United States: California To Clarify Money Transmission Act Exemption Through Rulemaking

Last Updated: March 19 2019
Article by David L. Beam and James C. Williams

On February 8, 2019, the California Department of Business Oversight ("DBO") announced that it will undertake a rulemaking to clarify the exemption in the state's money transmitter licensing law for agents of payees.1 This exemption allows payment agents working on behalf of recipients of funds to receive and remit payments to their principals without being licensed as money transmitters.2 Normally, entities that receive money from a person for purposes of transmitting that money to another person are engaged in "money transmission" under the money transmission laws of California and other states.

Background of the Exemption

The agent of the payee ("AOTP") exemption is an important exemption for merchant payment processors, as well as many fintech companies. It has also been controversial and attracted a lot of scrutiny from regulators— especially the DBO. FinCEN and many state regulators have interpreted the definition of "money transmission" to not include the receipt of money as the payment agent of a recipient—even when the definition did not contain an express AOTP exemption. In 2003, FinCEN interpreted the definition of "money transmitter" in its own regulations not to cover certain AOTPs.3 In the matter under consideration, the entity operated a service that provided third-party origination services for ACH transactions on behalf of merchants.4 Through the entity, merchants could accept customer payments in the form of a checking account debit. The merchants obtained payment instructions from a customer and submitted the instructions to the entity; the entity then batched and submitted the debit information to its bank for processing through the ACH system.5 After appropriate authorizations, the entity's bank would credit the amount to an operating account maintained at the bank by the entity, and, after a holding period, the entity would remit the funds to the merchant.6 FinCEN stated that it "does not...interpret the definition of money transmitter to include the [services] that [are] described" by the entity.7 FinCEN reasoned that the entity "acts on behalf of merchants receiving payments rather than on behalf of customers making payments. For th[is] reason, the service that [the entity] provides...more closely resembles payment processing/settlement than money transmission."8

FinCEN extended this reasoning to a bill payment service in 2008.9 A gift shop contracted with various utility companies to receive bill payments as the authorized agent of those utility companies. FinCEN concluded that the gift shop was not engaged in "money transmission":

FinCEN has concluded that a merchant payment processor, processing payments from consumers as an agent of the merchant to whom the consumers owe money - rather than on behalf of the consumers themselves - is not a money transmitter by virtue of such activities. As long as [the gift shop] limits itself to accepting payments only on behalf of the utilities with whom it has contracted as an agent, and declines to accept and transmit funds for any other purpose, [the gift shop]'s activities are sufficiently similar to the services provided to merchants by merchant payment processors for the same conclusion to apply.10

In 2014, the Texas Department of Banking ("TX DOB") interpreted the definition of "money transmission" not to include receiving money as a payee's agent.11 The TX DOB stated that "this is not a statutory exception but rather a function of common law, the effect of which is that the agent is not conducting money transmission."12 Specifically, the TX DOB noted that under Texas law it "has been long settled that payment to an authorized agent of a person is payment to the person," and that this "stems from the general doctrine of agency, which essentially states that whoever acts through another does the act himself."13 The TX DOB then explained why, under this principle, a party that received funds as agent of the payee was not receiving funds for the purpose of transmission:

This doctrine [that whoever acts through another does the act himself] means that when acting through its agent (the [party receiving funds]), it is the [payee] receiving the funds. As such, if the [party receiving funds] is an agent of the [payee], the [payee] is obligated to the consumer on all funds accepted by the [party receiving funds] within the scope of its agency. In essence, the agency relationship renders the exchange a two-party transaction between the [payee] and the customer. Without receipt of money in exchange for a promise to make it available at a later time or different location, there is no money transmission.14

However, California's DBO took the opposite position in response to the same question. The inquiring party asked whether it was engaged in "money transmission" with respect to an arrangement under which the party provided payment services to online merchants that permitted customers of the merchants make purchases through their mobile phones.15 The inquiring party argued that because each merchant entered into an agency agreement with the party, which explicitly stated that payment made by a customer to the entity is considered the same as payment made directly to the merchant, that no transmission of money takes place.16 California's DBO rejected this argument and concluded that "receiving money for transmission" is not defined by the respective liabilities of the parties, and the fact that customer's liability to the merchant is satisfied when the bill is paid has no bearing on whether money is being received for transmission.17 California's DBO stated that a party that receives money as agent of a merchant being paid is "nonetheless transmitting money between the customer and the merchant."18 It reasoned that "[the agents] stand as intermediaries between the customer and the merchant, transmitting monetary value between them. The conduct of transmitting money from one person to another person falls squarely within the meaning of money transmission under the MTA. Thus, any...transactions involving the payee-agent structure require licensing under the MTA."19


1 Invitation for Comments on Proposed Rulemaking – Money Transmitter Act: Agent of Payee: DBO (Feb. 8, 2019) (hereafter referred to as the "Invitation").

2 Cal. Fin. Code § 2010(l).

3 FinCEN Ruling 2003-08, "Definition of Money Transmitter (Merchant Payment Processor)" (Nov. 19, 2003), https://www.fincen.gov/sites/default/files/administrative_ru ling/fincenruling2003-8.pdf. At the time of this ruling, the definition of money transmitter in FinCEN's regulations did not include an express exemption for agents of payees. FinCEN amended its regulations to codify the AOTP exemption in 2011. See 76 Fed. Reg. 43,596, 43,586 (July 21, 2011) ("With respect to check cashers and money transmitters in particular, FinCEN has developed a large body of guidance in the years since the issuance of the final MSB regulations in 1999. Similarly, over the years, FinCEN has issued guidance and administrative rulings that provide examples of activities that do not meet the regulatory definition of a money transmitter, even though entities engaged in such activities may be involved in accepting and transmitting funds. Given the nature and scope of these important interpretative rulings, FinCEN has updated, streamlined, and clarified the MSB regulations in this rulemaking by incorporating and extending these interpretations in the regulatory revisions.").

4 Id.

5 Id

6 Id

7 Id.

8 Id.

9 FIN-2008-R006, "Whether an Authorized Agent for the Receipt of Utility Payments is a Money Transmitter" (May 21, 2008), https://www.fincen.gov/sites/default/files/administrative_ru ling/fin-2008-r006.pdf.

10 Id.

11 Tex. Dep't of Banking, Legal Opinion No. 14-01, "A person providing bill payment services as an agent of the payee is not engaged in the business of money transmission and does not need a license under the Texas Money Services Act" (May 9, 2014).

12 Id.

13 Id.

14 Id.

15 See California Department of Business Oversight, Opinion Letter, Payee-Agent and Factoring Agreements under the MTA (Mar. 3, 2014), http://www.dbo.ca.gov/Laws_&_Regs/dfi_orders_files/2014 _MTA_redacted_letter.3.4.14.pdf.

16 Id.

17 Id.

18 Id.

19 Id.

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