California’s New Money Transmission Law Sweeps Up

By Marie Hogan*

Effective as of January 1, 2011, California’s sweeping new Money Transmission Act (the “MTAct”) became applicable to the money transmission business. The MTAct expanded the state’s regulation and license requirements for money transmitters by covering domestic money transmitters, including stored value device issuers and other businesses that offer new types of alternative payment and mobile applications.  The new law assigns regulation and licensing authority to the California Department of Financial Institutions

Background

The regulation of money transmission varies from state to state, but most states regulate domestic money transmission involving their residents. The MTAct now covers domestic money transmission by adding similar requirements and consolidates the regulatory and licensing mandates previously found in other California statutes. California’s regulation of money transmission had previously been of persons who help consumers transmit money overseas through the Transmission of Money Abroad Law, the issuance of traveler’s checks through the Travelers Checks Act and the issuance of payment instruments through the Payment Instruments Law.

Under the MTAct, it is a crime for a person to engage in the business of money transmission without a license or for a person to intentionally make a false statement, misrepresentation or false certification in a record filed or required to be maintained under the MTAct.  Consequently, it is important that individuals and businesses planning to engage in money transmission activities comply with the MTAct and its licensing requirements.  Due to rapid technological advances, many emerging, alternative or stored value payment businesses and their applications could be covered for the first time in California.

What is money transmission?

Money transmission is selling or issuing in California, or to or from persons located in California, payment instruments, stored value devices or receiving money or monetary value for transmission by electronic or other means.

“Payment instrument” means an instrument for the transmission or payment of money or monetary value, whether or not negotiable, such as, for example, a check, draft or money order.  Excluded are issuers who also redeem the instrument for goods or services provided by the issuer or its affiliate, for example, a “rain check”.

“Stored value” involves monetary value representing a claim against the issuer that is stored on a digital or electronic medium and accepted as a means of redemption for money or as payment for goods or services.  For example, Visa® gift cards.  Excluded are cards issued by businesses that also redeem the card for goods or services provided by the issuer or an affiliate (“closed loop”), for example, cards issued by leading coffee chains.

“Receiving money for transmission” includes any transaction where money or monetary value is received for transmission within or outside the United States by electronic or other means.  Thus, certain new mobile payment applications or emerging payment platforms not offered by banks or other regulated depository institutions could  be within this category and subject to regulation and licensing.

Who can be a licensed money transmitter?

Only a corporation or limited liability company may be a California licensed money transmitter.  Under limited circumstances, a licensee may have agents who are not licensed money transmitters.  An example of a permissible non-licensed agent could include a local convenience grocery or liquor store that sells money orders as the agent for a bank.

Who cares?

  1. Anyone who sells a stored value instrument or creates stored value via a digital or electronic medium.
  2. Anyone who receives money for transmission, including by electronic means.
  3. Anyone who issues a payment instrument, for example, money orders.

Only licensed money transmitters or their permissible agents may issue or sell stored value instruments or payment instruments.

What does this law do?

The law does four things:

  1. Combines three existing licensing regimes into one.  The three prior licenses were travelers check issuers, money order sellers and foreign money transmitters.
  2. Newly subjects domestic money transmission to licensing.
  3. Licenses certain stored value (i.e., open loop) issuers.
  4. Makes it a crime to engage in the money transmission business in California without a license.

What activities require a license?

Similar to most California licensing requirements, anyone who engages in, solicits, advertises or performs specified “money transmission” services in California or for California residents must be licensed.

License Transition

Travelers check issuers, money order sellers and foreign money transmitters licensed in California prior to January 1, 2011, continue to be validly licensed. Any newly covered entity or business must file an application for a license by July 1, 2011.

Who is exempt from licensing?

All FDIC insured depository institutions are exempt, as are trust companies, credit unions, licensed broker dealers and payment systems serving exempt entities, such as an automated clearing house.  Affiliates of a FDIC insured entity are not exempt, nor is any other entity holding another license from the California Department of Financial Institutions or the California Department of Corporations.

Due to rapid technological advances involving alternative payment platforms, mobile applications, smart phones and other communication devices, businesses planning to offer any type of service involving the electronic receipt and transmission of money (or other medium of exchange) or stored value devices or applications should carefully consider whether licensing is required in California pursuant to the MTAct.

For additional information related to the California Money Transmission Act or other financial services matters, please contact Marie Hogan or Jonathan Joseph at Joseph & Cohen, Professional Corporation.

___________________________

*Marie Hogan is Of Counsel to Joseph & Cohen, Professional Corporation, San Francisco, CA.

© Joseph & Cohen, Professional Corporation. 2011. All Rights Reserved.

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