TOM BOLT, Corporate Place, Royal Dane Mall, St. Thomas, VI 00802-6410, Chair

PETER J. DYKMAN, Legislative Reference Bureau, P.O. Box 2037, 100 N. Hamilton Street, Madison,

WI 53701, Committee on Style Liaison

DAVID A. GIBSON, P.O. Box 1767, 40 Park Place, Brattleboro, VT 05302

BION M. GREGORY, Office of Legislative Counsel, State Capitol, Suite 3021, Sacramento,

CA 95814-4996

MICHAEL HOUGHTON, P.O. Box 1347, 18th Floor, 1201 N. Market Street, Wilmington, DE 19899

L. GENE LEMON, 1136 W. Butler Drive, Phoenix, AZ 85021-4428

KEN H. TAKAYAMA, Legislative Reference Bureau, State Capitol, Room 446, Honolulu, HI 96813

ANITA RAMASASTRY, University of Washington, School of Law, Condon Hall,

1100 N.E. Campus Parkway, Seattle, WA 98105-6617, Reporter

JOHN L. McCLAUGHERTY, P.O. Box 553, Charleston, WV 25322, President

JOHN P. BURTON, P.O. Box 1357, Suite 101, 123 E. Marcy Street, Santa Fe, NM 87501,

Division Chair

SARAH JANE HUGHES, Indiana University School of Law, 211 South Indiana Avenue, Bloomington,

IN 47405-1001, Advisor

MARIETTA M. MAXFIELD, 1980 Post Oak Boulevard, Suite 748, Houston, TX 77056-3817,

Real Property, Probate and Trust Law Section Advisor

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Road, Norman,

OK 73019, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI, 48104, Executive Director, Emeritus

SECTION 101. SHORT TITLE 31

SECTION 102. DEFINITIONS 31

SECTION 103. EXCLUSIONS 39

SECTION 104. LICENSE REQUIRED 42

SECTION 201. LICENSE REQUIRED 43

SECTION 202. APPLICATION FOR LICENSE 43

SECTION 203. SECURITY 48

SECTION 204. ISSUANCE OF LICENSE 50

SECTION 205. RENEWAL OF LICENSE 52

[SECTION 206. NET WORTH] 54

SECTION 301. LICENSE REQUIRED 56

SECTION 302. APPLICATION FOR LICENSE 56

SECTION 303. ISSUANCE OF LICENSE 58

SECTION 304. RENEWAL OF LICENSE 59

SECTION 401. LICENSE REQUIRED 61

SECTION 402. APPLICATION FOR LICENSE 61

SECTION 403. ISSUANCE OF LICENSE 62

SECTION 404. RENEWAL OF LICENSE 64

SECTION 501. RELATIONSHIP BETWEEN LICENSEE AND AUTHORIZED

DELEGATE 66

SECTION 502. UNAUTHORIZED ACTIVITIES 67

SECTION 601. AUTHORITY TO CONDUCT EXAMINATIONS 68

SECTION 602. JOINT EXAMINATIONS 69

SECTION 603. REPORTS 70

SECTION 604. CHANGE OF CONTROL 71

SECTION 605. RECORDS 74

[SECTION 606. MONEY LAUNDERING REPORTS] 75

SECTION 607. CONFIDENTIALITY OF RECORDS 76

SECTION 701. MAINTENANCE OF PERMISSIBLE INVESTMENTS 78

SECTION 702. TYPES OF PERMISSIBLE INVESTMENTS 79

SECTION 801. SUSPENSION AND REVOCATION [; RECEIVERSHIP] 84

SECTION 802. SUSPENSION OR REVOCATION OF AUTHORIZED DELEGATES 86

SECTION 803. ORDERS TO CEASE AND DESIST 88

SECTION 804. CONSENT ORDERS 89

SECTION 805. CIVIL PENALTIES 90

SECTION 806. CRIMINAL PENALTIES 90

SECTION 807. UNLICENSED PERSONS 91

SECTION 901. ADMINISTRATIVE PROCEDURES 93

SECTION 902. HEARINGS 93

SECTION 1001. UNIFORMITY OF APPLICATION AND CONSTRUCTION 95

SECTION 1002. SEVERABILITY CLAUSE 95

SECTION 1003. EFFECTIVE DATE 95

SECTION 1004. REPEALS 95

SECTION 1005. SAVINGS AND TRANSITIONAL PROVISIONS 96

SECTION 1006. APPLICATION TO EXISTING RELATIONSHIPS 96

(i) What is a Money-services business?

Money-services businesses ("MSBs") are non-bank entities that do not accept deposits like traditional banks or financial institutions. Rather, they provide alternative mechanisms for persons to make payments or to obtain currency or cash in exchange for payment instruments. MSBs engage in the following types of financial activities:

• money transmission (e.g., wire transfers);

• the sale of payment instruments (e.g., money orders, traveler's checks, and stored-value cards);

• check cashing; and

• foreign currency exchange.

MSBs have also been referred to as non-bank financial institutions ("NBFIs") or nondepository providers of financial services ("NDPs"). The so-called "core" customers of MSBs are "unbanked" consumers or persons that do not maintain formal relationships with banks/depository institutions. MSBs also are attractive to a growing range of customers because they offer a wide range of services under one roof (e.g., consumer financial services, travel-related services, postal and packaging services, etc). MSBs have often been associated with ethnic or immigrant communities in the United States as many of these communities use MSBs in order to send funds to relatives residing overseas. An MSB might be a large national company with offices and sales outlets nation-wide. An MSB might also be small business located in a corner shop in a local community.

As of 1996, there were approximately 158,000 MSB outlets or sales locations that provided financial services involving approximately $200 billion

annually throughout the United States.⁽¹⁾ Approximately seven large entities account for the majority of MSB activity conducted within the United States. This group is comprised of large firms that are publicly traded on major securities exchanges with significant capitalization. A far larger group of smaller enterprises compete with the seven larger firms. A smaller MSB might also be a travel agent or a grocery or liquor store. Smaller MSBs tend to operate in niche markets. For example, smaller companies often service a particular immigrant neighborhood within a certain metropolitan area.

(ii) Why have various types of MSBs been grouped together?

MSBs have been grouped together conceptually because (1) they provide an interrelated group of services to the "unbanked" population and (2) the range of services offered by MSBs have been identified as vulnerable to money laundering in recent years. As depository institutions have come under increased federal and state oversight with respect to money laundering, the federal government has turned its attention to MSBs as a possible means for transporting illegally obtained money or converting large cash proceeds into more easily portable payment instruments.⁽²⁾

The range of non-bank entities listed above were first grouped together with the passage of the Annunzio-Wylie Anti-Money Laundering Act of 1992 when the definition of "financial institution" for Bank Secrecy Act ("BSA") reporting purposes was expanded to include non-banks.⁽³⁾ MSBs have also been grouped together because many of these entities provide more than one of the services listed above. A customer may need a range of services. For example, a customer may take his paycheck to a check casher to have it converted into cash; he then may need to purchase a money order to pay his bills; finally, he may need to send funds to relatives abroad via a wire transfer.

Most MSBs, however, have a primary function or business activity from which they derive the majority of their revenue (e.g., check cashing or money transmission) but also offer secondary or ancillary services. Frequently, MSBs serve as authorized vendors or sales agents of another MSB as well (with respect to a secondary or ancillary activity). In particular, money transmitters and payment instrument sellers often rely on a distribution network of sales outlets in order to conduct their business. Very often check cashers or foreign currency exchangers will serve as sales representatives for money transmitters. Consequently, check cashers or currency exchangers will offer money transmission services or sell money orders and traveler's checks solely as contractors for money transmitters. For the sake of consistency, the term "authorized delegate" is used in these notes and in the UMSBA when referring to the sales outlets.

(iii) Expansion of the term MSB to include Internet-related payment mechanisms and "cyberpayments"

When the drafting committee ("Drafting Committee") commenced its work in the fall of 1997, Internet-based payment mechanisms and stored value were new innovations that had not gained widespread market penetration in the United States. As the Drafting Committee progressed with its work, however, these mechanisms and technologies have become more prevalent. Several States have taken the position that the transfer of money over the Internet or the use of an electronic payment instrument is the equivalent of money transmission in the brick and mortar world. In other words, Internet payment services are the equivalent of money services in that they are nondepository providers of financial services and accept customer funds for transmission to third parties. Such Internet payment mechanisms include online bill payment services, Internet funds transfer services as well as stored-value providers (which can be used on line or off line)

As of July 1999, the Drafting Committee had decided to include certain non-bank stored-value issuers within the scope of the UMSBA but had not fully considered whether other Internet payment mechanisms should also be included within the proposed Act. Hence, the Drafting Committee commissioned a cyberpayments working group ("Cyberpayments Working Group") in the autumn of 1999 to examine the issue of whether various Internet based payment mechanisms should be included within the scope of the UMSBA. The recommendations of the Cyberpayments Working Group and the Drafting Committee's work in this area are discussed in greater detail in Section 4B below. A description of the various types of mechanisms analyzed by the Drafting Committee is also discussed below.

(iv) MSBs and money laundering

There has been a growing concern about the role of MSBs with respect to money laundering. As banks have come under heightened regulation and supervision with respect to money laundering, criminals have had to turn to other types of financial institutions in order to transport their money easily and to convert larger amounts of physical currency into smaller more portable payment instruments. Of course, the majority of MSBs are law-abiding businesses that have compliance programs and who cooperate with regulatory and law enforcement officials to prevent and detect money laundering.

Customers often have different relationships with MSBs than customers do with depository institutions. Typically, a customer has an ongoing relationship with a financial institution at which it transacts business. This enables a bank to know its customer and to identify a pattern or behavior that may suggest illegal activity. By contrast, customers who utilize MSBs may do so because of the greater anonymity the services provide. One does not need to be an existing "customer" of an MSB as is the case with a bank. A customer can repeatedly use different MSBs to transact business.

Additionally, MSBs are not always subject to the same level of licensing, regulation and state oversight as are depository institutions. Money services are provided a bit differently than financial services in depository institutions. Many money transmitters and payment instrument sellers use networks of independent sales outlets (i.e., authorized delegates) as the sites where business is transacted. These sales outlets are operated under contract with a money transmitter and hence are not directly supervised by the money transmitter. Thus, the role of the authorized delegates with respect to money laundering has come under heightened scrutiny. State oversight of these delegates varies greatly, especially with respect to law enforcement. As noted below, the Drafting Committee has attempted to clarify the relationship of a money transmitter licensee with the various delegates with which it contracts and to provide regulators with greater enforcement powers with respect to the delegates themselves.

How do MSBs serve as vehicles for money laundering? In some instances MSBs may assist clients to evade federally mandated reporting requirements with respect to currency transactions in excess of a certain dollar amount. For example, corrupt delegates of money transmitters might accept illicit funds from a customer and then transfer the funds overseas in smaller amounts in order to evade certain currency reporting requirements. As the Financial Crimes Enforcement Network ("FinCEN") of Treasury has noted:

Most often, the traffickers bring the agents [of money transmitters] large amounts of currency, which need to be returned to a drug source country. The agents create invoices that make it appear as if the money had been brought in by a number of different senders, in amounts below the record keeping and reporting thresholds. These corrupt agents also provide the money transmitters with lists of recipient names in the foreign countries for each remittance, again using a different name for each remittance. In this way, each time it appears as is there were a number of smaller, unrelated remittances instead of one remittance, in excess of $3,000, that would trigger the record keeping rules . . . or in excess of $10,000 which would trigger the filing of a Currency Transaction Report.⁽⁴⁾

Additionally, MSBs may serve as another "layer" in a chain of funds transfer. In other words, a customer may use an MSB in order to mask his or her identity. A currency exchange house, for example, might accept cash from a customer, which it will then deposit in its own bank account at a commercial banking institution. The origin or source of the funds would be "disguised" because the bank will attribute ownership to the currency exchange business. Similarly, a wire transfer service may accept funds from a customer and wire them through its own commercial bank for a small commission. Again the source of funds is masked.

The use by money launderers of money orders, whether issued by the United States Postal Service or by private companies, has also been documented.⁽⁵⁾ The ease with which money orders can be redeemed or negotiated makes them attractive tools for money launderers. Money orders are negotiable, may be made out to "cash," and operate as a cash substitute. Traveler's checks also raise similar issues to money orders.⁽⁶⁾ The requirement that traveler's checks be countersigned on issuance at the time they are negotiated makes them more difficult to abuse. However, the counter-signature requirement can be evaded by a sales agent and may have less force abroad than in the United States. Consequently, traveler's checks can be purchased in bulk and used to transport large amounts of illegal currency overseas.

While new or emerging payment systems may not yet pose a money laundering threat, such technologies pose potential risks. As FATF has noted: "[e]lectronic purse systems would present a laundering risk in the future if their upper limits were to be raised substantially or removed altogether."⁽⁷⁾ FATF has also noted that electronic purse systems such as stored-value cards pose increased risks for money laundering when they are utilized for cross border purposes. Electronic currency or cyberpayments also may create risks, if they do not include mechanisms for leaving an audit trail when value is changed from one holder to another. Additionally, FATF has noted that the new payment technologies have features similar to traditional systems of electronic funds transfer: rapidity of execution, dematerialization, and the potential magnitude of the transactions.⁽⁸⁾

(v) Existing state and federal regulation of MSBs

In 1994, Congress enacted the Money Laundering Suppression Act of 1994 ("MLSA").⁽⁹⁾ The MLSA recommended that States enact uniform laws to regulate MSBs. The MLSA also called upon the Treasury to promulgate a registration rule for MSBs. The registration requirement is also meant to educate MSBs about their requirements under the federal Bank Secrecy Act ("BSA").

The MLSA urged States to enact uniform laws to "license and regulate" MSBs including "businesses which provide check cashing, currency exchange or money transmitting or remittance services, or issue or redeem money orders, traveler's checks and other similar instruments." Congress specifically requested that the States develop uniform legislation under the auspices of either NCCUSL or the American Law Institute. Congress recommended that a proposed uniform act would include:

(1) licensing requirements for MSBs;

(2) licensing standards for MSBs that focus on:

(a) the business records and capital adequacy of the MSB; and

(b) the competence and experience of the directors and officers of the MSB;

(3) reporting requirements concerning disclosure of fees for services offered to consumers;

(4) procedures to comply with federal currency transaction reporting requirements; and

(5) criminal penalties for the operation of an MSB business without a license.

Section 407 of the MLSA also called for the States to enact civil or criminal penalties for MSBs who fail to comply with the currency reporting requirements of the federal FSA.

In September 1999, the Secretary of the Treasury Lawrence H. Summers and United States Attorney General Janet Reno presented the National Money Laundering Strategy to Congress. As noted in this document, Goal 3 of the Strategy is "Strengthening Partnerships with State and Local Governments to Fight Money Laundering Throughout the United States."⁽¹⁰⁾ Objective 4 under Goal 3 is to "Encourage Comprehensive State Counter-Money Laundering and Related Legislation."⁽¹¹⁾

This objective reads:

At last count, 17 states still have not made money laundering a state crime. That gap in coverage should be speedily closed. State money laundering statutes are essential if states are to be full partners in the national counter-money laundering effort. . . . . Experts at the Departments of Treasury and Justice will assist states that are considering enacting or revising statutes dealing with money laundering or financial reporting and recordkeeping. Assistance can take the form of producing information about the patterns of money laundering encountered in a state, or providing drafting or related advice about the terms of the necessary statutes themselves or related legal issues. The Administration also will encourage states to enact legislation licensing and regulating appropriate money-services businesses and those engaged in the business of transporting currency.⁽¹²⁾

Congress called for a two-tier approach to MSB regulation because of the existing duality of MSB regulation. Direct oversight of MSBs occurs at the state level through state licensing laws. State licensing, regulation and oversight of MSBs vary greatly from State to State. Because state legislation focuses on licensing and safety and soundness, the UMSBA also focuses on these issues. The sale of payment instruments and money transmission is the most heavily regulated activity with more than 44 States having some form of law which regulates the sale of checks and other payment instruments and/or money transmission. States vary to the extent in which they regulate both payment instrument sellers and money transmission - with some States regulating money transmission, others the sale of payment instruments and still others a combination of the two activities.

Far fewer States regulate the check cashing industry. Approximately 24 States currently have specific check cashing legislation. Check cashers are often licensed but are subject to less oversight than check sellers. This is due, in part, to the perception that check selling poses a greater risk to consumers that check cashing. Check cashers also offer services such as wire transfers or the sale of money orders as authorized delegates. Net worth requirements are typically less stringent for check cashers. These businesses are also examined less frequently (if at all) by the state banking authority or other supervisory body. Currency exchange is the least regulated with approximately eight States having a form of regulation of this activity.

The existing state laws vary in terms of detail and the actual requirements imposed on MSBs, the type of enforcement mechanisms and records available to regulators, and the nature of penalties for non-compliance with relevant state laws. The Money Transmitters Regulators Association ("MTRA"), an association of state regulators that deal with certain aspects of money services, has developed a model legislation outline that lists some of core elements of a state licensing law. Some of the common elements of existing state law include:

• licensing and registration of MSBs (with more detailed requirements for payment instrument sellers and money transmitters than for check cashers or currency exchangers);

• bonding, collateral, and net worth requirements;

• examination of MSBs;

• record keeping requirements;

• reporting requirements;

• enforcement powers; and

• civil and/or criminal penalties.

