FinCEN Rules that ISOs and Processors Are Not Money Transmitters

2 Oct

In the age of greater regulatory scrutiny on the ISO business, here’s a shout-out to FinCEN, who recently ruled that ISOs and processors are not money transmitters under the Federal Bank Secrecy Act (BSA).

In a refreshingly straight-forward administrative ruling dated August 27, 2014, the Financial Crimes Enforcement Network (FinCEN) clarified that an ISO company’s activities marketing card processing services to merchants does not make the company a money transmitter under FinCEN regulations.   Because the ISO neither accepted nor transmitted funds on behalf of the merchants it solicited, nor on behalf of the sponsor bank, it did not satisfy a critical component of a money transmitter:  that of transmitting funds.  

The ruling also set forth a four part test to determine whether payment processing activities fit within a payment processor exemption to the money transmitter definition.  In order for the payment processor exemption to apply, the processor:

 1.  must facilitate the purchase of goods or services,

2.  must operate through clearance and settlement systems that admit only BSA-regulated financial institutions,

3.  must provide the service pursuant to a formal agreement, and

4.  must have an agreement with the seller or creditor that provided the goods or services and receives the funds.  

The question of whether or not ISOs and processors qualify as money transmitters under Federal law has dogged the industry for some time.  This ruling finally clarifies that traditional ISOs do not qualify as money transmitters, and that as long as processors satisfy the above conditions, they will not be deemed a money transmitter under the BSA. 

Unfortunately state law still must be reckoned with, and remains murky.  Each state has its own money transmitter law, and a similar ruling would need to be obtained from each state to fully settle the issue.  But the FinCEN action will make an easier case in front of state regulators that the activities of ISOs and processors should not render them money transmitters under state statutes.

–Holli Targan, Attorney and Partner, Jaffe, Raitt, Heuer & Weiss, P.C.

Holli Targan

Attorney & Partner

htargan@jaffelaw.com

Leave a Comment Below

Leave a Reply

Why ask?