have faced existential challenges with their bank account relationship over the past decade since federal guidance was issued, cautioning banks to use heightened due diligence with their money services business relationships. Nowadays, opening and maintaining a bank account relationship has become the most vexing aspect of being a money transmitter. Efforts to reverse the tide of banks abandoning serving money transmitters have been largely unsuccessful and the industry remains at high risk as more banks exit the market.

Science and Art of the License Application Process

There are many interdependent moving parts in the multi-state licensing process. Sequencing the interdependent components of multi-state licensing requires a good tracking system, lest one hiccup cause a ripple effect across the entire process. A robust database system or spreadsheets and careful planning will help a company to get its products launched faster and save time, money and frustration during the licensing process.

Organizations applying for licensure these days are often early stage businesses with a background in technology, the Internet or social entrepreneurship. To pivot to becoming a supervised entity, the companies must sometimes make many internal adjustments. For example, previously anonymous consumer transactions may require disclosure of customer identification as well as suspicious activity monitoring and reporting. Loose governance needs to be replaced by regular board meetings. Staff and directors will require BSA/AML training. Audited financial statements must take the place of internally prepared financials. Customer funds need to be set apart from operating funds and can only be invested in certain forms of highly liquid instruments. And so forth.

A prospective licensee should allow sufficient lead time to assemble documents and receive Secretary of State, tax and FinCEN registrations. These are conditions precedent to having a complete license application. It is generally a good idea, if you are seeking licensure in many states, to combine a few difficult and easier applications at the beginning of the process in hopes of landing some quick ‘wins’ while the more stringent state reviews may take 6-12 months.

Due to backlogs in several states, expedited processing is recommended for Secretary of State registrations when available, as well as any fax filing, credit card and ACH processing options.  These alternate payment and processing methods generally save time and effort. This is particularly important for international companies because a couple of states will not accept checks in U.S. funds drawn on foreign banks.

Obtaining bank accounts and reference letters from bank compliance officers is sometimes difficult for MSBs. This requirement of many license applications can cause delays in processing the applications while companies wait for their bank account approval. It is wise to seek out account relationships well ahead of licensure and to approach the banks with a strong compliance program. A healthy balance sheet will not by itself convince a bank to open an MSB account. Having more than one account relationship is recommended in case one of your banks decides not to serve money transmitters later on.

Despite its many advantages and streamlined processing, there are still a few stumbling blocks with creating new submissions on the NMLS system and transitioning onto NMLS as more states migrate to the system.  In addition, there are confidentiality issues and information sharing capabilities between state regulators via NMLS that present concerns for companies. With NMLS it is also difficult to get all of the individual forms (such as the MU2, Multistate Uniform Form) completed and attested in a timely manner as required in the licensing process. Some executive officers, directors and other control persons may not be familiar with the licensing process, or they may find all of the personal reporting arduous and confusing.  Unfortunately, the use of a Power of Attorney for attestation has been rejected by most if not all states.

Whether talking about new applications, exams, or enforcement activity, there are common threads about how to develop good working relationships between regulators and licensees.  The ideal relationship between regulators and licensees will be well balanced and have mutual respect.  Regulators appreciate when licensees accept accountability for their actions and responsibility for learning and following the laws and rules.  They expect licensees to let them know about changes (that require approval) in advance so that they have enough time to review them, and they expect licensees to fully disclose the information needed for the review. Licensees also appreciate accountability and timely responses: clear communication about law changes; new systems; or new policies and procedures; and realistic estimates of processing times.   The relationship does not have to be adversarial; fundamentally, regulators and licensees have common goals. At the end of the day, they both serve consumers and benefit from sound consumer protection practices.  They both support the growth of good businesses and benefit from sound internal business policies and procedures.

When preparing your license applications, clearly call out sections that are confidential, because certain parts of your application may become part of the public record otherwise. This is no guarantee that the information will be kept under wraps, but many states will consider the request if it is reasonable (e.g. trade secrets about the business model or financial statements).

Science and Art of Maintaining Approved Licenses

A licensed entity should compartmentalize who is responsible within the organization and through any external professional service providers for the ongoing tasks associated with being licensed. These tasks include but aren’t limited to: periodic reporting; customer complaints; examinations; agent management; financial reporting; transaction monitoring and reporting; and so forth.

It is very important to keep up to date with regulatory changes that affect the industry.  The areas of money transmission and currency exchange are particularly well suited for change due to innovation in technology and new emerging business models.  State and federal regulators must review business models that have never been seen before and adjust regulations accordingly.  Whether it is FinCEN’s guidance on prepaid access or virtual currency, or a new state requirement, keeping up to date on regulatory changes will help you remain in compliance.  When you are getting licensed, make sure you understand how a state communicates their regulatory changes.  Do they have any regular communication with the industry and how can you make sure that you receive that communication?  For example, Washington State has electronic ListServ notifications that provide important updates as well as an electronic quarterly newsletter. Determine who within your company needs to see current industry updates and make sure they get signed up.  Also, make sure you are familiar with states’ websites so that you know where to look for law or rule changes, or recent updates to industry information.