Federal and state regulators and law enforcement authorities have traditionally relied on currency transaction reports ("CTRs") as a means of detecting money laundering in financial institutions and in MSBs. Pursuant to the federal BSA (which is a federal anti-money laundering record keeping statute), financial institutions are required to report currency transactions equal to or greater than $10,000 to Treasury. For example, if a bank customer deposits $10,000 into his or her bank account, the bank is obligated to file a CTR.⁽¹³⁾ The CTR indicates the name of the depositor as well as the nature of the transaction (as a way of trying to track down customers who may be money launderers). Additionally, financial institutions are also required to retain records for transactions in excess of $3,000.⁽¹⁴⁾

MSBs are technically obligated to file CTRs and to also keep records for transactions greater than $3,000. The lack of consistent and coherent federal and state oversight of MSBs, however, makes it more difficult to enforce this obligation and for regulators to act on information that they receive. Additionally, many money launderers avoid triggering the CTR or record keeping requirements of the BSA by structuring their transactions into several smaller transactions below the reporting thresholds of $10,000 or $3,000. As noted above, in some instances, MSBs may actively assist the customer in evading reporting requirements (as was the case with transmitters monitored under Operation El Dorado). Some MSBs may be unaware, furthermore, that they possess such an affirmative obligation. Unlike banks, which are licensed and regulated more closely at either a state or a federal level, MSBs are subject to a varying degree of state regulation (especially with respect to the role of authorized delegates).

On May 21, 1997, FinCEN proposed rules on the following subjects: (1) registration of MSBs (2) suspicious transaction reporting by money transmitters and issuers, sellers, and redeemers of money orders and travelers checks and (3) currency transaction reporting by money transmitters of overseas transmissions of funds.⁽¹⁵⁾

In August 18, 1999, FinCEN issued a final rule requiring that MSBs register with Treasury.⁽¹⁶⁾ This rule is based on a proposed rule that was published on May 21, 1997.⁽¹⁷⁾ The registration requirement was mandated by Congress as part of the Money Laundering Suppression Act of 1994. The registration requirement applies to five types of MSBs: (1) currency dealers or exchangers; (2) check cashers; (3) issuers of traveler's checks or money orders; (4) sellers or redeemers of traveler's checks or money orders; and (5) money transmitters.

At present, these categories of MSBs are required to register with the Department of Treasury by December 31, 2001 and to renew their registration every two years. Additionally, MSBs will be required to update the list of agents annually. Agents of MSBs will not have to register unless they operate as an MSB on their own behalf. At present, stored-value issuers and sellers will not be required to register with Treasury.⁽¹⁸⁾

Currently, depository institutions are also required to file suspicious activity reports ("SARs") on transactions that suggest money laundering or other illegal/fraudulent activity on the part of a customer. Unlike currency reporting requirements, which are triggered by the dollar value of transactions, SARs are designed to detect unusual patterns or activities that may involve money laundering or financial crime. Treasury initiated proposed rulemaking in May 1997 that would create a SAR form for money transmitters and payment instrument sellers. The final SAR rule was promulgated on March 14, 2000.⁽¹⁹⁾

Under the SAR rule (1) money transmitters, (2) issuers, sellers, and redeemers of money orders, (3) issuers, sellers, and redeemers of traveler's checks, and (4) the United States Postal Service (except with regard to the sale of postage or philatelic products) are required to report certain classes of transactions that meet certain dollar thresholds to the Department of the Treasury, beginning on January 1, 2002. The reportable transactions include:

• transactions involving funds derived from illegal activity or intended or conducted in order to hide or disguise funds or assets derived from illegal activity;

• transactions designed, whether through structuring or other means, to evade the requirements of the BSA; and

• transactions that appear to serve no business or apparent lawful purpose.⁽²⁰⁾

Since the 1999 Annual Meeting, the Drafting Committee has met two additional times in October 1999 and March 2000. The Drafting Committee reviewed a Fifth Draft of the UMSBA in October 1999 at a meeting in Arlington, Virginia. The Fifth Draft of the UMSBA contained revisions suggested during the 1999 Annual Meeting. One of the major revisions discussed at the October meeting was an amendment to the application information required from non-corporate entities seeking licenses for money transmission. The revised provisions included broader standards that would be applicable to limited liability companies and partnerships as well as joint stock companies. This change addressed concerns raised at the Annual Meeting concerning the ability of non-publicly held business entities to comply with the application requirements (e.g., concerning audited financials) as previously drafted.

The Drafting Committee also requested that a working group be formed to examine issues relating to cyberpayments and stored value. Subsequent to the October meeting, the Chairman of the Drafting Committee appointed a Cyberpayments Working Group composed of: Commissioner Bion M. Gregory, Chair of the Working Group and Member of the Drafting Committee, Sarah Jane Hughes, Professor of Law at Indiana University School of Law - Bloomington, Nicholas Kyrus, President of the Money Transmitters Regulators Association and Deputy Commissioner, Department of Financial Institutions, Virginia, Ezra Levine, Partner at Howrey & Simon and Counsel to the Non Bank Funds Transmitter Group, Joseph Sommer, Counsel, Federal Reserve Bank of New York, and Russell B. Stevenson, Jr., General Counsel, Arbros Communications. Anita Ramasastry, Reporter for the Drafting Committee, served as the Reporter for the Cyberpayments Working Group.

The Cyberpayments Working Group met for more than 5 hours by conference call on February 15, February 29, and March 7, 2000 and exchanged electronic communications. The Cyberpayments Working Group based its discussion on a Memorandum, dated January 5, 2000 and prepared by Anita Ramasastry. A copy of this memorandum may be found at the University of Pennsylvania's web site.⁽²¹⁾

In March 2000, the Drafting Committee held its final meeting in Washington, D.C. The Drafting Committee voted to change the definition of "money-services business" to "money services." Money services include money transmitters, check cashers and currency exchangers. The previous term, "money-services business," closely paralleled the federal definition included in recent registration rules promulgated by FinCEN. However, within the UMSBA the use of the word "business" was confusing because of the separate use of the term "engage in the business." Additionally, the Drafting Committee felt that the term money services was succinct and provided for greater clarity within the statute. Furthermore, the definition of money services within the UMSBA is more consistent with terminology used in existing state law.

The Drafting Committee also voted to send a request to the Executive Committee of NCCUSL that the name of the UMSBA be changed to the Uniform Money Services Act ("UMSA") to provide consistency between the changed definitions and the name of the act. This request has been sent to the Executive Committee for their consideration.

During its final meeting, the Drafting Committee considered the recommendations of the Cyberpayments Working Group. Based on the recommendations of the Working Group, the Drafting Committee made several decisions which are summarized in Section 4B of the Prefatory Note.

In addition to consideration of the cyberpayments recommendations, the Drafting Committee spent time revising and fine turning the draft. At the March meeting, the Drafting Committee also voted to amend the definition of "check cashing" to specifically exclude entities that provide deferred-deposit services for a fee. Such services are often referred to as "pay-day lending" whereby a customer receives money in exchange for a check that will be submitted for collection at a specified time in the future. The check is often to be presented at the time of the customer's next pay period (hence the reference to "pay-day"). It is believed that such services do not constitute check cashing but are rather a related service often regulated by separate statute. The security requirements set forth for money transmitters in Section 203 were also shortened and simplified.

The Drafting Committee also decided to make optional (denoted by brackets) the provisions of the UMSBA, which require licensees to file annual renewal reports (Sections 205(b), 304(b), and 404(b)). States often use either an annual renewal report or annual examinations as a means of exercising regulatory oversight of a licensee. Thus, some States do not currently require renewal reports and utilize annual examinations as a supervisory mechanism. Other States rely more on renewal reports. The examination provision has not been bracketed because Section 601 only provides authority for the superintendent to conduct examinations but does not require such examinations to take place annually. States will be free to choose whether they wish to make renewal reporting part of their supervisory regime.

The other area where revisions were made was Article 8 of the Act, which deals with enforcement. Section 801 provides the superintendent with authority to bring enforcement proceedings against a licensee. Section 801(a)(2) has been amended and language concerning the licensee's responsibility for the fraud, misrepresentation, deceit or gross negligence of an authorized delegate has been removed because the Committee decided that it was not desirable to create liability for the licensee on the basis of the fraudulent activities of a delegate. Under the previous Section 801(a)(2), the licensee could have its license revoked based on misrepresentation or fraudulent acts by one of its authorized delegates.

Section 801(a)(3) has also been revised. The licensee may still have its license revoked should an authorized delegate violate either a money-laundering statute or any part of the UMSBA. This creates a degree of accountability on the part of the licensee for its delegates with respect to compliance with state and federal anti-money laundering measures and also with the requirements of this Act. However, it has been difficult for regulators to articulate a clearly defined standard as to what constitutes a "wilful failure to supervise" an authorized delegate. Consequently, this language has been omitted.

The Seventh Draft of the UMSBA, which is being presented to the Annual Meeting, contains the following additional revisions. First, the Drafting Committee worked during its March 2000 session to tighten the enforcement provisions and to make the provisions dealing with licensees and delegates more consistent with each other. Additionally, a new confidentiality provision has been included. The Drafting Committee, after hearing the views of industry representatives, decided that it was important to provide licensees and license applicants with an appropriate degree of protection for business and proprietary information that is contained in applications and reports filed with state regulators. In the absence of such protections, information concerning an applicant's receivables, for example, could be used to reconstruct the market share of a particular MSB. Hence, the Drafting Committee voted to include the current confidentiality provision. Finally, the Seventh Draft contains a new Section 807, which provides regulators with the ability to take enforcement actions against unlicensed persons.

Unless otherwise noted, references in this draft are to the following sources:

• "Model Act Regulating Money Transmitters" - Non-Bank Funds Transmitter Group Model Act Regulating Money Transmitters (1996).

• "Arizona Money Transmitter Act" - Arizona Revised Statutes, Title 6, Banks and Financial Institutions, Chapter 12, Transmitters of Money (Title 6, Banks and Financial Institutions; Chapter 12, Transmitters of Money, [1999]).

• "Florida Money Transmitter's Code" - Florida Money Transmitters' Code (Title XXXIII, Regulation of Trade, Commerce, Investments, and Solicitations, Chapter 560, Money Transmitters' Code [1999]).

• "President's Commission Act" - President's Commission on Model State Drug Laws Model Money Transmitter Licensing and Regulation Act (1993).

• "MTRA Outline" - Money Transmitters' Regulators Association Model Legislation Outline (1991).

There are several major goals that the Act seeks to achieve.

• Encompassing all MSBs within a single legislative framework (keeping in mind the differences between various types of money services);

• Providing a strong safety and soundness law that will give regulators a means of assessing whether a certain MSB should be permitted to engage in business within a State (and ensuring consistent standards across the country);

• Creating strong licensing mechanisms that will deter businesses that engage in money laundering and illegal activity from conducting business in a State;

• Strengthening enforcement and supervisory powers that will permit regulators and attorneys general to take appropriate action in the event of suspected money laundering or other related violations of law;

• Including new Internet-based money transmission services and cyberpayments within a statutory framework to the extent appropriate in an effort to create a unified licensing mechanism that will not serve as a barrier to entry for new business entities;

• Providing industry with a cost efficient manner of complying with various state licensing requirements; and

• Providing regulators with the means of reducing administrative costs through cooperation with other States and through the sharing and exchange of uniform information provided by licensees.

As mentioned above, there are several reasons why a Uniform Act is desirable. First, uniformity will create a level playing field with respect to the entry of MSBs into various States. Uniform licensing, reporting and enforcement provisions for MSBs will serve as a much larger deterrent to money laundering than will a host of varying state laws. More generally, the uniformity of the reporting and record keeping requirements will enable industry to comply with multiple state requirements in a uniform and cost effective manner.

Additionally, while many States have laws that deal with the sale of payment instruments, state regulation of money transmission, check cashers and currency exchangers is extremely varied. Furthermore, only a few States have attempted to create statutory frameworks which tie together the various types of MSBs in a way that assists regulators and attorneys general in terms of law enforcement and the prevention and detection of money laundering. The UMSBA creates a framework that connects all types of MSBs and which clearly sets forth the relationship between a licensee and it delegates.

In some States, the Act will replace existing licensing laws for money transmitters and potentially check cashers. For the vast majority of States, the Act will provide new provisions for dealing with currency exchangers (which are virtually unregulated at the state level). The Act is not designed, however, to repeal existing consumer protection laws. To the extent that States have existing check casher law that merges licensing with regulation of consumer fees, the Act is structured to allow States to choose which licensing provisions they wish to adopt. Thus, a State could decide not to incorporate the check cashing provisions as part of its new statutory framework.

Alternatively, States might choose to use the Act as a basic framework that it can supplement with additional consumer-related provisions. A State might choose to supplement the Act's check cashing licensing provisions, for example, with its own requirements concurring consumer issues such as fee disclosure and fee setting. It is important to emphasize, however, that the only check cashers that have to obtain licenses under this Act are check cashers that are NOT also authorized delegates of money transmitters. In reality, the number of check cashers that do not serve as delegates is minimal. At the same time, this Act provides for a greater recognition of the relationship between a licensee and authorized delegates in terms of the enforcement measures that a regulator may take directly against the delegate and also, under certain circumstances, against the licensee with respect to the conduct of the delegate.

The Act provides a unique opportunity for States to take a consistent approach to the licensing and regulation of stored value and other forms of emerging cyberpayment mechanisms. A uniform and consistent approach will provide less of a barrier to competition and growth in these new sectors. For the majority of States, the Act will provide a new approach to the treatment of stored value and electronic currency at the state level. A handful of States have begun to license and regulate such diverse entities as nonbank stored-value issuers, Internet bill payment services and Internet money transfer services. Rather than create a varied and complex regulatory system for these emerging payment service providers, the UMSBA attempts to provide a simple and consistent set of licensing requirements for these new entities.

As noted above, three principal issues have evolved over the course of the Drafting Committee's previous meetings: (1) the scope of the licensing provisions in the UMSBA; (2) the treatment of Internet payment mechanisms within the UMSBA; and (3) the categories of permissible investments available to money transmitters.

The UMSBA currently has two separate licensing regimes. The first is for money transmitters (consisting of money transmitters, payment instrument sellers, and certain types of Internet payment services). The second is for check cashers and currency exchangers.

As stated above, the UMSBA is a state safety and soundness law that creates licensing provisions for various types of MSBs. Licensing is potentially a crucial element in money laundering prevention. Proper licensing mechanisms will help States to identify MSB operations that may be operated for illegitimate purposes and to prevent them from conducting business in their States. Additionally, licensing is one method whereby States could monitor the operations of these businesses on an ongoing basis. Licensing will ensure better compliance with existing laws, especially if obligations are accompanied by appropriate enforcement mechanisms.

The Drafting Committee is aware of the potential implementation problems that may be created by licensing requirements. State banking departments have frequently been the administrative body vested with MSB oversight. The Drafting Committee has attempted to keep regulatory burdens to a minimum and focused on the types of provisions that would bolster the state regulatory and enforcement mechanisms. There are, however, potential benefits to be gained from a uniform statute. Uniform law would simplify MSB compliance efforts with respect to transacting business in multiple jurisdictions. The diverse nature of state law makes compliance difficult for some MSBs. The UMSBA would also facilitate and enhance enforcement of existing money laundering and MSB provisions.

Because the UMSBA is a state licensing statute, which also has safety and soundness elements, the Drafting Committee has considered the extent to which all MSBs should (or should not) be subject to the same requirements with respect to safety and soundness of the business entries. Requirements related to capital adequacy, permissible investments, net worth and bonding are all tied to the safety and soundness of a business. The reason for the requirements is to prevent a business from becoming insolvent with customers having outstanding payment obligations (e.g., money orders that have not been redeemed).

The September 1998 Draft included a separate licensing regime for two distinct groups of MSBs. The first group was money transmitters, payment instrument sellers, and stored-value providers (these entities are still grouped together but are labeled as "money transmitters" more broadly for ease of definition). The second group was check cashers and currency exchangers. The Drafting Committee concluded that check cashers and currency exchangers did not pose the same type of safety and soundness concerns for state regulators as other types of MSBs because they did not accept funds from consumers for obligations that might remain unpaid. Rather, both check cashers and currency exchangers immediately provide customers with funds as part of their services. Thus, there is no risk that customers may lose their money (as with the purchase of a money order that might not be redeemed on a future date). Therefore, the Drafting Committee decided that check cashers and currency exchangers should be subject to different types of reporting and record keeping requirements and should be exempt from bond requirements.

Check cashers and currency exchangers were still included within the Act (albeit in a different manner) because (1) there was some indication that the activity of currency exchange itself was vulnerable to money laundering (as contrasted to check cashing); and (2) that the role of many check cashers and currency exchangers as authorized delegates of money transmitters meant that they were potential vehicles for money laundering with respect to money transmission and the sale of money orders and traveler's checks.

