By Gianvito Grieco
By purchasing, selling, or exchanging currency, a business may unwittingly become a money transmitter and become subject to regulation. The Code of Federal Regulations states that a money transmitter is a person that “provides money transmission services.”1 Money transmission services are defined in the code as “the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.”
Why is this a big problem? Compliance will likely be very costly, and almost certainly unexpected by a business that is simply looking for a quick, convenient exchange. If the business becomes a money transmitter, it then becomes subject to additional regulations as a “money service business.” The code defines a money service business as “a person wherever located doing business, whether or not on a regular basis or as an organized or licensed business concern, wholly or in substantial part within the United States in one or more of the following capacities…”2 A money transmitter is one of the categories listed in the code.
Several companies have recently been in the news after facing large fines because of their failure to register as money services businesses. Enforcement actions have not been limited to traditional fiat currency. Recently, the first fine was issued against a virtual currency company that distributes and exchanges its own cryptocurrency.3 Individuals have also been charged with operating unlicensed currency exchange businesses after buying and selling virtual currency.4
If identified as a money service, a business can become subject to reporting and recording requirements specific to money services businesses. This includes registration with the United States Department of the Treasury. By not registering, businesses may risk large civil penalties of US$5,000 for each violation.
The costs of the additional compliance requirements will be continuous, and are not merely limited to initial registration costs. For instance, if the business becomes a money service business, via its money transmitter status, it is required to develop, implement, and maintain programs designed to recognize suspicious activity subject to the Bank Secrecy Act. This is because money service businesses are considered financial institutions as defined by the Bank Secrecy Act.
The code does provide some clear exemptions in its language. Most notably, the code excludes those who operate a money service business on an infrequent basis and not for gain or profit. However, FinCEN, the bureau of the United States Department of the Treasury mentioned above, makes it clear that falling under the money transmitter definition is frequently a matter of facts and circumstances.
Those exempted include, for example, any persons that “provide the delivery, communication, or network access services used by a money transmitter to support money transmission services; acts as a payment processor to facilitate the purchase of, or payment of a bill for, a good or service through a clearance and settlement system by agreement with the creditor or seller; operates a clearance and settlement system or otherwise acts as an intermediary solely between Bank Secrecy Act regulated institutions; and accepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.”5 This exemption, along with the remaining exemptions provided by the code, likely do not describe a business that is simply looking to cut some costs by purchasing, selling, or exchanging foreign currency for its own purposes.
Purchasing, selling, or exchanging foreign currency to fulfill a purchase order or engage in an international business transaction may seem like a relatively quick, easy, and cost-effective solution to issues dealing with the use of foreign currency. Unfortunately, this could raise a completely new set of issues that the business likely did not previously consider. In the long run, the best and most cost-effective solution may be working with a company that specializes in international payments. A reputable company will offer competitive fees and exchange rates that eliminate much of the issues that the business likely sought to avoid in the first place.
Gianvito Grieco has served in a variety of roles in investment banking, financial services, and law. Gianvito holds a Bachelor of Science in Finance from the University of Florida, and a Juris Doctor from Stetson University College of Law. He is also fluent in English, Italian, and Spanish.
1. 31 C.F.R. § 1010.100(ff)(i)(a) (2015).
2. 31 C.F.R. § 1010.100(ff) (2014).
3. Why Did This Hot Cryptocurrency Company Halt New Account Signups?, Fortune, http://fortune.com/2015/07/09/ripple-halts-new-accounts/.
4. Amid Arrests and Prosecutions, Rules Around Selling Bitcoin Remain Fuzzy, Fast Company, http://www.fastcompany.com/3059770/selling-bitcoin-could-land-you-in-jail-but-rules-remain-fuzzy.
5. 31 C.F.R. § 1010.100(ff)(5)(ii)(a-e) (2014).