States have divergent requirements about what, how and when material events need to be reported. Generally, relevant corporate events include changes in management or governance; significant new shareholders; changes in control; acquisitions or mergers; new product launches; a change in address; or a significant legal, regulatory or bankruptcy action. Certain material events, namely transfers of control, may require advance approval by some state regulatory agencies.

You may wish to conduct periodic inspections of your retail or agent locations’ signage, receipts, and files to ensure they are being managed in a proper way and that they contain any required disclosures.

Certain states may allow you to reduce the size of your bonds or cancel them altogether over time based on good performance (e.g. no claims against the bonds and having good financials).

Beginning in 2011 and enhanced in 2012, the Money Transmitter Regulators Association (MTRA) has helped create and facilitate the use of a joint work program for multi-state examinations of companies.  Not all states are using the MTRA format, but many are.  This program covers the pre-exam as well as the procedures during exam.  Washington State, for instance, has found joint exams to be highly successful, with many benefits to both the licensees and the regulators.  In general, companies have praised the uniformity of the procedures.  While companies still must address variation in states’ laws and rules, they are able to prepare fewer responses that would have formerly been caused by variations in the exam procedures.  Some of the major benefits are:

When you are scheduled for a joint exam, make sure to communicate any questions to the Examiner in Charge before the exam takes place.  Consider the space that you need for the examiners, what materials need to be accessible during the exam, and what people need to be available during the exam.

Money Transmitter and Currency Exchange information can be highly confidential and protected by specific laws or protocol for ensuring confidentiality. MTRA has a Cooperative Agreement that regulators may sign that allows for information sharing among state supervisors. The information is confidential unless otherwise specified by the originating authority.  If states have signed the cooperative agreement, they may share information, including: copies of examinations; information about whether a company is licensed in their state; and if a company has enforcement actions.  In addition, MTRA facilitates a monthly emerging issues phone call where states may discuss new industry trends, business models, and emerging issues.  Again, the content of that phone call is confidential.

States understand that confidentiality is a highly sensitive topic. With that said, states need to be able to share information to better regulate licensees.  While state laws and rules vary, some states do try to align their procedures where possible.  In addition, with so many emerging business models, states benefit from each other’s expertise in reviewing these complex new issues.

It is very important to keep your license information current by reporting material events according to the regulations of any given state.  Unfortunately, it is quite common to discover that a company failed to report a material change.  Sometimes this is relatively easy to correct, and other times the omission or resulting issues may be severe enough to justify enforcement action.  State reporting requirements may vary, and it would benefit you to have a good tracking system about what needs to be reported and in what timeframe.  Know which changes require advanced notification and/or approval versus which ones can be reported after the fact or don’t require approval.   For example, in Washington State, a change of control requires advanced notification (at least thirty days prior to the proposed change of control) and approval.  A mailing address change would need to be reported within thirty business days of the occurrence of the change, so advanced notification and post notification are both acceptable as long as it does not exceed the timeframe specified.  A felony charge or conviction of a person in control of the licensee must be reported within one business day after the licensee has reason to know of the occurrence. Taking the time to identify reporting requirements at the beginning of your journey will help your company stay in compliance and avoid potential costly issues with your license.

Once a business is licensed, it is possible suitors may approach it seeking agency under the license. Use care in reviewing the background and business plans of the counterparty, as you will be in good measure responsible for their actions and compliance as an authorized delegate of your company. Do not speak in terms of “renting” your licenses, as licenses are not available for rent any more than a doctor or lawyer can rent their professional licenses. Also, be wary of sub-agency (when an agent appoints an agent in turn); sub-agency is not allowed in most states.

Recommendations for Drafting Successful Business Plans, Financial Pro Formas and Compliance Programs in Support of Money Transmitter License Applications

Organizations seeking money transmitter licensure are expected by many state regulatory agencies (namely the large states such as California and New York), to provide a comprehensive written business plan and financial projections. Often, savvy corporate analysts in the regulatory agencies review these documents with a critical eye. Surety bond underwriters and bank account providers to the prospective licensee may also require this material to evaluate risk. Some prospective licensees have these documents, but they are developed for an investor or a sales pitch, which is different than appealing to a regulatory audience. Following are recommendations for building winning business plans and financial pro formas for license applications. The author managed strategy, licensing, and compliance and did significant fundraising work for a licensed money transmitter from its incorporation in 2003 until 2010, and thereafter has been a consultant to money transfer license seekers.