During the October 1998 Drafting Committee meeting, the Drafting Committee voted to further narrow the extent to which check cashers and currency exchangers were subject to licensing requirements. In the Third Draft, check cashers and currency exchangers were required to obtain a license ONLY IF they were not authorized delegates of money transmitters, payment instruments sellers, or stored-value providers. Committee members observed that check cashers and currency exchangers who act as authorized delegates would already be identified (for law enforcement purposes) as part of the information supplied to the state regulator by the principal licensee. Additionally, the UMSBA permits the state regulator to take enforcement actions against both licensees and authorized delegates. Check cashers and currency exchangers are subject to anti-money laundering provisions of the Act if they are EITHER (1) authorized delegates or (2) licensed separately under the provisions for check cashers and currency exchangers.

The UMSBA also does not deal with issues such as consumer rate and fee regulation for check cashing. The scope of the Act as approved by Scope and Program pertains solely to safety and soundness as that relates to the prevention of money laundering. The Drafting Committee was not directed to address consumer issues. Nonetheless, the UMSBA is not meant to replace or supplant existing consumer protection laws relating to check cashing. Instead, the UMSBA is meant to coexist with existing state consumer protection laws. Additionally, the licensing provisions for check cashing are separable to the extent that States have existing laws that combine licensing provisions with consumer protection provisions. As noted above, the UMSBA requires only those check cashers that are not authorized delegates to become licensed. Relatively few check cashers offer check cashing exclusively without offering an ancillary service of money transmission on behalf of another licensed money transmitter. Thus, the majority of check cashers will be authorized delegates under the UMSBA and subject to certain enforcement measures rather than a full fledged licensing scheme.

The MTRA, which is the lead regulatory association that deals with MSBs, has also been developing, in cooperation with industry, a uniform renewal form for licensees. This form is meant to serve as a uniform document that licensees might file in multiple jurisdictions. The Drafting Committee has reviewed this form and has attempted to make the information requested pursuant to the UMSBA consistent with the proposed renewal form. Additionally, the current draft of the UMSBA offers the States some flexibility with respect to their regulatory and supervisory practices. For example, the requirements that a licensee file an annual renewal form have been bracketed. This is because some States examine a licensee annually rather than require the filing of an annual report. Other States by contrast, prefer to utilize annual reports in lieu of examinations. States thus have a menu of options presented within the uniform framework of the UMSBA. Similarly, States will retain discretion with respect to important issues such as licensing fees and bonding and net worth requirements.

Subsequent to the first reading of the Act, the Drafting Committee focused on the treatment of new payment technologies within the framework of the UMSBA. The various types of payment mechanisms examined by the Drafting Committee are outlined below, followed by the decisions of the Committee within respect to their inclusion within the UMSBA.

The Seventh Draft has been revised to incorporate certain Internet payment mechanisms into the existing licensing framework. However, the UMSBA does not include new or different licensing regimes for such payment mechanisms. Thus, the proposals contained in the UMSBA are not complex and cumbersome. Rather, they are simple and meant to apply the existing licensing frameworks to new technologies. Existing definitions have been expanded slightly to take into account the fact that (1) Internet payment mechanisms and are in man respects the functional equivalent of traditional money transmission and (2) that the sale of stored value is in many respects analogous to the sale of traditional payment instruments such as money orders.

The main changes to the Act involve an expansion of our traditional concept of "money". With the advent of the Internet and new microchip technology it is possible to exchange value that is not "money" in the traditional sense. The UMSBA consequently provides a new definition of "monetary value". Like money, monetary value can be transmitted. Similarly issuers need not sell a physical tangible payment instrument in order to issue value to consumers. It is possible for consumers to purchase redeemable value that may only exist in a computerized format. Hence, the UMSBA contains definition of stored value that is distinct from the traditional payment instrument.

(i) Stored value

Stored-value products are a recent innovation in payment systems technology. Stored-value products possess certain basic characteristics. According to the Federal Reserve, stored-value products share three attributes: "(1) [a] card or other device electronically stores or provides access to a specified amount of funds selected by the holder of the device and available for making payments to others; (2) the device is the only means of routine access to the funds; and (3) the issuer does not record the funds associated with the device as an account in the name of (or credited to) the holder."⁽²²⁾

Stored-value cards are also known as "smart" cards, prepaid cards, or value-added cards. These cards record a balance on a computer chip that is debited at a point-of-sale terminal when a consumer or individual makes a purchase. Typically, a consumer will pay a bank or other provider money in exchange for a card that is loaded with value. The value can evidence the provider's promise (typically to pay money), or can evidence the promise of a trustworthy third party. The consumer uses the card rather than paper currency to purchase goods and services. Merchants who accept smart cards can typically transfer the value of accumulated credits to their bank accounts. A smart card is not typically used for transactions over the Internet, although this may be changing with the advent of new credit-card products that include a stored-value component. Several new services, however, provide for remote payments to be made by electronic currency that is stored on the hard drive of a person's computer.

The transfer of stored-value may provide an opportunity for money laundering. The amount of value that can be retained on a stored-value card will, of course, affect whether people will use these products for money laundering. If one can store a large amount of value on a card that is highly portable and transferable, this will increase the likelihood of money laundering. Stored value and electronic currency may give people the ability to move money globally without using banks as intermediaries. Theoretically, funds can be transferred to jurisdictions with less stringent money laundering laws via a stored-value instrument or over the computer. A smart card encoded with a large amount of electronic money can be slipped into a person's pocket and taken anywhere in the world.

Several States have begun to include stored value within their existing money transmission law. Connecticut, for example, has defined stored value as a form of "electronic payment instrument."⁽²³⁾ This term would also include electronic traveler's checks. West Virginia defines "currency transmission" or "money transmission" to include "the transmission of funds through the issuance and sale of stored-value cards which are intended for general acceptance and use in commercial or consumer transactions."⁽²⁴⁾ Other States, such as Texas, have included stored-value providers by interpretation. The Texas Banking Department has explained, for example, its rationale for requiring nonbank issuers of open system stored-value cards to obtain a license under the Texas Sale of Checks Act:

Stored-value cards issued by non-banks for use in "open" systems (i.e., to purchase goods and services offered by vendors other than the issuer of the card) will generally be subject to regulation under the Sale of Checks Act because the non-bank issuer is holding the funds of third parties. Consumers are relying on the non-bank issuer that the card will be honored when presented by the purchaser of goods and services at diverse locations.⁽²⁵⁾

Oregon is the most recent State to include a provision for the regulation of stored value. Section 2 of the Sale of Checks Act includes a definition of electronic instrument which "means a card or other tangible object . . . for the storage of information, that is prefunded and for which the value is decrement upon each use."⁽²⁶⁾ The term excludes "a card or other tangible object that is redeemable by the issuer in the issuer's goods and services."⁽²⁷⁾

(ii) E-money and Internet payment mechanisms

New types of cyberpayments or Internet payment mechanisms have been referred to by regulators and commentators by a host of different names including electronic cash, digital cash, electronic currency, and Internet or on-line scrip ("E-money"). E-money refers to money or a money substitute that is transformed into information stored on a computer chip or a personal computer so that it can be transferred over information systems such as the Internet. Technology permits the transmission of electronic value over networks that link personal computers (PCs) and the storage of electronic cash on the hard drives of personal computers.

The first type is through use of a traditional payment mechanism such as Automated Clearing House ("ACH") or a credit card. The Internet serves as a mode of communication only. The second type of Internet payment mechanisms involves "E-money". One type of Internet-based E-money system has been described as a token or notational system. These computer-based systems involve a customer purchasing electronic tokens, which serve as cash substitutes for transactions over the Internet. With this type of system, "money" or "value" is purchased from an issuer (who may be a bank or a nonbank). The value is then stored in a digital form on a consumer's personal computer and the notational value is transferred over the Internet. The "coin" is merely a notational series of numbers or other symbols that are transmitted over the Internet to a merchant. The merchant must then redeem the "coin" with an issuerCwho will verify that the coin has not been spent previously. The issuer of the Internet E-money is obligated to redeem these payments when received from the merchant. Company A issues a certain type of E-money - Internet "cash" cards with unique personal identification numbers ("PINs"). These cash cards are purchased from venders who are sales representatives. A consumer uses his PIN when transacting with a merchant on-line.

Commentators have noted that state money transmission statutes may, by implication, include or regulate Internet payment systems such as the notational systems described above. Others have suggested that in the future might be a source of prudential regulation for non-bank entities engaged in this activity. For example, the United States Consumer Electronic Payments Task Force has noted:

Many commentators have informed the Task Force that they were concerned that e-money issuers would become insolvent, and that consumers would not be informed of their rights in the event of such an insolvency ****

Other nonbank issuers may be subject to state regulatory oversight; however, the extent of this supervision is unclear. Clarification by state regulators and legislatures of the applicability of their laws to e-money could be beneficial.⁽²⁸⁾

In addition to token or notational systems, there are also "account-based" E-money systems. Account-based systems involve a consumer purchasing "E-money" by debiting an existing bank account or using a credit card to buy "coins". The value is then stored on the issuer's records and the consumer might access the records. The merchant who accepts the E-money ultimately redeems the account-based E-money with a bank or credit card company.

(iii) Internet scrip

Stored value cards, token or notational systems as well as account-based systems may all involve exchange of value that is not redeemable in money. The term "scrip" has been used to refer to value that may be exchanged over the Internet but which may not be redeemable for money. Scrip is more analogous to coupons or bonus points that can be exchanged by a consumer for goods or services but have no cash redemption value. Scrip can be used by merchants to sell access to value-added web pages on a per-access basis or a subscription basis. They can also use scrip to provide promotional incentives to users. Scrip can represent any form of currency, points in a frequent user program, access rights, etc.

At present, there are new micropayments systems being developed that allow customers to either earn reward points on line or to purchase points or "value" that is redeemable for goods and services rather than for money. One such example is Company B which issues its own gift "money." Company B issues what are essentially online gift certificates. A customer opens an account and purchases a certain amount of Company B's reward "dollars." Then, the person can send the dollars to anyone with an email address (along with a card). The recipient, upon receipt, opens an account and then can spend the gift "dollars" at any participating store that accepts the "dollars." What is not apparent from the website is whether Company B's "dollars" are redeemable in cash or merely in goods and services.

Another company, Company C, offers online points that are billed as web "currency." Company C's "points" are units that consumers may earn when visiting various websites, filling out surveys or engaging in other online activities for which merchants seek to reward consumers. The points accrue and are stored in an online "account" that a customer may access to redeem his or her "points" for various goods and services. The points are not redeemable for money, and the company states that it may discontinue the service at any point. Company C is offering an account-based payment system that issues non-redeemable points.

(iv) Internet funds transfer

New payment services offered by banks and nonbanks will transfer money over the Internet. One such service, offered by Company D, will transfer money over the Internet to anyone who has an email address. Consumers who wish to send money via the Internet must first establish an online account with Company D. A consumer can fund his or her account with payments from a credit card, a debit from his bank account, or by sending in a money order or check. Company D holds the consumer's money until it receives a request to transfer the funds to a recipient. A transfer is effectuated by sending an email to the recipient. The recipient then has several options for receiving paymentCranging from establishing his or her own online account with Company D, having the funds transferred to an existing bank account, or, if the customer has no bank account, receiving a check from Company D.

(v) Gold/precious metals transfer and payment

Somewhat similar to an Internet funds transfer system is a system whereby customers transfer precious metal via accounts on the Internet. For example, with Company E, rather than having an "account" with E-money denominated in U.S. dollars, a customer sets up an online account and buys gold, silver, platinum, or palladium. The customer then has "x" grams or troy ounces of the precious metal. One can only send money to or purchase items from an existing customer of Company E. The advantage, Company E claims, is the stability of precious metals relative to currency. Customers can utilize their precious metal accounts to buy goods and services, to receive payment from third parties, and to pay bills.

(vi) Internet bill payment services

Banks and nonbank have began to offer Internet bill payment services. For a fee, electronic bill payment services pay certain bills for consumers, after receiving authorization from a consumer. The customer accesses the service via the Internet. Bill payments may subsequently be made for the consumer electronically. Typically, the service provider will use an automated clearinghouse (ACH) transfer to effectuate payment. However, if the designated payee does not accept electronic payment, the bill-payment service will print and mail a check on behalf of its customer. When a nonbank service is involved, the nonbank has no contractual relationship with the consumer's bank. Instead, the consumer's bank will transfer money to the bill-payment service company. The bill-payment service will, in turn, deposit the funds into its own bank account. The bill-payment service will then issue a payment instrument payable on its own account to the designated payee.

The Texas Department of Banking has required at least one bill-payment service to obtain a license under its Sale of Checks Act.⁽²⁹⁾ Texas made this decision based on the fact that the bill-payment service was holding the money of consumers in its own account and issuing payment instruments to merchants payable on the same account. The Texas Sale of Checks Act defines a check to include "an instrument for the transmission or payment of money, including a draft, traveler's check, or money order. The term also includes an instrument for the transmission or payment of money in which the purchaser or remitter of the instrument appoints or purports to appoint the seller as its agent for the receipt, transmission, or handling of money, regardless of who signs the instrument."⁽³⁰⁾ Texas is currently assessing the situation with several other Internet bill-payment services. California has also required an Internet bill-payment service to obtain a license under its relevant statute.⁽³¹⁾ By implication, Internet bill-payment services may already be included within various sale of payment instruments or money transmission statutes.

(vii) Previous treatment of stored value

At the October 1998 meeting, the Drafting Committee affirmed its decision to include stored-value products and stored-value providers within the scope of the Act. Drafting Committee members saw the use of stored value as a means of payment as similar to money transmission. Therefore, to the extent possible, the Drafting Committee recommended including stored value within existing definitions of payment instruments. The Committee made the following decisions with respect to stored value:

• stored value was defined as a form of electronic payment instrument, and thus, the sale of a stored-value instrument would constitute the sale of a payment instrument for purposes of UMSBA;

• stored-value issuers, sellers, and redeemers were treated as payment instrument sellers; payment instrument sellers, in turn, were subsumed under the definition of money transmitters, thereby triggering the Article 2 licensing provisions of the UMSBA.

• closed-end stored-value instruments, such as phone cards or metro cards, were excluded from the definition of stored-value instrument⁽³²⁾; and

• stored-value issuers that were subject to supervision and oversight by a federal or state banking agency also would be exempt from the licensing provisions of the Act.

(viii) Current revisions to THE UMSBA that reflect inclusion of certain cyberpayments within the scope of the Act

In March 2000, The Drafting Committee considered the recommendations of the Cyberpayments Working Group and decided to expand the scope of the UMSBA to include a broader category of payment mechanisms. In general, the Drafting Committee concluded that Internet-based payment mechanisms should be included within the scope of the UMSBA to the extent that such services involved the sale and issuance of monetary value or the transmission of monetary value by a nonbank, if the nonbank also holds a consumer's money for its own account prior to redemption. In such circumstances, the Drafting Committee felt that the types of cyberpayment mechanisms listed above posed the same safety and soundness concerns as their brick and mortar counterparts. In furtherance of this general principle, the Drafting Committee made the following decisions with respect to cyberpayments:

• New concept of monetary value. The definition of "money" and related definitions should be revised to reflect the fact that certain payment service providers employ a form of value that is not directly redeemable in money, but nevertheless (1) serves as a medium of exchange, and (2) places the customer at risk of the provider's insolvency while the medium is outstanding. The same safety and soundness issues pertinent to redeemable forms of value apply to these irredeemable forms of value. Online gift certificates (redeemable at many locations) or reward points or precious metal transfers would constitute monetary value.

Consequently, a new definition of "monetary value" has been added Monetary value is defined as "a medium of exchange, whether or not redeemable in money." The term "medium of exchange" connotes that value that is being exchanged be accepted by a community, larger than the two parties to the exchange. Hence, bilateral units of account used in closed systems, such as university payment cards, would not constitute "monetary value" for purposes of this Act. A university payment card that was also accepted by a few local pizzerias could be at the borderline. A university payment card accepted by most local merchants in a city or town would likely be true open-system "monetary value."

• Definition of stored value. The definition of stored-value instrument should be changed to stored value because the instrument in which the stored value is embedded is not conceptually relevant. Any definition that conflates the two ideas may lead to confusion. For example, multiple issuers of stored value might provide different value on a single instrument. The instrument is unitary, but the stored value is not. Alternatively, value might not be stored on any identifiable physical object, but instead by purely cryptanalytic means. Based on the change of term, the definition of payment instrument and the exclusion for certain stored-value providers has been amended as well.

In the Seventh Draft, the term "stored value" is defined as "monetary value that is evidenced in an electronic record." The revised definition still excludes from regulation closed-end stored-value systems such as transportation cards and single issuer cards such as department store gift certificates. Because monetary value is defined as "a medium of exchange, whether or not redeemable in money," only stored value which consists of a medium of exchange evidenced in electronic record would qualify as stored value for purposes of regulation. A medium of exchange needs to be something that is a widely accepted. Closed systems, as mere bilateral units of account, therefore, would be excluded from regulation.

