Cross-order payment discussions continue everywhere and for good reason. Statistics published by the Conference of State Banking Supervisors (CSBS) state that licensed Money Service Businesses (MSBs) conduct more than $2.6 trillion in transactions annually and are an essential part of the financial services industry for banks, commercial customers, and consumers.
Compliance or regulatory compliance defines the rules and policies that must be used by these companies to protect their consumers in the process of transacting payments. Cross-border payments are not a one-size-fits all for compliance in this Industry, a reality that is frequently misunderstood. Understanding the requirements prior to entry can be the difference between success and failure.
Cross-border payments are part of a group of entities called Money Services Businesses or MSBs. Under federal law, 18 USC § 1960, businesses are required to register for a money transmitter license where their activity falls within the state definition of a money transmitter.
In addition, the licensed money transmitters are subject to the jurisdiction of four Federal Agencies:
- The Financial Crimes Enforcement Network (FinCEN)
- The Federal Trade Commission (FTC)
- The Office of Foreign Asset Control (OFAC)
- The Consumer Financial Protection Bureau (CFPB)
The Federal Law does not prepare you for the next step of determining if your activity falls within the definition of a state definition of money transmitter. It takes a lot of research and work to take the next step.
There are also other requirements to comply with including:
- The Bank Secrecy Act (BSA) (enforced by FinCEN)
- Anti-Money Laundering (AML) Rules under the BSA
- Currency transaction reporting (CTR) requirements
- Suspicious activity reporting (SAR) requirements
- Customer identification (CID) rules
- Recordkeeping requirements
- Beneficial ownership (BO) requirements
- Independent examination requirements
- Policy and procedure requirements
- Employee training requirements
- Compliance officer requirements
- Economic and trade sanctions based on U.S. foreign policy and national security goals (enforced by OFAC)
- OFAC maintains a list of “specially designated nationals,” or SDNs, with whom people in the U.S. are prohibited from dealing.
- Violators of this prohibition may be liable for civil or criminal penalties.
- OFAC requires money transmitters to ensure that the transactions they process do not involve a party on the SDNs list and are not in violation of OFAC regulations.
- Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA) (enforced by the CFPB)
- Regulation E
- Protects consumers who use electronic fund transfer services.
- Subject financial institutions that process electronic transfers to various requirements, including:
- Periodic statements
- Resolution of errors procedures
- Records retention
- Limitations on consumer liability for unauthorized transactions.
- The Federal Trade Commission Act (FTC Act) (enforced by the FTC)
- Section 5(a) of the FTC Act protects consumers from unfair or deceptive trade practices.
- The Gramm-Leach-Bliley Act (GLBA) (enforced by the FTC)
- Protects consumers against financial institutions’ use of nonpublic personal information.
- Regulation P dictates the rules regarding the use of consumers’ nonpublic personal information.
- The Safeguard Rules provide requirements for keeping consumers’ information secure.
- Violations subject to penalties of up to $100,000 per violation.
- Regulation E
The prudential regulation for companies is the State Regulator and is currently comprised of 49 different entities. State regulations cover critical company processes for obtaining a license, preparing financial reports, performing background checks of key individuals, and overseeing supervisory activities. The current process is not clear, and each state addresses your business activity differently. A recent initiative aims to modernize this antiquated and inconsistent regulatory regime that burdens companies as well as regulators.
State regulators and payment industry experts collaborated to create the Money Transmission Modernization Act (MTMA). The roll-out of the MTMA is underway and the industry is encouraging states to take a “Repeal and Replace” approach to minimize the challenge of incorporating a new law into an existing statute.
The Money Transmission Model Act is in its infancy stage, but with support from the industry and regulators, the harmonization that it provides creates a more business-friendly environment, and maintains protection for consumers and businesses. This Act provides a set of clear standards that can be implemented by state regulators in a consistent and coordinated manner, which will benefit all.
Legislation is not a quick process, and we do not anticipate a complete implementation for at least at two-year period. In the interim, there are some ways to expedite your licensing process.
Investigate the MMLA. The MMLA is the Multi-State MSB Licensing Agreement that assists companies in expediting the licensing process in the interim. The MMLA Program was created for a more efficient Money Service Business (MSB) licensing process among state regulators. State regulators recognized the pain points MSB companies were experiencing when seeking licensure in individual states, including different legal requirements, resources and turn-around times, procedural requirements and interpretations, and satisfying these similar requirements in each state. The MMLA currently has 30 states participating in the program, so it is worthwhile to investigate.
If you are a recent entrant into the Payments Industry, ensure that you have checked the box and know your responsibilities about these Federal and State Regulations. Registering as an MSB with FinCEN does not mean that you are free from your state licensing obligations, so do not get confused.
As noted above, there are other regulatory requirements that were not discussed but your company needs to review. Ensure all areas of your company participate in the compliance overview as it affects everyone. For example, marketing will need to use certain font sizes and specific words in communications and receipts of transactions, customer service personnel must record and relay complaints in a timely fashion and training must be an ongoing activity for all.
Cross-border payments present companies with exciting opportunities but require an in-depth understanding of more than the technology that will be used. The fees for licensing and compliance are not insignificant and cannot be ignored for the success of your business long-term. Finding expert support is a very worthwhile investment as you begin the process.
 See 2021 CSBS Annual Report” (2022).