Consider including the following sections in your business plan:

Key Components for a Comprehensive Anti-Money Laundering, Office of Foreign Assets Control, and Consumer Compliance Program

In equal measure to a business plan and financials, state regulators judge the strength of a prospective money transmitter licensee by evaluating its Bank Secrecy Act / Anti-Money Laundering / Office of Foreign Assets Control (BSA/AML/OFAC) and consumer compliance written program, electronic systems and staff qualifications. A compliance program can be built specifically for an organization’s new subsidiary applying for licensure, and then synchronized with the parent company’s compliance program to ensure reasonable harmony and overall centralization. A program that meets regulatory requirements and best practices generally consists of the following components, produced roughly in the following sequence:

  1. BSA/AML/OFAC Risk Assessment: a risk assessment will consist of a written document, a data spreadsheet or both. This may or may not be sub-divided into multiple distinct risk assessments dealing with the company’s overall risk, product and service risk, agent risk, country risk and so forth. Risks will be weighted and scored in relation to one another, and measures will then be designed to mitigate the identified risks (e.g. enhanced due diligence). The implementation of those mitigants will be reflected in the risk-based compliance manual, policies and procedures and systems of the organization.
  1. BSA/AML/OFAC Compliance Manual: this document contains the organization’s policies, procedures and internal controls for managing compliance with BSA/AML/OFAC compliance requirements. There may be a companion manual for agent compliance management. The manual will contain many sections dealing with subjects such as know your customer; customer identification; training; independent testing; risk assessment; suspicious transaction monitoring and reporting; record keeping and case management; dealing with law enforcement requests; OFAC; due diligence and enhanced due diligence; compliance governance, staffing and reporting structure; and so forth.
  1. State and Federal Consumer Compliance Program: an organization will need to develop policies, procedures and electronic reporting systems to ensure systematic ongoing compliance with idiosyncratic state-by-state money transmitter regulations, as well as federal rules such as the Electronic Fund Transfers Act (Regulation E); Unfair, Deceptive or Abusive Acts or Practices Act (UDAAP); and Gramm-Leach-Bliley (GLB) privacy policy provisions. The thrust of these regulations deals with, but is far from limited to, required receipt and social media disclosures; agent management; reporting; renewals; and maintaining prescribed financial thresholds. State and federal regulators of course intimately review BSA/AML/OFAC compliance as well.
  1. BSA/AML/OFAC and State Regulation Compliance Training: employees and directors of a licensee will be required by law to have BSA/AML/OFAC training on a periodic basis. The organization should also consider training on the varied requirements of each state and Federal consumer compliance regulations. The type and depth of training can be adapted to the types of employees being trained; compliance, risk management and financial personnel can, for example, merit more intensive training including case studies. Training may also cover settlement and reconciliation operations.
  1. Suspicious Activity and Watch List Monitoring System: an electronic system with customized rules, reporting and case management tools will be needed to detect and flag potentially suspicious transaction activity (e.g. structuring, aggregation or other unusual transaction patterns). A separate system will detect and warn about potential matches between customers and persons on OFAC’s specially designated nationals (SDN) watch list or Interpol lists. Both systems can be run on an automated or manual basis (the former option being more efficient) and either developed in-house as a proprietary asset or bought off-the-shelf (SDN watch tools such as World Check and Bridger Insight are commonplace; however, transaction monitoring software specific for money services businesses is not widely marketed by anyone and thus companies often buy the former and build the latter).
  1. BSA/AML/OFAC Diagnostic Assessment and Future Independent Testing: a periodic testing of BSA/AML/OFAC compliance by an independent party (generally an internal auditor or external consultancy) is recommended every 12-18 months (determined on a risk-basis) after starting regulated operations. This is also an expectation of state regulators and bank partners; Colorado even requires a diagnostic assessment (an independent review-lite) of organizations applying for licensure, even if the business is brand new.
  1. Assign Roles and Responsibilities: the company will need to delineate the responsibilities and lead persons for each of the tasks identified in the compliance program or related areas, such as but not limited to: day to day AML compliance; state and Federal examinations; independent review; training; due diligence and Know Your Customer/Customer Identification Programs (“KYC/CIP”); monitoring, reporting and record-keeping; financial reconciliation, settlement and segregation of funds; license and registration renewals, periodic and material event reporting, a consumer complaints contact; and so forth.

How Chartwell Can Help

Chartwell Compliance has the country’s most experienced team of money services and emerging payments practitioners and provides exceptionally well-rounded services to support organizations with applying for and maintaining state license portfolios as well as developing, reviewing and administering or testing their BSA/AML/OFAC and consumer compliance programs. We can also assist with developing or providing guidance on comprehensive business plans and pro formas. Our staff includes experienced veterans of both new and well-established licensed money transmitters, such as First Data, Western Union, MoneyGram, Coinstar, American Express, WorldRemit and Microfinance International, as well as former regulators and law enforcement professionals. Members of the team have worked for years at the intersection of corporate strategy, regulatory compliance, financial safety and soundness and financial crimes prevention.

Daniel Weiss is President and CEO of Chartwell Compliance and a former chief compliance, strategy and state license officer for an international money transmitter. Trish Lagodzinski, Compliance Director for Chartwell Compliance, has more than 20 years of experience in regulatory compliance and government contracting, including managing several multi-state license projects.


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