• Definition of money transmission. Internet payment services that hold customer's funds or monetary value for their own account rather than serve simply as clearing agents should fall within the scope of the Act. By contrast, entities that simply transfer money between parties as clearing agents should clearly fall outside the scope of a safety and soundness statute. The definition of money transmission should be revised to reflect this distinction.

The revised definition of money transmission has been amended as follows: "Money transmission" means to engage in the business of:

(A) selling or issuing payment instruments;

(B) selling or issuing stored value; or

(C) receiving money or monetary value for transmission to a location within or outside the United States.

The previous definition of "money transmission" included the "sale or issuance of a payment instrument, or engaging in receiving money for transmission, or transmitting money within the United States or to locations outside the United States". The revised definition omits the language "or transmitting money" in an attempt to distinguish between clearing services and entities that actually receive and hold funds or monetary value before transmitting it on behalf of a customer. The Drafting Committee decided that only those entities that received and held funds for consumers prior to transmission should be licensed under the UMSBA, whereas entities that merely served as clearing agencies and transmitted money but never were in possession of consumer funds (e.g., a credit card processing facility) should be exempt from licensing.

• Exclusion of pure barter. To the extent possible, the Act should not encompass entities that engage in pure barter activities but should encompass an issuer of monetary value that could be redeemed by multiple merchants for goods and services.

As noted above, the term "monetary value" is defined in such a manner as to exclude pure barter or activities where the "value" that is being exchanged is used for exchange with a single issuer or merchant or within a small geographic radius. Of course, regulators will have discretion with respect to which entities are engaged in the transmission or issuance of monetary value. Some States, such as Texas, for example, require the issuer of mall gift certificates that can be redeemed at multiple issuers to become licensed.⁽³³⁾

• Jurisdiction. To the extent that Internet money transmitters choose to engage in money services online, they should be subject to regulatory jurisdiction if they meet the threshold for "engaging in business" with customers domiciled in a particular State.

State money transmitter statutes include lists of "permissible" investments. Money transmitters are required to maintain investments at all times that are equal to the market value of the aggregate face amount of all funds transmitted and outstanding payment instruments issued or sold by the money transmitter and all of its authorized delegates. Typically, permissible investments have included the following:

• cash;

• certificates of deposit of a financial institution (either domestic or foreign);

• banker's acceptances eligible for purchase by member banks of the Federal Reserve System;

• an investment bearing a rating of one of the highest grades as defined by a nationally recognized rating service of such securities;

• investment securities that are obligations of the United States, its agencies or instrumentalities, or obligations that are guaranteed fully as to principal and interest by the United States or any of its obligations of any State or municipality, or any political subdivision thereof;

• shares in a money market mutual fund;

• a demand borrowing agreement or agreements made to a corporation or a subsidiary of a corporation whose capital stock is listed on a national exchange; and

• receivables that are due to a money transmitter from its authorized delegates unless they are past due or doubtful of collection.

The Model Act Regulating Money Transmitters, the MTRA Model Legislation Outline and other state money transmitter statutes include lists similar to the one described above, with minor variations. There are no caps or restrictions on the amounts or percentage of overall permissible investments that a money transmitter can make in any one category. For example, it would be possible under many existing state statutes for a money transmitter to satisfy its permissible investment requirements solely through demand borrowing agreements with a parent or subsidiary corporation.

At the October 1998 Drafting Committee meeting, the Committee expressed some concerns about the types of permissible investments that have been included in model legislation as well as in existing state money transmission statutes. As stated in the Prefatory Note, money transmitters have to maintain investments that are equal to the aggregate face amount of all their outstanding funds transfers and payment instrument obligations (on a dollar for dollar basis). The Drafting Committee observed that certain investments appeared more risky than others - especially in the absence of any limitations or caps on percentage of the licensee's portfolio invested in any of these items.

At the October 1998 Drafting Committee meeting, Committee members expressed disagreement with the list of permissible investments contained in the Second Draft. The items that certain Committee members identified as posing a higher risk were:

(1) shares in money market mutual funds, interest-bearing bills or notes or bonds, debentures on stock traded on any national securities exchange or on a national over-the-counter market, or mutual funds primarily composed of one or more investments of those items;

(2) demand borrowing agreement made to a corporation or a subsidiary of a corporation whose capital stock is listed on a national exchange; and

(3) receivables that are due to a licensee from its authorized delegate pursuant to a contract which are not past due or doubtful of collection.

The Committee thought that the lack of restrictions on the amount that a money transmitter could invest in any of the categories was problematic. Industry Observers pointed out that these types of permissible investments were typically contained in existing state law. The same Observers emphasized that it was important for many licensees to have diverse portfolios, which included the type of investments listed above.

With respect to the inclusion of receivables from delegates, industry representatives explained that the inclusion had become a necessity due to the use of automated money order dispensers. Typically, money orders are sold at sales outlets through automated dispensers. The automated dispenser immediately records the sale of the money order and notifies the money transmitter. This real-time "notification" immediately triggers the obligation of a money transmitter to retain permissible investments for the money order sold on a dollar for dollar basis. However, while the obligation to maintain investments is triggered at the time of sale, there is a lag of time until the sales outlet actually remits funds to the money transmitter. For the time period between sale and remittance of the funds that the sales outlet has received, the money transmitter needs to treat those "receivables" as part of its permissible investment portfolio. Previously, authorized delegates had notified a money transmitter of the number of money orders sold at the same time that it remitted a check for the funds received.

The current version of the UMSBA reflects an attempt to impose some restrictions on the type and amount of permissible investment that a money transmitter is allowed to make. The list of investments mirrors the list contained in the Second Draft. The main difference, however, is that the current provisions in the Act limit the aggregate amount of each of these contested categories of investments to 20 percent of the licensee's total permissible investments. Additionally, a licensee may not invest in more than 10 percent of any one entity whose investments fall into these categories. The revised section on permissible investments is an attempt to balance the concerns about the safety of the investments made by licensees with the needs of MSBs to have diverse investment opportunities and to include receivables among the categories permitted.

SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Money-Services Business Act.

SECTION 102. DEFINITIONS. In this [Act]:

(1) "Applicant" means a person that files an application for a license under this [Act].

(2) "Authorized delegate" means a person that a licensee designates to provide money services on behalf of the licensee.

(3) "Bank" means an institution organized under federal or state law which:

(A) accepts demand deposits or deposits that the depositor may use for payment to third parties and engages in the business of making commercial loans; or

(B) engages in credit card operations, does not accept demand deposits or deposits that the depositor may use for payments to third parties, does not accept a savings or time deposit less than $100,000, maintains only one office that accepts deposits, and does not engage in the business of making commercial loans.

(4) "Check cashing" means receiving at least $500 compensation within a 30-day period for accepting payment instruments, other than traveler's checks, in exchange for money or monetary value delivered to the presenter of the instrument at the time and place of presentation without any agreement specifying when the payment instrument will be submitted for collection.

(5) "Control" means:

(A) ownership of, or the power to vote, directly or indirectly, at least 25 percent of a class of voting securities or voting interests of a licensee or person in control of a licensee;

(B) power to elect a majority of executive officers, managers, directors, trustees, or other persons exercising managerial authority of a licensee or person in control of a licensee; or

(C) the power to exercise directly or indirectly, a controlling influence over the management or policies of a licensee or person in control of a licensee, if the [superintendent], after notice and opportunity for hearing, so determines.

(7) "Currency exchange" means receipt of revenues equal to or greater than [five percent] of total revenues from the exchange of money of one government for money of another government.

(8) "Executive officer" means a president, chairperson of the executive committee, chief financial officer, responsible individual, or other individual who performs similar functions.

(9) "Licensee" means a person licensed under this [Act].

(10) "Limited station" means private premises where a check casher is authorized to engage in check cashing for no more than two days of each week solely for the employees of the particular employer or group of employers specified in the check casher's license application.

(11) "Mobile location" means a vehicle or a movable facility where check cashing occurs.

(12) "Monetary value" means a medium of exchange, whether or not redeemable in money.

(13) "Money" means a medium of exchange that is authorized or adopted by the United States or a foreign government. The term includes a monetary unit of account established by an intergovernmental organization or by agreement between two or more governments.

(14) "Money services" means money transmission, check cashing, or currency exchange.

(15) "Money transmission" means to engage in the business of:

(A) selling or issuing payment instruments;

(B) selling or issuing stored value; or

(C) receiving money or monetary value for transmission to a location within or outside the United States.

(16) "Outstanding," with respect to a payment instrument, means issued or sold by or for the licensee and which has been reported as sold but not yet paid by or for the licensee.

(17) "Payment instrument" means a check, draft, money order, traveler's check, or other instrument for the transmission or payment of money or monetary value, whether or not negotiable. The term does not include a credit card voucher, letter of credit, or instrument that is redeemable by the issuer in goods or services.

(18) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, or any other legal or commercial entity. The term does not include a government or a governmental subdivision, agency, or instrumentality.

(19) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

(20) "Responsible individual" means an individual who is employed by a licensee and has principal, active managerial authority over the provision of money services by the licensee in this State.

(21) "State" means a State of the United States, the District of Columbia, Puerto Rico, the United States Virgin Islands, or any territory or insular possession subject to the jurisdiction of the United States.

(22) "Stored value" means monetary value that is evidenced by an electronic record.

(23) "[Superintendent]" means the [state superintendent of banks or other senior state regulator].

(24) "Unsafe or unsound practice" means a practice or conduct by a person licensed to engage in money transmission or an authorized delegate of such a person which creates the likelihood of material loss, insolvency, or dissipation of the licensee's assets, or otherwise materially prejudices the interests of its customers.

Source: Definitions in this Act have been mainly derived from the Model Act Regulating Money Transmitters Section 3; President's Commission Act; Arizona Money Transmitter Act, Ariz. Rev. Stat. Ann. Section 6-1201 (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); and Florida Money Transmitter's Code, Fla. Stat. Ann. ch. 560 Section 560.103 (West, Westlaw through End of 1999 1st Regular Session).

1. "Authorized delegate." The ability of a state superintendent to regulate the conduct of authorized delegates is of vital importance to the prevention and detection of money laundering. It is important, therefore, to clearly define the outlets through which a money-services business ("MSB"), primarily a money transmitter, conducts its business. The term "authorized delegate" was selected rather than "agent" to avoid confusion as to the nature of the legal relationship between a money transmitter and the sales outlets through which it transacts business. Sales outlets provide money transmission on behalf of a money transmitter on a contractual basis. Although the delegates are not defined as "agents" of a money transmitter, there are circumstances under which the superintendent may take enforcement action against a licensed money transmitter on the basis of actions of its delegates. The Act does impose some statutory obligations on the licensee with respect to the conduct of its delegates. Additionally, the superintendent has the authority to take action directly against the delegate. See Section 801.

2. "Bank." The definition of bank has been revised to more closely mirror the definition of bank in the Federal Reserve Act. It does not include unlicensed firms that engage in money services and make commercial loans, because the payment obligations of the MSB are not "deposits" in the traditional banking sense of the term. It is intended to include partnerships regulated as banks, even though they are not technically "organized" under United States law. The definition also includes nonbank banks such as credit card banks that do not engage in traditional deposit taking and commercial lending activity.

3. "Check cashing." The definition of check cashing excludes businesses that may offer a small amount of check-cashing services incidental to their primary business. Hotels, for example, which cash checks as a courtesy for their guests, fall in this excluded category. This definition was initially agreed upon at the October 1998 drafting meeting and has been refined during subsequent drafting meetings. The main difference in the new definition (as compared with many existing state definitions) is the method used to determine which businesses should be excluded because they cash checks as a service that is incidental to their primary business and which is also at a de minimis level. The exemption reflects an aggregate level of fees over a 30-day period, rather than relying on a daily level of business. In order for a business to qualify as an entity engaged in check cashing, it would have to cash more than $16,666 worth of checks within a 30-day period in order to receive revenues of more than $500. This figure was derived using a three- percent fee for each check cashed (which is the average fee charged within the check cashing industry). On an annual basis, a business would be able to cash up to $200,000 worth of checks without having to obtain a license.

The definition of "check cashing" has been amended to specifically exclude entities that provide deferred deposit services for a fee. Such services are often referred to as "payday loans" whereby a customer receives money in exchange for a check that will be submitted for collection at a specified time in the future. The check is often to be presented at the time of the customer's next pay period (hence the reference to "payday"). It is believed that such services do not constitute check cashing but are rather a related service often regulated by separate statute.

4. "Control." The definition of control is derived from the definition contained in the federal Bank Holding Company Act, 12 U.S.C. Section 1842(a)(2) and Federal Reserve Regulation Y, 12 C.F.R. Section 225.2(e)(1). It was decided that the definition of control included in the September 1998 draft was too formalistic in that it required a bright line threshold of 25 percent or more ownership to trigger control. The Drafting Committee decided that the Federal Bank Holding Company Act provided a useful definition because it did not relate solely to a threshold of share ownership. The current definition is more flexible and allows for a broader interpretation of the concept of control. Subpart (c), which refers to the power to exercise, directly or indirectly, a controlling influence over the management of policies of a licensee or a person in control of the licensee, is a broader more flexible category that allows the superintendent to hold a hearing to determine whether a person exercises control, albeit not by pure ownership of shares. The notion of controlling influence is also derived from the Federal Bank Holding Company Act and Regulation Y, cited above.

5. "Engage in the business." The term "engage in the business" has been deleted from the draft. The Drafting Committee felt that the use of the term caused confusion and also imprecision when trying to determine which entities were subject to licensing requirements and which entities were engaged in unauthorized activities but were nevertheless treated as if engaging in the business of providing money services.

6. "Limited station." This definition refers to sites where check-cashing services are solely offered to employees of one or several employers. Specifically, employers have arranged with a check casher to provide check cashing in connection with payroll checks. It was necessary to define this type of location because check casher licensees are required to list all of their locations (including limited stations) on their license applications and their renewal reports.

7. "Mobile location." Mobile locations are movable locations (normally motor vehicles such as vans) from which check cashing or currency-exchange services are provided to members of the public. This term is defined because check casher and currency-exchanger licensees are required to report these locations on their license applications and subsequent renewal reports.

8. "Money services." Money services is used to define a group of entities that engage in any of the following activities: money transmission, sale of payment instruments (i.e., money orders or traveler's checks or stored-value), check cashing and currency exchange. The definition focuses on the activities engaged in rather than the entity that engages in the activities. The Drafting Committee decided to use an activity-based definition because different money services may engage in one or more of these money services activities.

9. "Money transmission." Money transmission subsumes several activities or functions: the transmission of funds as well as the sale or issuance of payment instruments and the sale or issuance of stored value. Stored value, as defined in the Act, is treated similarly to payment instruments, although some kinds of stored value are irredeemable in money. The grouping of funds transmission and the sale or issuance of payment instruments and stored value is consistent with existing state practice. The Drafting Committee has consolidated related functions to simplify the Act.

10. "Monetary value." The definition of "money" has been expanded to reflect the fact that certain payment service providers employ a form of value that is not directly redeemable in money, but nevertheless (1) serves as a medium of exchange and (2) places the customer at risk of the provider's insolvency while the medium is outstanding. The same safety and soundness issues pertinent to redeemable forms of value apply to these irredeemable forms of value. Consequently, a new definition of "monetary value" has been added. Monetary value is defined as "a medium of exchange, whether or not redeemable in money." The term "medium of exchange" connotes that the value that is being exchanged be accepted by a community, larger than the two parties to the exchange. Hence, bilateral units of account, such as university payment cards, would not constitute "monetary value" for purposes of this Act. A university payment card that was also accepted by a few local pizzerias could be at the borderline. A university payment card accepted by most local merchants would likely be "monetary value." The definition of monetary value, to some extent, must remain flexible to allow regulators to deal with emerging forms of monetary value and Internet "scrip" on a case by case basis.

11. "Payment instrument." The definition of payment instrument has been revised to exclude any reference to stored value. At the October 1998 meeting, the Drafting Committee affirmed its decision to include stored-value products and stored-value providers within the scope of the Act. Drafting Committee members determined that the use of stored value as a means of payment was similar to money transmission as a process. Therefore, to the extent possible, the Drafting Committee included stored value within existing definitions of MSBs. Previous versions of the Act followed the Connecticut approach and treated stored-value instruments (including electronic traveler's checks) as payment instruments. See Conn. Gen. Stat. Ann. Section 36a-596. In March 2000, the Drafting Committee, based upon the recommendations of the Cyberpayments Working Group, has provided a separate definition of stored value that is not tied to a tangible instrument. Because stored value is no longer related to an instrument, the definition of payment instrument was also revised.

The definition of payment instrument specifically excludes credit cards, vouchers, letters of credit, or instruments that are redeemable by the issuer in goods and services. These excluded payment mechanisms are regulated under separate legislative provisions. Additionally, coupons and gift vouchers are excluded as they are considered instruments "redeemable by the issuer in goods and services."

12. "Stored value." The definition of stored-value instrument has been replaced with a simplified definition of stored value because the instrument in which the stored value is embedded is not conceptually relevant. Any definition that conflates the two ideas may lead to confusion. Multiple issuers of stored value might provide different value on a single instrument. For example, a fast food restaurant, a department store and a bank might all issue different forms of stored value that can be loaded onto a single card but redeemed at several different issuers. The instrument is unitary, but the stored value is not. Alternatively, value might not be stored on any identifiable physical object, but instead stored by purely cryptanalytic means. Based on the change of term, the definition of payment instrument and the exclusion for certain stored-value providers needed to be amended as well.

In the Seventh Draft, the term "stored value" is defined as "monetary value that is evidenced in an electronic record." (The revised definition still excludes from regulation closed-end stored-value systems such as transportation cards, and single issuer cards, such as department store gift certificates.) Because monetary value is defined as "a medium of exchange, whether or not redeemable in money," only stored value that consists of a medium of exchange evidenced in electronic record would qualify as stored value for purposes of regulation. A medium of exchange needs to be something that is a widely accepted. Closed-end systems, as mere bilateral units of account, therefore would be excluded from regulation.

13. "Stored-value instrument." This definition has been deleted.

14. "Unsafe or unsound practice." Under the Act, the superintendent possesses the authority to take action against a money transmitter or its authorized delegates in the event that the money transmitter engages in an unsafe or unsound practice. The term unsafe and unsound is a general concept that has been used in state and federal banking and financial law. Unsafe and unsound practices are ones that may pose financial risk to a financial institution. The Act provides a definition of unsafe and unsound that applies solely to money transmitters. Money transmitters who engage in unsafe or unsound activity may leave consumers with unredeemed money orders or uncollected funds transfers. The superintendent is able to take protective action in the event that a money transmitter engages in an unsafe or unsound activity. This prevents the dissipation of licensee assets that should be used to fulfill obligations to customers.

The Drafting Committee determined that unsafe and unsound practices related solely to the risk of financial loss posed by the actions of the money transmitter. Currency exchangers and check cashers do not engage in an unsafe or unsound practice with respect to their check cashing or currency-exchange activity because they provide their customers with funds immediately. To the extent that a check casher or currency exchanger dissipates its assets or becomes insolvent, it will typically have to cease business. However, this will not directly harm consumers as they will not be left with unpaid obligations. Furthermore, if a check casher or currency exchanger engages in an unsafe activity with respect to money transmission, this will not have any direct impact on or harm to individual consumers. This is because the check casher or currency exchanger may only conduct money transmission as an authorized delegate. The money transmitter will remain liable to the holders of its money orders, even if an authorized delegate sells them. Because the money transmitter bears ultimate financial responsibility to customers, check cashers and currency exchangers are not considered to engage in unsafe or unsound practices.

SECTION 103. EXCLUSIONS. This [Act] does not apply to:

(1) the United States or a department, agency, or instrumentality thereof;

(2) the United States Postal Service;

(3) a State or a governmental subdivision, agency, or instrumentality thereof;

(4) a bank, bank holding company, an office of an international banking corporation, a branch of a foreign bank, a corporation organized pursuant to the Bank Services Act, or a corporation organized under the Edge Act under the laws of a State or the United States if the person does not issue, sell, or provide payment instruments or stored value through an authorized delegate that is not such a person;

(5) electronic funds transfer of governmental benefits for a federal, state, [county,] or governmental agency by a contractor on behalf of the United States or a department, agency, or instrumentality thereof, or a State or governmental subdivision, agency, or instrumentality thereof;

(6) a board of trade designated as a contract market under the Commodity Exchange Act or a person that, in the ordinary course of business, provides clearance and settlement services for a board of trade to the extent of its operation as or for such a board of trade;

(7) a registered futures commission merchant under the federal commodities laws to the extent of its operation as such a merchant;

(8) a person that provides clearance or settlement services pursuant to a registration as a clearing agency or an exemption from such registration granted under the federal securities laws to the extent of its operation as such a provider;

(9) an operator of a payment system that provides processing, clearing, or settlement services, between or among persons excluded by this section or licensees, in connection with wire transfers, credit card transactions, debit card transactions, stored-value transactions, automated clearing house transfers, or similar funds transfers to the extent of its operation as such; or

(10) a person registered as a securities broker-dealer under federal or state securities laws to the extent of its operation as such a broker-dealer.

Source: President's Commission Act Section 6 (with several modifications and additions).

1. Exemptions are provided liberally to reduce the cost of the Act to a minimum both in terms of administration and in terms of regulation. This list should be modified to match a State's existing regulatory categories and terminology as appropriate. The entities listed in paragraphs (1) through (5) are exclusions normally included in relevant state licensing statutes for money transmitters.

2. Many of the new exclusions apply to organizations that provide clearing and settlement services (which do involve the transmission of money). Clearing and settlement often involves the transfer of funds from one participating financial institution's bank account to another (e.g., the debiting and crediting of accounts of various participants in a trading system or credit card consortium). The clearing and settlement organizations listed in the exemptions are already subject to supervision by other federal or state regulators.

3. The proposed exclusion involving boards of trade was submitted to FinCEN by various clearing organizations that collectively represent several of the largest commodity exchanges and commodities/options clearing organizations. In a letter dated October 8, 1997, these organizations recommended that FinCEN change the proposed definition of MSB to exclude regulated entities that are already subject to regulation by the U.S. Securities and Exchange Commission ("SEC") and the U.S. Commodities and Futures Trading Commission.

4. The proposed exclusion for broker-dealers arises from the fact that broker-dealers are already subject to BSA reporting requirements and are highly regulated by the SEC.

5. Previously, the Act contained a proposed exclusion for stored-value issuers, sellers or redeemers that were subject to oversight by a federal or state banking agency and that are subject to safety and soundness regime that includes investment and capital requirements. In March 2000, the Drafting Committee decided to remove this exclusion because the Committee decided that it would be too cumbersome for state regulators to determine whether a particular stored-value issue was subject to adequate federal oversight with respect to safety and soundness. Rather than creating an unclear standard, the Drafting Committee decided that nonbank stored-value issuers must obtain a license.

SECTION 104. LICENSE REQUIRED.

(a) A person may not engage in money transmission without:

(1) obtaining a license under [Article] 2; or

(2) being an authorized delegate of a person licensed under [Article] 2.

(b) A person may not engage in check cashing or currency exchange without:

(1) obtaining a license under [Article] 3 or 4;

(2) obtaining a license for money transmission under [Article] 2; or

(3) being an authorized delegate of a person licensed under [Article] 2.

(c) A person not licensed under this [Act] or not an authorized delegate of a licensee is engaged in providing money services if the person advertises those services, solicits to provide those services, or holds itself out as providing those services.

(d) A license is not transferable or assignable.

Source: Model Act Regulating Money Transmitters Section 2, combined with President's Commission Act Section 5. The restrictions on transfer or assignment of a license come from California Financial Code Section 12219, Cal. Fin. Section 12219 (West, Westlaw through 1999 portion of 1999-2000 Regular Session and 1st Ex. Sess.), which prohibits the transfer of check selling licenses.

This section sets forth the overall licensing structure for MSBs created by the Act. All MSBs (including money transmitters as broadly defined, check cashers and currency exchangers) must either obtain a license or become an authorized delegate with respect to the type of money service business it wishes to perform. Additionally, should an MSB have neither a license nor status as an authorized delegate, the person is treated, for purposes of the Act, as if it is engaging in money-services business on its own behalf.

SECTION 201. LICENSE REQUIRED. A person licensed under this [article] or that is an authorized delegate of a person licensed under this [article] may engage in money transmission and may also engage in:

(1) check cashing without obtaining a separate license under [Article] 3; and

(2) currency exchange without obtaining a separate license under [Article] 4.

Source: New

SECTION 202. APPLICATION FOR LICENSE.

(a) In this section, "material litigation" means any litigation that according to generally accepted accounting principles is deemed significant to an applicant's or a licensee's financial health and would be required to be disclosed in the applicant's or licensee's annual audited financial statements, report to shareholders, or similar records.

(b) A person applying for a license under this [article] shall do so in a form and in a medium prescribed by the [superintendent]. The application must state or contain:

(1) the legal name and residential and business addresses of the applicant and any fictitious or trade name used by the applicant in conducting its business;

(2) the applicant's criminal convictions and any material litigation in which the applicant has been involved in the [10]-year period next preceding the submission of the application;

(3) a description of any money services previously provided by the applicant and the money services that the applicant seeks to provide in this State;

(4) a list of the applicant's proposed authorized delegates and the locations in this State where the applicant and its authorized delegates propose to engage in money transmission or provide other money services;

(5) a list of other States in which the applicant is licensed to engage in money transmission or provide other money services and information concerning [the placing the licensee in receivership, and] any license revocations, suspensions, or other disciplinary action taken against the applicant in other States;

(6) a sample form of contract for authorized delegates, if applicable, and a sample form of payment instrument or instrument upon which stored value is recorded if applicable;

(7) the name and address of any bank through which the applicant's payment instruments will be paid;

(8) a description of the source of money and credit to be used by the applicant to provide money services; and

(9) any other information the [superintendent] reasonably requires with respect to the applicant.

(c) If an applicant is a corporation, limited liability company, or partnership, the applicant must also provide:

(1) the date of the applicant's incorporation or formation and State or country of incorporation or formation;

(2) if applicable, a certificate of good standing from the State or country in which the applicant is incorporated or formed;

(3) a brief description of the structure or organization of the applicant, including any parent or subsidiary of the applicant, and whether any parent or subsidiary is publicly traded;

(4) the legal name, any fictitious name or trade names, all business and residential addresses, and the employment, in the [10]-year period next preceding the submission of the application, of each executive officer, manager, or director of, or person that has control of, the applicant;

(5) criminal convictions and any material litigation in which the applicant has been involved in the [10]-year period next preceding the submission of the application of each executive officer, manager, and director of, and individual in control of, the applicant;

(6) a copy of the applicant's audited financial statements for the most recent fiscal year and, if available, for the two year period next preceding the submission of the application;

(7) a copy of the applicant's unconsolidated financial statements for the current year, whether audited or not, and, if available, for the two year period next preceding the submission of the application;

(8) if the applicant is publicly traded, a copy of the most recent 10-K report filed with the United States Securities and Exchange Commission;

(9) if the applicant is a wholly owned subsidiary of:

(A) a corporation publicly traded in the United States, a copy of audited financial statements for the parent corporation for the current year or a copy of the parent corporation's most recent 10-K reports filed with the United States Securities and Exchange Commission; or

(B) a corporation publicly traded outside the United States, a copy of similar documentation filed with the regulator of the parent corporation's domicile outside the United States;

(10) if the applicant is a corporation, the name and address of the applicant's registered agent in this State; and

(11) any other information the [superintendent] reasonably requires with respect to the applicant.

(d) A nonrefundable application fee of [$2,000] and a license fee of [$2,000] must accompany an application for a license under this [article]. The license fee must be refunded if the application is denied.

(e) The [superintendent] may waive a requirement of subsections (a) through (c) or permit an applicant to submit substituted information in lieu of the required information.

Source: Arizona Money Transmitter Act Section 6-1203, Ariz. Rev. Stat. Ann. Section 6-1203 (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); President's Commission Act Section 7; Florida Money Transmitter's Code Section 560.205, Fla. Stat. Ann. ch. 560 Section 560.205 (West, Westlaw through End of 1999 1st Regular Session) (with modifications).

1. At the February 1998 drafting meeting, the Drafting Committee decided to create separate licensing provisions for money transmitters (which includes payment instrument sellers and stored-value issuers and sellers) as distinct from check cashers and currency exchangers. It was determined that check cashers and currency exchangers posed less safety and soundness concerns because customers who exchanged currency or cashed checks were provided with cash immediately.

As set forth in Articles 2, 3, and 4, separate licensing requirements are established for money transmitters and for check cashers/foreign currency exchangers. The superintendent's supervisory and enforcement powers, however, are the same for all MSBs. The licensing requirement promotes one of the main goals of the Act: to create an appropriate regulatory framework to deter and eliminate the use of MSBs as potential vehicles for money laundering. Only a handful of States have attempted to create a framework that links all MSBs together within a statute, while recognizing the differences inherent in the various activities concerned. Florida and Arizona, for example, are two States that have enacted statutes that have uniform enforcement and penalty provisions for all MSBs, while retaining separate licensing and record keeping provisions for each type of money service activity. The Drafting Committee chose this approach because, for law enforcement purposes, the state superintendent and the Attorney General need general enforcement powers with respect to each of the different entities as a means of prevention and detection of money laundering. Therefore, the Act contains uniform enforcement provisions and different licensing requirements for each type of money service.

The licensing application is the first point at which the State may protect the public by prohibiting entry by those persons that would bring discredit on the industry, and the first source of information for investigators and regulators in the event that there is misconduct by a licensee. The information requested from money transmitter applicants in Section 202 is the type of information recommended by the Money Transmitter Regulators Association, Inc. ("MTRA") in Section IV of its Model Legislation Outline and also in the Model Act Regulating Money Transmitters. The information concerning criminal convictions and employment histories, as well as the identity of executive officers, controlling persons, managers, directors, and responsible individuals is designed to assist the superintendent in determining whether the license applicant is a reputable business or whether there are any suggestions that the business might be used for illegal purposes. Additionally, information relating to the applicant's financial position (including information about net worth) is necessary in order to determine whether an applicant will be able to meet its obligations with respect to any obligations it might have (in connection with the sale of money payment instruments and stored value).

2. Section 202(c) has been revised to include corporations as well as other forms of business organizations such as limited liability companies and partnerships. The information required by legal persons that are not publicly held corporations would include the date of the applicant's formation (as opposed to incorporation), a certificate of good standing (if applicable), and a brief description of the structure of the applicant rather than the "corporate" structure of the applicant. The license application will also require information about managers of an application in addition to executive officers, directors, and controlling persons.

3. At the October 1999 Drafting Committee meeting, the Committee decided to adopt Section 202(c)(8). As an alternative to the requirement that publicly traded corporations submit all filings made to the SEC, the corporate applicant is required to submit a copy of its most recent 10-K report filed with the SEC. This report is required pursuant to the Securities and Exchange Act of 1934 for exchange-traded securities and contains financial information and other details concerning the status of a publicly held company. Second, a new requirement has been included for applicants that are wholly owned subsidiaries of publicly traded corporations. These applicants are required to submit a copy of the parent's audited financial statement or its most recent 10-K report filed with the SEC or if it is a foreign corporation, any similar filings made with the foreign regulator of the corporation. See MTRA Model Legislation Outline Section IV(C)(5). Additionally, applicants must furnish information concerning material litigation and criminal convictions for the past ten rather than five years.

SECTION 203. SECURITY.

(a) Except as otherwise provided in subsection (b), the following rules apply:

(1) A surety bond, letter of credit, or other similar security acceptable to the [superintendent] in the amount of [$50,000] must accompany an application for a license.

(2) If an applicant proposes to provide money services at more than one location through authorized delegates or otherwise, the amount of the security is increased by [$10,000] per location, not exceeding a total increase of [$250,000].

(b) The [superintendent] may increase the amount of security required to a maximum of [$1,000,000] upon the basis of the impaired financial condition of a licensee, as evidenced by reduction of net worth, financial losses, or other relevant criteria.

(c) Security must be in a form satisfactory to the [superintendent] and payable to the State for the benefit of any claimant against the licensee to secure the faithful performance of the obligations of the licensee with respect to money transmission.

(d) The aggregate liability on a surety bond may not exceed the principal sum of the bond. A claimant against a licensee may maintain an action directly on the bond, or the [superintendent] may maintain an action on behalf of the claimant.

(e) A surety bond must cover claims effective for as long as the [superintendent] specifies but for at least five years after the licensee ceases to provide money services in this State. However, the [superintendent] may permit the amount of security to be reduced or eliminated before the expiration of that time to the extent the amount of the licensee's payment instruments or stored-value obligations outstanding in this State is reduced. The [superintendent] may permit a licensee to substitute another form of security acceptable to the [superintendent] for the security effective at the time the licensee ceases to provide money services in this State.

(f) In lieu of the security prescribed in this section, an applicant for a license or a licensee may provide security in a form prescribed by the [superintendent].

Source: Arizona Money Transmitter Act Section 6-1205, Ariz. Rev. Stat. Ann. Section 6-1205 (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); President's Commission Act Section 8 (with modifications).

The bond and net worth requirements are safety and soundness measures designed to protect the public, but also to deter companies that have questionable solvency or business practices from entering the market. The bond requirement serves as a barrier to entry for financially unstable companies. Alternatives to the bond requirement, however, are provided in the form of cash or letters of credit. Licensees may also be permitted to deposit specified liquid assets in the amount of the bond. The Drafting Committee has attempted a balance between the goals of safety and soundness and open access to businesses that wish to enter the money transmission market, recognizing that decisions as to the final dollar amounts will need to reflect the particular fiscal needs and concerns of different States.

Section 203 has also been revised and simplified. At the October 1999 Drafting Committee meeting, the Committee decided to focus on the requirements for surety bonds in particular, which are the most common form of security used by money transmitters. At the same time, Section 203(f) provides the superintendent with the flexibility to allow for other forms of security that the superintendent deems acceptable.

SECTION 204. ISSUANCE OF LICENSE.

(a) Upon the filing of an application under this [article], the [superintendent] shall investigate the applicant's financial condition and responsibility, financial and business experience, character, and general fitness. The [superintendent] may conduct an on-site investigation of the applicant, the reasonable cost of which the applicant must bear. The [superintendent] shall issue a license to an applicant under this [article] if the [superintendent] finds that all of the following conditions have been fulfilled:

(1) the applicant has complied with Sections 202[,][and] 203[, and 206];

(2) the financial condition and responsibility, financial and business experience, competence, character, and general fitness of the applicant; and competence, experience, character, and general fitness of the executive officers, managers, and directors of, and persons in control of, the applicant indicate that it is in the interest of the public to permit the applicant to engage in money transmission; and

(3) the applicant has paid the requisite application and license fees.

(b) The [superintendent] shall approve or deny an application for an original license within 120 days after a complete application is filed and notify the applicant of its decision in a record. The [superintendent] for good cause may extend the application period. The [superintendent] shall notify the applicant in a record of the date on which the application is determined to be complete. If the application is not approved or denied within the period allowed for approval, the application is deemed approved and the [superintendent] shall issue the license under this [article], to take effect as of the first business day after expiration of the period.

(c) An applicant whose application is denied by the [superintendent] under this [article] may appeal from the denial and request a hearing before the [superintendent] within [30] days after receipt of the notice of the denial.

Source: Arizona Money Transmitter Act Section 6-1206(B), Ariz. Rev. Stat. Ann. Section 6-1206(B) (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); Tennessee Revised Code Section 45-7-210, Tenn. Code Ann. Section 45-7-210 (West, Westlaw through End of 1999 Regular Session).

1. The Drafting Committee has previously inquired as to whether States have mandatory time frames in which the superintendent must respond to license applications. MTRA supplied the Drafting Committee with sample statutory provisions that included mandatory time frames for response to a license application. Based on existing state practice, the Drafting Committee decided on a 120-day response period. The MTRA Model Legislation Outline recommends a 120-day time period. The extension for "good cause" comes from the Maine Act to Regulate Money Transmitters and Amend Consumer Credit Laws, Me. Rev. Stat. Ann. tit 32 section 6109(2).

2. Concerns have been expressed about whether the costs of examining an applicant by the superintendent (which may have locations in other States and overseas) may be onerous and burdensome. It is customary for regulators to set examination fees by administrative rule. Those fees are often capped or structured in such a manner to provide the applicant with a clear picture of the potential costs of an investigation.

SECTION 205. RENEWAL OF LICENSE.

(a) A licensee under this [article] shall pay an annual renewal fee of [$2,000] no later than [30] days before the anniversary of the issuance of the license or, if the last day in the period is not a business day, on the next business day.

[(b) A licensee under this [article] shall submit with the renewal fee a report, in a form and in a medium prescribed by the [superintendent]. The renewal report must state or contain:

(1) a copy of the licensee's most recent audited annual financial statement or, if the licensee is a wholly owned subsidiary of another corporation, the most recent audited consolidated annual financial statement of the parent corporation or the licensee's most recent audited consolidated annual financial statement;

(2) the number of payment instruments and stored-value obligations sold by the licensee in this State that have not been previously included in a renewal report, the monetary amount of those instruments, and the monetary amount of those instruments currently outstanding;

(3) a description of each material change in information submitted by the licensee in its original license application that has not been previously reported to the [superintendent] on any required report;

(4) a list of the licensee's permissible investments and a certification that the licensee continues to maintain permissible investments according to the requirements set forth in Sections 701 and 702;

(5) proof that the licensee continues to maintain adequate security as required by Section 203; and

(6) a list of the locations in this State where the licensee or an authorized delegate of the licensee engages in money transmission or provides other money services.]

(c) If a licensee does not [file a renewal report or] pay its renewal fee by the renewal date, and has not been granted an extension of time to do so by the [superintendent], its license is suspended on the renewal date. The licensee has [30] days after its license is suspended in which to [file a renewal report and] pay the renewal fee, plus [$100] for each day after suspension that the [superintendent] does not receive [the renewal report and] the renewal fee. The [superintendent] for good cause may grant an extension of the renewal date.

Source: Model Act Regulating Money Transmitters Section 11 (with modifications).

1. The Drafting Committee has previously decided that it was too cumbersome to have a hearing provision for failure to renew a license. The Drafting Committee decided that a preferable alternative was for the license to expire if not renewed in a timely fashion. The licensee, however, will have 30 days to cure its failure to renew its license. As part of the renewal process, Article 2 licensees are required to submit additional information to the superintendent as a means of appraising the safety and soundness of the business.

2. Section 205 also provides for automatic license suspension in the event that a licensee fails to renew its license in a timely fashion. In the previous draft, the superintendent was required to send a notice of suspension to the licensee. The superintendent has a pre-existing duty to notify the licensee of the renewal date and to send the licensee a renewal form. Thus, the Drafting Committee concludes that it was unnecessary to require the superintendent to notify the licensee of its own failure to renew its license.

3. Subsections (b) and (c) have been bracketed because some States conduct annual examinations of a licensee in lieu of requiring an annual report from each licensee. Conversely, some States utilize annual reports in lieu of annual examinations. States use a combination of supervisory examinations and annual reports to maintain current information concerning the safety and soundness of a licensee.

4. The MTRA, in cooperation with industry representatives, has developed a uniform renewal form that may be used by licensees as an alternative to the myriad forms that have been created by the various States. MTRA membership is currently reviewing the forms and are considering whether to adopt such forms in their States as an alternative to (rather than a replacement form) existing state renewal forms. The creation of a uniform renewal form will allow licensees who engage in money transmission in multiple jurisdictions, to complete one standard for annually rather than a series of different forms. This will provide greater convenience and efficiency for licensees and also for regulators who can more easily share information. Regulators, through the use of such a uniform form may also be able to store such forms in a centralized computer database. A copy of the proposed MTRA Uniform Renewal Form is on file with the Drafting Committee.

[SECTION 206. NET WORTH. A licensee under this [article] shall maintain a net worth of at least [$25,000] determined in accordance with generally accepted accounting principles.]

Source: President's Commission Act Section 8.

1. Net worth requirements, in combination with bonding/security and permissible investment requirements, are a means of ensuring that a money transmitter has sufficient resources to honor its obligations to customers. As stated in the Prefatory Note, only Article 2 licensees are subject to net worth requirements. Check cashers and currency exchangers provide funds immediately to customers; therefore there is no risk of non-payment. Net worth requirements are a means of screening an applicant, at the time of their initial entry into the money-services business, as to their ability to meet their obligations.

2. Only a minimal net worth requirement has been suggested because net worth is used as an additional requirement to make sure that license applicants and licensees have some resources for commencing and operating a money transmission business. Section 206 has been bracketed because some States use net worth as part of the safety and soundness mechanisms whereas other States rely on bonding/security and permissible investment requirements instead. The current draft gives States the option of choosing between a combination of security, net worth and permissible investment requirements

SECTION 301. LICENSE REQUIRED.

(a) A person licensed under this [article] may engage in check cashing.

(b) A person licensed under [Article] 2, an authorized delegate of a person licensed under [Article] 2, or a person licensed under [Article] 4 may engage in check cashing without first obtaining a separate license under this [article].

(c) A person licensed under this [article] may also engage in currency exchange without obtaining a separate license under [Article] 4.

Source: New

SECTION 302. APPLICATION FOR LICENSE.

(a) A person applying for a license under this [article] shall do so in a form and in a medium prescribed by the [superintendent]. The application must state or contain:

(1) the legal name and residential and business addresses of the applicant, if the applicant is an individual or, if the applicant is not an individual, the name of each partner, executive officer, manager, and director;

(2) the location of the principal office of the applicant;

(3) complete addresses of other locations in this State where the applicant proposes to engage in check cashing or currency exchange, including all limited stations and mobile locations;

(4) a description of the source of money and credit to be used by the applicant to engage in check cashing and currency exchange; and

(5) other information the [superintendent] reasonably requires with respect to the applicant, but not more than the [superintendent] may require under [Article] 2.

(b) A nonrefundable application fee of [$2,000] and a license fee of [$2,000] must accompany an application for a license under this [article]. The license fee must be refunded if the application is denied.

Source: Arizona Money Transmitter Act Section 6-1203, Ariz. Rev. Stat. Ann. Section 6-1203 (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); President's Commission Act Section 7; Florida Money Transmitter's Code Section 560.205, Fla. Stat. Ann. ch. 560 Section 560.205 (West, Westlaw through End of 1999 1st Regular Session).

1. At the February 1998 drafting meeting, the Drafting Committee decided that check cashers should be treated differently than money transmitters with respect to licensing, bonding and, in particular, net worth. Because check cashers and currency exchangers provide customers with funds immediately, they do not need the same type of bond or security requirements. Existing state law makes a distinction between check cashers and money transmitters with respect to information provided to superintendents (e.g., audited as contrasted to unaudited financial statements are requested and bond and net worth requirements are not imposed). In general, fewer States have check-cashing law. The Drafting Committee decided to include separate licensing provisions in this Act as an alternative to a unified licensing system as contained in the February 1998 draft.

2. A provision has been included to require that check cashers provide superintendents with information about the source of their funds. Superintendents and law enforcement officials want to ensure that the cash used in such a business is not derived from money laundering or other illegal activity. For a general discussion of the main differences between Article 2 and Articles 3 and 4 see the Reporter's Notes to Section 202 (which also explains the rationale for separate licensing requirements for different types of MSBs). The Note to Section 202 also discusses the reasons why certain types of information are requested from applicants during the application process.

SECTION 303. ISSUANCE OF LICENSE.

(a) Upon the filing of an application under this [article], the [superintendent] shall investigate the applicant's financial condition and responsibility, financial and business experience, character, and general fitness. The [superintendent] may conduct an on-site investigation of the applicant, the reasonable cost of which the applicant must bear. The [superintendent] shall issue a license to an applicant under this [article] if the [superintendent] finds that all of the following conditions have been fulfilled:

(1) the applicant has complied with Section 302;

(2) the financial condition and responsibility, financial and business experience, competence, character, and general fitness of the applicant; and the competence, experience, character, and general fitness of the executive officers, managers, and directors of, and persons in control of, the applicant indicate that it is in the interest of the public to permit the applicant to engage in check cashing; and

(3) the applicant has paid the requisite application and license fees.

(c) The [superintendent] shall approve or deny an application for an original license within 120 days after a complete application is filed and notify the applicant of its decision in a record. The [superintendent] for good cause may extend the application period. The [superintendent] shall notify the applicant in a record of the date on which the application is determined to be complete. If the application is not approved or denied within the period allowed for approval, the application is deemed approved and the [superintendent] shall issue the license under this [article], to take effect as of the first business day after expiration of the period.

(d) An applicant whose application is denied by the [superintendent] under this [article] may appeal from the denial and request a hearing before the [superintendent] within [30] days after receipt of the notice of the denial.

Source: Arizona Money Transmitter Act Section 6-1206(B), Ariz. Rev. Stat. Ann. Section 6-1206(B) (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); Tennessee Revised Code Section 45-7-210, Tenn. Code Ann. Section 45-7-210 (West, Westlaw through End of 1999 Regular Session).

See the Reporter's Notes accompanying Section 203.

SECTION 304. RENEWAL OF LICENSE.

(a) A licensee under this [article] shall pay a biennial renewal fee of [$2,000] no later than [30] days before the anniversary of the issuance of the license or, if the last day in the period is not a business day, on the next business day.

[(b) A licensee under this [article] shall submit with the renewal fee a report, in a form and in a medium prescribed by the [superintendent]. The renewal report must state or contain:

(1) a description of each material change in information submitted by the licensee in its original license application that has not been previously reported to the [superintendent] on any required report; and

(2) a list of the locations in this State where the licensee or an authorized delegate of the licensee engages in check cashing or currency exchange, including limited stations and mobile locations.]

(c) If a licensee does not [file a renewal report or] pay its renewal fee by the renewal date, and has not been granted an extension of time to do so by the [superintendent], its license is suspended on the renewal date. The licensee has [30] days after its license is suspended in which to [file a renewal report and] pay the renewal fee, plus [$100] for each day after suspension that the [superintendent] does not receive the [renewal report] and the renewal fee. The [superintendent] for good cause may grant an extension of the renewal date.]

Source: Model Act Regulating Money Transmitters Section 11 (with modifications).

See the Reporter's Notes accompanying Section 205. The Drafting Committee decided to require check cashers and currency exchangers to renew their licenses biennially rather than annually. Because check cashers and currency exchangers pose no safety and soundness concerns, the superintendent does not have a need to examine renewal reports on an annual basis for these businesses. The superintendent, however, will have the authority to conduct an on-site examination if the check casher or currency exchanger engages in money laundering activity or violates a provision of the Act.

SECTION 401. LICENSE REQUIRED.

(a) A person licensed under this [article] may engage in currency exchange.

(b) A person licensed under [Article] 2, an authorized delegate of a person licensed under [Article] 2, or a person licensed under [Article] 3 may engage in currency exchange without first obtaining a separate license under this [article].

(c) A person licensed under this [article] may also engage in check cashing without obtaining a separate license under [Article] 3.

Source: New

SECTION 402. APPLICATION FOR LICENSE.

(a) A person applying for a license under this [article] shall do so in a form and in a medium prescribed by the [superintendent]. The application must state or contain:

(1) the legal name and residential and business addresses of the applicant, if the applicant is an individual or, if the applicant is not an individual, the name of each partner, executive officer, manager, and director;

(2) the location of the principal office of the applicant;

(3) complete addresses of other locations in this State where the applicant proposes to engage in currency exchange or check cashing, including all limited stations and mobile locations;

(4) a description of the source of money and credit to be used by the applicant to engage in check cashing and currency exchange; and

(5) other information the [superintendent] reasonably requires with respect to the applicant, but not more than the [superintendent] may require under [Article] 2.

(b) A nonrefundable application fee of [$2,000] and a license fee of [$2,000] must accompany an application for a license under this [article]. The license fee must be refunded if the application is denied.

At the March 1999 drafting meeting, Observers noted that the Act should contain a different Article for the licensing of check cashers and currency exchangers. Although the provisions contained in Articles 3 and 4 are almost identical, the Drafting Committee thought that States should be presented the option to include less than all of the Articles in an MSB licensing statute. Thus, each of the licensing parts of the Act is separable. As indicated in the Prefatory Note, at present, very few States have licensing requirements for currency exchangers. At the same time, the activity of currency exchange (exchanging larger amounts of one currency for smaller denominations in another, for example) has been identified by law enforcement officials as vulnerable to money laundering (as contrasted with check cashing).

For a general discussion of the main differences between Article 2 and Articles 3 and 4 see the Reporter's Notes to Section 202 (which also explains the rationale for separate licensing requirements for different types of MSBs) and Section 302. The Note to Section 202 also discusses the reasons why certain types of information are requested from applicants during the application process.

SECTION 403. ISSUANCE OF LICENSE.

(a) Upon the filing of an application under this [article], the [superintendent] shall investigate the applicant's financial condition and responsibility, financial and business experience, character, and general fitness. The [superintendent] may conduct an on-site investigation of the applicant, the reasonable cost of which the applicant must bear. The [superintendent] shall issue a license to an applicant under this [article] if the [superintendent] finds that all of the following conditions have been fulfilled:

(1) the applicant has complied with Section 402;

(2) the financial condition and responsibility, financial and business experience, competence, character, and general fitness of the applicant; and the competence, experience, character, and general fitness of the executive officers, managers, and directors of, and persons in control of, the applicant indicate that it is in the interest of the public to permit the applicant to engage in currency exchange; and

(3) the applicant has paid the requisite application and license fees.

(b) The [superintendent] shall approve or deny an application for an original license within 120 days after a complete application is filed and notify the applicant of its decision in a record. The [superintendent] for good cause may extend the application period. The [superintendent] shall notify the applicant in a record of the date on which the application is determined to be complete. If the application is not approved or denied within the period allowed for approval, the application is deemed approved and the [superintendent] shall issue the license under this [article], to take effect as of the first business day after expiration of the period.

(c) An applicant whose application is denied a license by the [superintendent] under this [article] may appeal from the denial and request a hearing before the [superintendent] within [30] days after receipt of the notice of the denial.

Source: Arizona Money Transmitter Act 6-1206(B), Ariz. Rev. Stat. Ann. Section 6-1206(B) (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); Tennessee Revised Code Section 45-7-210, Tenn. Code Ann. Section 45-7-210 (West, Westlaw through End of 1999 Regular Session).

See the Reporter's Notes accompanying Section 203.

SECTION 404. RENEWAL OF LICENSE.

(a) A licensee under this [article] shall pay a biennial renewal fee of [$2,000] no later than [30] days before the anniversary of the issuance of the license or, if the last day in the period is not a business day, on the next business day.

[(b) A licensee under this [article] shall submit with the renewal fee a report, in a form and in a medium prescribed by the [superintendent]. The renewal report must state or contain:

(1) a description of each material change in information submitted by the licensee in its original license application that has not been previously reported to the [superintendent] on any required report; and

(2) a list of the locations in this State where the licensee or an authorized delegate of the licensee engages in currency exchange or check cashing, including limited stations and mobile locations.]

(c) If a licensee does not [file a renewal report or] pay its renewal fee by the renewal date, and has not been granted an extension of time to do so by the [superintendent], its license is suspended on the renewal date. The licensee has [30] days after its license is suspended in which to [file a renewal report and] pay the renewal fee, plus [$100] for each day after suspension the [superintendent] does not receive the [renewal report and the] renewal fee. The [superintendent] for good cause may grant an extension of the renewal date.

Source: Model Act Regulating Money Transmitters Section 11 (with modifications).

See the Reporter's Notes accompanying Section 204. The Drafting Committee decided to require check cashers and currency exchangers to renew their licenses biennially rather than annually. Because check cashers and currency exchangers pose no safety and soundness concerns, the superintendent does not have a need to examine renewal reports on an annual basis for these businesses. The superintendent, however, will have the authority to conduct an on-site examination if the check casher or currency exchanger engages in money laundering activity or violates a provision of the Act.

SECTION 501. RELATIONSHIP BETWEEN LICENSEE AND AUTHORIZED DELEGATE.

(a) In this section, "remit" means to make direct payments of money to a licensee or its representative authorized to receive the money or to deposit money in a bank in an account specified by the licensee.

(b) A contract between a licensee and an authorized delegate must require the authorized delegate to operate in full compliance with this [Act]. The licensee shall furnish in a record to each authorized delegate policies and procedures sufficient to permit compliance with this [Act].

(c) An authorized delegate shall remit all money owing to the licensee in accordance with the terms of the contract between the licensee and the authorized delegate.

(d) If a license is suspended or revoked or a licensee does not renew its license, the [superintendent] shall notify all authorized delegates of the licensee whose names are in a record filed with the [superintendent] of the suspension, revocation, or non-renewal. After notice is sent or publication is made, an authorized delegate shall immediately cease to provide money services as a delegate of the licensee.

(e) An authorized delegate may not provide money services outside the scope of activity permissible under the contract between the authorized delegate and the licensee, except activity for which the authorized delegate is authorized to engage under [Articles] 2, 3, or 4. [An authorized delegate of a licensee holds in trust for the benefit of the licensee all money net of fees received from money transmission.]

Source: President's Commission Act Section 10.

The sections included in Article 5 are meant to further delineate the nature of the authorized delegate's relationship with the licensee and to further clarify the delegate's responsibilities and obligations. Similarly, this section also sets forth some of the general obligations that the licensee has with respect to providing the delegate with a contract and making the delegate aware of relevant laws and rules.

SECTION 502. UNAUTHORIZED ACTIVITIES. A person may not provide money services on behalf of a person not licensed under this [Act]. A person that engages in that activity provides money services to the same extent as if the person were a licensee.

Source: Arizona Money Transmitter Act Section 6-1218, Ariz. Rev. Stat. Ann. Section 6-1218 (West, Westlaw through End of 1999 1st Regular Session and the 2nd Special Session); President's Commission Act Section 10.

This section provides that an authorized delegate may only be a delegate for a licensee. Should the licensee lose its license, the delegate will be considered to act in its own capacity as if the delegate were a licensee itself. This section may trigger potential civil and criminal liability pursuant to Sections 805 and 806.

SECTION 601. AUTHORITY TO CONDUCT EXAMINATIONS.

(a) The [superintendent] may conduct an annual examination of a licensee or of any of its authorized delegates upon 45-days' notice in a record to the licensee.

(b) The [superintendent] may examine the licensee or its authorized delegate without having given notice, if the [superintendent] has reason to believe that the licensee or authorized delegate is engaging in an unsafe or unsound practice or has violated or is violating this [Act] or a rule adopted or an order issued under this [Act].

(c) If the [superintendent] concludes that an on-site examination is necessary under subsection (a), the licensee shall pay the reasonable cost of the examination.

(d) Information obtained during an examination under this [Act] may be disclosed only as provided in Section 607.

Source: Model Act Regulating Money Transmitters Section 14; Florida Money Transmitter's Code Section 560.118(1)(a) (with modifications), Fla. Stat. Ann. ch. 560 Section 560.118(1)(a) (West, Westlaw through End of 1999 1st Regular Session).

1. This section provides the superintendent with general authority to conduct on-site supervisory exams of licensees and their authorized delegates. This provision is essential to ensure the safety and soundness of licensees and enable the superintendent to examine a licensee's books and records in the event that it is suspected of money laundering or any other violation of the Act. Subsection (a) permits the superintendent to examine a licensee or its delegates without advance notice if the licensee is engaging in an unsafe or unsound practice or has violated or is violating the Act. Previously, this section stated that the superintendent had to have a reason to believe that the licensee or authorized delegate was engaging in an unsafe or unsound practice. It was noted, however, that this is an ambiguous standard that may hinder the superintendent's ability to examine licensees and delegates in a timely fashion (i.e., because licensee will be able to challenge the examination). Additionally, it was noted that superintendents have not abused this authority where it has been given to them by statute. Furthermore, some regulators have observed that resource constraints provide a natural check on abuse of examination authority.

2. Subsection (b) allows the superintendent to waive an annual on-site examination for licensees. It gives the superintendent flexibility in dealing with reputable licensees. For example, if a licensee has been licensed for several years, has maintained adequate financial resources, and has been cooperative with regulators, the superintendent may determine that annual examinations are not necessary. The waiver also conserves financial resources of the superintendent.

SECTION 602. JOINT EXAMINATIONS.

(a) The [superintendent] may conduct an on-site examination of records listed in Section 605 in conjunction with representatives of other state agencies or agencies of another State or of the federal government. Instead of an examination, the [superintendent] may accept the examination report of an agency of this State or of another State or of the federal government or a report prepared by an independent licensed or certified public accountant.

(b) A joint examination or an acceptance of an examination report does not preclude the [ superintendent] from conducting an examination as provided by law. A joint report or a report accepted under this subsection is an official report of the [superintendent] for all purposes.

Source: Model Act Regulating Money Transmitters Section 14.

The use of joint examinations is an important feature of the Act that will reduce some of the increased costs that may be incurred as a result of licensing and regulation. Many States already engage in joint examinations of major MSBs or allow the submission of reports generated by another regulator in lieu of an on-site examination. This is another provision designed to conserve financial resources.

SECTION 603. REPORTS.

(a) A licensee shall file with the [superintendent] within [15] business days any material changes in information provided in a licensee's application as prescribed by the [superintendent].

(b) A licensee shall file with the [superintendent] within 45 days after the end of each fiscal quarter a current list of all authorized delegates, responsible individuals, and locations in this State where the licensee or an authorized delegate of the licensee provides money services, including limited stations and mobile locations. The licensee shall state the name and street address of each location and authorized delegate.

(c) A licensee shall file a report with the [superintendent] within one business day after the licensee has reason to know of the occurrence any of the following events:

(1) the filing of a petition by or against the licensee under the United States Bankruptcy Code for bankruptcy or reorganization;

(2) the filing of a petition by or against the licensee for receivership;

(3) the commencement of a proceeding to revoke or suspend its license in a State or country in which the licensee engages in business or is licensed;

(4) the cancellation or other impairment of the licensee's bond or other security;

(5) a [charge] or conviction of the licensee or of an executive officer, manager, or director of, or person in control of, the licensee for a felony; or

(6) a [charge] or conviction of an authorized delegate for a felony.

Source: President's Commission Act Section 13 (with modifications).

1. Reports are essential to the proper regulation of problem delegates or licensees. Although on-site examinations are authorized, the reporting requirements provide a cost efficient mechanism for superintendents and industry members alike. Certain significant events must be reported immediately, including a money-laundering allegation against a delegate. The Drafting Committee, after consultation with Observers, decided that quarterly reporting was only necessary with respect to changes in authorized delegates. Furthermore, annual audited financial statements are only required for Article 2 licensees (as this relates once again to the safety and soundness of money transmitters and their financial solvency). All licensees are required to file renewal reports pursuant to Articles 2, 3 and 4.

2. Section 603(a) was added in March 2000 and requires a licensee to report on any changes that occur in information supplied in a license application within 15 days after the change has occurred. This provision ensures that the superintendent has current and accurate information in the time between the filling of an initial application and the submission of a renewal report.

SECTION 604. CHANGE OF CONTROL.

(a) A licensee shall give the [superintendent] written notice of a proposed change of control within [15] days after learning of the proposed change of control and request approval of the acquisition. A licensee shall also submit with the notice a nonrefundable fee of [$2,000].

(b) After review of a request for approval under subsection (a), the [superintendent] may require the licensee to provide additional information concerning the proposed persons in control of the licensee. The additional information must be limited to the same types required of the licensee or persons in control of the licensee as part of its original license or renewal application.

(c) The [superintendent] shall approve a request for change of control under subsection (a) if, after investigation, the [superintendent] determines that the person or group of persons requesting approval has the competence, experience, character, and general fitness to operate the licensee or person in control of the licensee in a lawful and proper manner and that the interests of the public will not be jeopardized by the change of control.

(d) The following persons are exempt from the requirements of subsection (a), but the licensee shall notify the [superintendent] of a change of control:

(1) a person that acts as a proxy for the sole purpose of voting at a designated meeting of the security holders or holders of voting interests of a licensee or person in control of a licensee;

(2) a person that acquires control of a licensee by devise or descent;

(3) a person that acquires control as a personal representative, custodian, guardian, conservator, or trustee, or as an officer appointed by a court of competent jurisdiction or by operation of law; and

(4) a person that the [superintendent] by rule or order exempts in the public interest.

(e) Subsection (a) does not apply to public offerings of securities.

(f) Before filing a request for approval to acquire control, a person may request in writing a determination from the [superintendent] as to whether the person would be considered a person in control of a licensee upon consummation of a proposed transaction. If the [superintendent] determines that the person would not be a person in control of a licensee, the [superintendent] shall enter an order to that effect and the proposed person and transaction is not subject to the requirements of subsections (a) through (c).

Source: Florida Money Transmitter's Code Section 560.127 (with modifications), Fla. Stat. Ann. ch. 560 Section 560.127 (West, Westlaw through End of 1999 1st Regular Session).

1. Section 604 requires all persons who wish to acquire a controlling interest in a licensee (as broadly defined in Section 102) to obtain approval from the superintendent prior to obtaining control. The Drafting Committee determined that prior notification was essential for both safety and soundness reasons, as well as for the superintendent to properly assess the background of the persons who wish to acquire control (in order to evaluate whether such persons pose any risks in terms of potential illegal activity). The superintendent retains discretion to request additional information from an applicant (e.g., personal financial information) that might assist the superintendent in evaluating the application.

2. The Committee and Observers have previously debated the issue of whether the superintendent should require applicants to provide personal financial information under Section 604 about persons that have control of a licensee, such as executive officers of the acquiring company. It was noted, however, that it should not be a mandatory requirement because many executive officers at larger publicly traded companies would object to such a requirement as an unnecessary invasion of privacy, because the financial well-being of the company would bear no connection to the officer's personal wealth. The superintendent retains the discretion to request such information for smaller entities where the superintendent needs more information to make an assessment of net worth and financial capability (i.e., individual proprietors who wish to acquire control of an MSB).

SECTION 605. RECORDS.

(a) A licensee shall maintain records for determining the licensee's compliance with this [Act]. A licensee shall maintain the following for at least [three] years after the record is created:

(1) a record of each payment instrument or stored-value obligation sold;

(2) a general ledger posted at least monthly containing all asset, liability, capital, income, and expense accounts;

(3) bank statements and bank reconciliation records;

(4) records of outstanding payment instruments and stored-value obligations;

(5) records of each payment instrument and stored-value obligation paid within the [three]-year period;

(6) a list of the last known names and addresses of all of the licensee's authorized delegates; and

(7) any other records the [superintendent] reasonably requires by rule.

(b) The items specified in subsection (a) may be maintained in any form of a record.

(c) Records may be maintained outside this State if they are made accessible to the [superintendent] on [seven] business-days' notice that is sent in a record.

(d) All records maintained by the licensee as required in subsections (a) through (c) are open to inspection by the [superintendent] pursuant to Section 601.

Source: Model Act Regulating Money Transmitters Section 15 (with modifications).

This section combines the more general reporting provisions of the Florida Money Transmitter's Code Section 560.310, Fla. Stat. Ann. Section 560.310, and the more detailed reporting requirements contained in Section 15 of the Model Act Regulating Money Transmitters. The Drafting Committee determined that the statutory prescription for record keeping should be a minimum and that additional books and records might be required by rule, if needed. Therefore, the current Section 605 is an amalgamation of two previous provisions. The reporting requirements contained in Section 605 pertain mainly to money transmitters (with respect to the sale of payment instruments). Most check cashing and currency-exchange law simply states that the licensee must maintain books and records as required by rule. Both Committee members and Observers were in agreement with a three-year record retention period. The record retention period also reflects existing state practice. A new subsection (d) has been added to clarify that the records maintained by the licensee are subject to inspection pursuant to a regulatory examination as set forth in Section 601.

[SECTION 606. MONEY LAUNDERING REPORTS.

(a) A licensee and an authorized delegate shall file with the [attorney general] all reports required by federal currency reporting, record keeping, and suspicious transaction reporting requirements as set forth in 31 U.S.C. Section 5311, 31 C.F.R. Part 103, and other federal and state laws pertaining to money laundering.

(b) The timely filing of a complete and accurate report required under subsection (a) with the appropriate federal agency is compliance with the requirements of subsection (a), unless the [superintendent] notifies the licensee that the [attorney general] has notified the [superintendent] that reports of this type are not being regularly and comprehensively transmitted by the federal agency to the [attorney general].]

Source: Abbreviated version of Florida Money Transmitter's Code Section 560.128, Fla. Stat. Ann. ch. 560 Section 560.128 (West, Westlaw through End of 1999 1st Regular Session); President's Commission Act Section 5.

MSBs are required to file relevant reports as mandated by federal or state law with respect to suspected money laundering. Section 606 is meant to achieve two purposes. First, it requires licensees and their authorized delegates to comply with federal and state anti-money laundering reporting requirements. By making this requirement explicit in a state statute, money services will be put on notice of their reporting obligations. Second, the superintendent has a basis for taking enforcement action against non-compliant licensees and delegates.

The section also permits licensees to comply with state reporting requirements by filing the appropriate federal anti-money laundering reports as required by the federal BSA, and thereby avoid duplicative filing. FinCEN provides state law enforcement authorities access to these reports via its Gateway computer system. Through Gateway, state enforcement agencies have on-line access to records filed under the BSA. Every State, as well as the District of Columbia and Puerto Rico has access to the Gateway system.

Approximately ten States require that an MSB comply with all federal and state money laundering and currency transaction reporting laws. State laws typically replicate the federal law and require that cash transactions in excess of $10,000 be reported to a state authority, as well as to the U.S. Treasury. Most of the state reporting law does not specifically address MSBs (but may apply to MSBs by implication). Several States, including Colorado, Connecticut, Idaho, Indiana and Oklahoma, require financial institutions to file suspicious activity reports concurrently with federal and state authorities. Arizona has its own suspicious activity form for financial institutions. Suspected money laundering activities are reported to Arizona's Attorney General on a one-page form. Georgia provides that each financial institution must keep a record of currency transactions in excess of $10,000 and that those reports must be filed with the State within 15 days of the transaction.

SECTION 607. CONFIDENTIALITY OF RECORDS.

(a) Except as otherwise provided in subsection (b), all information or reports obtained by the [superintendent] from an applicant, licensee, or authorized delegate, whether obtained through reports, applications, examination, audits, investigation, or otherwise, including all information contained in or related to examination, investigation, operating, or condition reports prepared by, on behalf of, or for the use of the [superintendent], or financial statements, balance sheets, or authorized delegate information, are confidential and are not subject to disclosure under [this State's open records law].

(b) The [superintendent] may disclose information not subject to disclosure under [this State's open records law] to representatives of state or federal agencies who undertake in a record that they will maintain the confidentiality of the information if the licensee provides consent before the release; or the [superintendent] finds that the release is reasonably necessary for the protection of the public and in the interests of justice, and the licensee has been given previous notice by the [superintendent] of its intent to release the information.

(c) This section does not prohibit the [superintendent] from disclosing to the public a list of persons licensed under this [Act] or the aggregated financial data on those licensees.

Source: Model Act Regulating Money Transmitters Section 16 (with modifications).

Section 607 is an important confidentiality provision that protects the business or proprietary financial information that may be submitted by a license applicant or licensee. At the March drafting meeting, the Drafting Committee, after hearing the views of industry representatives, concluded that it was important to provide licensees and license applicants with an appropriate degree of protection for various information, especially business and proprietary information, that is contained in applications and reports filed with state regulators. In the absence of such protections, information concerning an applicant's receivables, for example, could be used to reconstruct the market share of a particular MSB. Hence, the Drafting Committee voted to include the current confidentiality provision.

SECTION 701. MAINTENANCE OF PERMISSIBLE INVESTMENTS.

(a) A licensee shall maintain at all times permissible investments that have a market value computed in accordance with generally accepted accounting principles of not less than the aggregate amount of all of its outstanding payment instruments issued or sold and money transmitted by the licensee or its authorized delegates.

(b) The [superintendent], with respect to any licensees, may limit the extent to which a type of investment within a class of permissible investments may be considered a permissible investment, except for money and certificates of deposit issued by a bank. The [superintendent] by rule may prescribe or by order allow other types of investments that the [superintendent] determines to have a safety substantially equivalent to other permissible investments.

(c) Permissible investments, even if commingled with other assets of the licensee, are held in trust for the benefit of the purchasers and holders of the licensee's outstanding payment instruments in the event of bankruptcy or receivership of the licensee.

Source: President's Commission Act Section 14 (with modifications)

Money transmitters are required to maintain a certain level of investments that are equal to the value of their outstanding obligations as a means of protecting individual consumers. This is another safety and soundness requirement designed to safeguard funds received from consumers.

SECTION 702. TYPES OF PERMISSIBLE INVESTMENTS.

(a) Except to the extent otherwise limited by the [superintendent] pursuant to Section 701, the following investments are permissible under Section 701:

(1) cash, a certificate of deposit, or senior debt obligation of an insured depositary institution, as defined in Section 3 of the Federal Deposit Insurance Act [12 U.S.C. Section 1813];

(2) a banker's acceptance or bill of exchange that is eligible for purchase upon endorsement by a member bank of the Federal Reserve System and is eligible for purchase by a Federal Reserve Bank;

(3) an investment bearing a rating of one of the three highest grades as defined by a nationally recognized organization that rates securities;

(4) an investment security that is an obligation of the United States or a department, agency, or instrumentality thereof; an investment in an obligation that is guaranteed fully as to principal and interest by the United States; or an investment in an obligation of a State or a governmental subdivision, agency, or instrumentality thereof;

(5) receivables that are payable to a licensee from its authorized delegates pursuant to contracts which are not past due or doubtful of collection if the aggregate amount of investments in receivables under this paragraph does not exceed 20 percent of the total permissible investments of a licensee and the licensee does not have at one time investments in receivables under this paragraph in any one person aggregating more than 10 percent of the licensee's total permissible investments; and

(6) a share or a certificate issued by an open-end management investment company that is registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 [15 U.S.C. Section 80a-1 et. seq.], and whose portfolio is restricted by the management company's investment policy to investments specified in paragraphs (1) through (4).

(b) The following investments are permissible under Section 701, but only to the extent specified:

(1) an interest-bearing bill, note, bond, or debenture of a person whose equity shares are traded on a national securities exchange or on a national over-the-counter market, if the aggregate of investments under this paragraph do not exceed 20 percent of the total permissible investments of a licensee and the licensee does not at one time have investments under this paragraph in any one person aggregating more than 10 percent of the licensee's total permissible investments;

(2) a share of a person traded on a national securities exchange or a national over-the-counter market or a share or a certificate issued by an open-end management investment company that is registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940, and whose portfolio is restricted by the management company's investment policy to shares of a person traded on a national securities exchange or a national over-the-counter market, if the aggregate of investments under this paragraph does not exceed 20 percent of the total permissible investments of a licensee and the licensee does not at one time have investments under this paragraph in any one person aggregating more than 10 percent of the licensee's total permissible investments;

(3) a demand-borrowing agreement made to a corporation or a subsidiary of a corporation whose securities are traded on a national securities exchange if the aggregate of the amount of principal and interest outstanding under demand-borrowing agreements under this paragraph does not exceed 20 percent of the total permissible investments of a licensee and the licensee does not at one time have principal and interest outstanding under demand-borrowing agreements under this paragraph with any one person aggregating more than 10 percent of the licensee's total permissible investments; and

(4) any other investment the [superintendent] reasonably determines to be permissible, to the extent specified by the [superintendent].

(c) The aggregate of investments under subsection (b) may not exceed 50 percent of the total permissible investments of a licensee calculated in accordance with Section 701.

Source: This is a new provision that works with some of the categories of permissible investments contained in the Model Act Regulating Money Transmitters Section 3.

1. At the October 1998 drafting meeting, the Drafting Committee expressed some concern about the types of permissible investments that have been included in model legislation, as well as in existing state money transmission statutes. As stated in the Prefatory Note, money transmitters have to maintain investments that are equal to the aggregate face amount of all their outstanding funds transfers and payment instrument obligations (on a dollar for dollar basis). The Drafting Committee observed that certain investments appeared more risky than others - especially in the absence of any limitations or caps on percentage of the licensee's portfolio invested in any of these items.

The items that the Committee identified as potentially problematic were:

• shares in a money market mutual fund, interest-bearing bills or notes or bonds, debentures or stock traded on any national securities exchange or on a national over-the counter-market, or mutual funds primarily composed of one or more investments as described in this section;

• a demand borrowing agreement made to a corporation or a subsidiary of a corporation whose capital stock is listed on a national exchange; and

• receivables that are due to a licensee from its authorized delegates pursuant to a contract which are not past due or doubtful of collection.

The Drafting Committee thought that these types of investments posed higher levels of risk to the licensee and ultimately to the public than was appropriate for MSBs. Industry Observers noted, however, that such investments were commonly included in state law. In fact, the MTRA outline lists such investments as permissible, though it states that loans should not exceed 10 percent of the net worth of a licensee, and the amount of such loans as a total percentage of permissible investments may be subject to legislation.

2. The current list of permissible investments is an attempt to balance the concerns of regulators for safety and soundness and of industry participants who have concerns about their ability to properly conduct business. The categories of investments listed in Section 702(b) permit the type of investments that had previously raised concerns. The main difference in the new Section 702(b) and current practice is that the aggregate cap on such investments is set at 20 percent of the licensee's portfolio. Additionally, the licensee may not invest in more than 10 percent of any one person with respect to these same investment categories. This balances the need to allow licensees to have flexible and diverse options for investment, but also limits the aggregate amount that a licensee can invest in these riskier categories.

3. Receivables, in particular, was one category that received considerable attention by members of the Committee. Industry Observers, however, explained that there was a practical reason for including receivables as a category of permissible investments. They noted that the practice of including receivables as permissible investments had become a necessity due to the use of automated money order dispensers. Typically, money orders are sold at sales outlets through automated dispensers. The automated dispenser immediately records the sale of the money order and notifies the money transmitter. This real-time "notification" immediately triggers the obligation of a money transmitter to retain permissible investments for the money order sold on a dollar for dollar basis. However, while the obligation to maintain investments is triggered at the time of sale, there is a lag of time until the sales outlet actually remits funds to the money transmitter. For the time period between sale and remittance of the funds that the sales outlet has received, the money transmitter needs to treat those "receivables" as part of its permissible investment portfolio. Previously, authorized delegates had notified a money transmitter of the number of money orders sold at the same time that it remitted a check for the funds received.

SECTION 801. SUSPENSION AND REVOCATION [; RECEIVERSHIP].

(a) The [superintendent] may suspend or revoke a license [, place a licensee in receivership,] or order a licensee to revoke the designation of an authorized delegate if:

(1) the licensee violates this [Act] or a rule adopted or an order issued under this [Act];

(2) the licensee does not cooperate with an examination or investigation by the [superintendent];

(3) the licensee engages in fraud, intentional misrepresentation, or gross negligence;

(4) an authorized delegate is convicted of a violation of a state or federal anti-money laundering statute, or violates a rule adopted or an order issued under this [Act], as a result of the licensee's willful misconduct or willful blindness;

(5) the competence, experience, character, or general fitness of the licensee, authorized delegate, person in control of a licensee, or responsible person of the licensee or authorized delegate indicates that it is not in the public interest to permit the person to provide money services;

(6) the licensee engages in an unsafe or unsound practice;

(7) the licensee is insolvent, suspends payment of its obligations, or makes an assignment for the benefit of its creditors; or

(8) the licensee does not remove an authorized delegate after the [superintendent] issues and serves upon the licensee a final order including a finding that the authorized delegate has violated this [Act];

(b) In determining whether a licensee is engaging in an unsafe or unsound practice, the [superintendent] may consider the size and condition of the licensee's money transmission, the magnitude of the loss, the gravity of the violation of this [Act], and the previous conduct of the person involved.

Source: President's Commission Act Sections 11 and 12 (with modifications).

1. Section 801 sets forth the circumstances pursuant to which the superintendent may take disciplinary actions against a licensee. This is an important mechanism for the prevention of money laundering. The issuance of a cease and desist order and suspension and revocation of a license may only occur after a hearing in accordance with the State's administrative procedure act. Licensee violation of state money laundering prohibitions is specified on the list. Section 801 also specifics the circumstances under which the superintendent may take action against the licensee for the authorized delegate's conduct. Pursuant to Section 801 (a)(3), the superintendent is authorized to take action against a licensee for a delegate's violations of money laundering prohibitions or any act done "as a result of a course of a willful failure to supervise or of the willful misconduct or willful blindness of the licensee." A willful misconduct standard has been chosen because a strict liability standard may result in consequences disproportionate to the social harm involved from the delegate's activity.

2. Some States provide more detailed standards for when a cease and desist order becomes effective. Texas' Currency Exchange Transportation or Transmission provisions of the Texas Finance Code provide that a cease and desist order takes effect on issuance if the Banking Commissioner finds a threat of immediate and irreparable harm to the license holder or the public. If no immediate or irreparable harm is found, the order is not effective before 10 days after the order is received. See Tex. Rev. Fin. Stat. Ann. Section 153.407. Other state laws enumerate separate and specific grounds for the denial of a license or for revocation, suspension or restriction of a previously granted license. Florida, for example, lists a material misstatement of fact in an initial or renewal application, the loss of license in another jurisdiction (due to fraud or dishonest dealing) and criminal convictions involving fraud or dishonest dealing as grounds for license denial, suspension or non-renewal. See Florida Money Transmitter's Code Section 560.114(2)(a)-(c), Fla. Stat. Ann. ch. 560 Section 560.114(2)(a)-(c).

3. Section 801(a)(2) has been amended and language concerning the licensee's responsibility for the fraud, misrepresentation, deceit or gross negligence of an authorized delegate has been removed. Under the previous Section 801(a)(2), the licensee could have its license revoked based on misrepresentation or fraudulent acts by one of its authorized delegates. Section 801(a)(3) has also been revised. The licensee may still have its license revoked should an authorized delegate violate either a money laundering statute or any part of the Act. This creates a degree of accountability on the part of the licensee for its delegates with respect to compliance with state and federal anti-money laundering measures and also with the requirements of this Act. However, it has been difficult for regulators to articulate a clearly defined standard as to what constitutes a "willful failure to supervise" an authorized delegate. Consequently, this language has been omitted.

SECTION 802. SUSPENSION OR REVOCATION OF AUTHORIZED DELEGATES.

(a) The [superintendent] may issue an order suspending or revoking the designation of an authorized delegate, if the [superintendent] finds that:

(1) the authorized delegate violates this [Act] or a rule adopted or an order issued under this [Act];

(2) the authorized delegate does not cooperate with an examination or investigation by the [superintendent];

(3) the authorized delegate engages in fraud, intentional misrepresentation, or gross negligence;

(4) the authorized delegate is convicted of a violation of a state or federal anti-money laundering statute;

(5) the competence, experience, character, or general fitness of the authorized delegate or a person in control of the authorized delegate indicates that it is not in the public interest to permit the authorized delegate to provide money services; or

(6 ) the authorized delegate is engaging in an unsafe or unsound practice.

(b) In determining whether an authorized delegate is engaging in an unsafe or unsound practice, the [superintendent] may consider the size and condition of the authorized delegate's provision of money services, the magnitude of the loss, the gravity of the violation of this [Act], and the previous conduct of the authorized delegate.

(c) An authorized delegate may apply for relief from a suspension or revocation of designation as an authorized delegate according to procedures prescribed by the [superintendent].

Source: President's Commission Act Section 10 (with modifications).

1. Section 802 complements Section 801. Section 802 sets forth the circumstances pursuant to which the superintendent may take direct action against the authorized delegate. This is another important enforcement and regulatory tool for the prevention of money laundering. Because authorized delegates may be potential sites for money laundering activity (due to a lesser degree of supervision and oversight and also the large number of delegates that may exist for a given licensee), the superintendent needs to have authority to take action against the delegate directly.

2. Section 802(a) has been revised to focus solely on the conduct of the authorized delegate. Previously, the superintendent was able to issue a cease and desist order against the licensee based on the conduct of a licensee's delegate. As noted in Section 801, under certain circumstances, a licensee may lose its license or be subject to other action by the superintendent if a delegate engages in violations of the Act or of related money laundering statutes and regulations as a result of the licensee's willful misconduct or willful blindness. A new subsection (b) has been added to Section 802, which permits the superintendent to issue an order against a licensee requiring the licensee to cease providing services through a delegate if the delegate is already subject to a separate cease and desist order.

SECTION 803. ORDERS TO CEASE AND DESIST.

(a) If the [superintendent] determines that a violation of this [Act] or of a rule adopted or an order issued under this [Act] by a licensee or authorized delegate is likely to cause immediate and irreparable harm to the licensee, its customers, or the public as a result of the violation, or cause insolvency or significant dissipation of assets of the licensee, the [superintendent] may issue an order requiring the licensee or authorized delegate to cease and desist from the violation. The order becomes effective upon service of it upon the licensee or authorized delegate.

(b) The [superintendent] may issue an order against a licensee to cease and desist from providing money services through an authorized delegate that is the subject of a separate order by the [superintendent].

(c) An order to cease and desist remains effective and enforceable pending the completion of an administrative proceeding pursuant to Section 801 or 802.

(d) A licensee or an authorized delegate that is served with an order to cease and desist may petition the [appropriate court], for a judicial order setting aside, limiting, or suspending the enforcement, operation, or effectiveness of the order pending the completion of an administrative proceeding pursuant to Section 801 or 802.

(e) The [superintendent] must commence an administrative proceeding pursuant to Section 801 or 802 within [10] days after issuing an order to cease and desist.

Source: This new provision is loosely based on Section 8(c) of the Federal Deposit Corporation Insurance Act, 12 U.S.C. Section 1818(c) (1999).

There was some concern expressed at the October 1998 meeting that the Act did not provide the superintendent with sufficient authority to deal with exigent situations through the use of expedited procedures. Section 803 provides the superintendent with limited authority to issue orders to cease and desist without prior notice and hearing procedures. The superintendent, however, must have a reasonable belief that the licensee or its authorized delegate is engaging in an unsafe or unsound activity or is violating a provision of the Act, before invoking temporary powers. Subsection (d) is new. At the October 1999 Drafting Committee meeting, it was decided that the superintendent needed to commence an administrative proceeding at a certain time after issuing the temporary cease and desist order. Subsection (d) requires the superintendent to begin an enforcement proceeding pursuant to Section 801 or 802 rather than relying solely on the cease and desist order as an enforcement tool.

SECTION 804. CONSENT ORDERS. The [superintendent] may enter into a consent order at any time with a person to resolve a matter arising under this [Act]. A consent order must be signed by the person to whom it is issued or by the person's authorized representative, and must indicate agreement with the terms contained in the order. A consent order may provide that it does not constitute an admission by a person that this [Act] or a rule adopted or an order issued under this [Act] has been violated.

Source: Model Act Regulating Money Transmitters Section 24.

Section 804 gives the superintendent the ability to enter into a negotiated settlement with an MSB with respect to alleged violations of the Act and potential disciplinary proceedings. The use of consent orders provides the superintendent with a flexible means of achieving enforcement goals while minimizing the administrative and fiscal burden of lengthy administrative proceedings and hearings.

SECTION 805. CIVIL PENALTIES. The [superintendent] may assess a civil penalty against a person that violates this [Act] or a rule adopted or an order issued under this [Act] in an amount not to exceed [$1,000] per day for each day the violation is outstanding, plus the State's costs and expenses for the investigation and prosecution of the matter, including reasonable attorney's fees.

Source: Florida Money Transmitter's Code Section 560.117, Fla. Stat. Ann. ch. 560 Section 560.117 (West, Westlaw through End of 1999 1st Regular Session); President's Commission Act Section 23 (with modifications).

In addition to the ability to take disciplinary action against an MSB or its delegates for violations of the Act, civil penalties provide another enforcement mechanisms aimed at deterring money laundering. As discussed at the first meeting of the Drafting Committee, civil penalties are preferred enforcement mechanisms due to the commercial nature of the Act.

SECTION 806. CRIMINAL PENALTIES.

(a) A person that intentionally makes a false statement, misrepresentation, or false certification in a record filed or required to be maintained under this [Act] or that intentionally makes a false entry or omits a material entry in such a record is guilty of a [reference to state classification] felony.

(b) An individual that knowingly engages in any activity for which a license is required under this [Act] without being licensed under this [Act] is guilty of a [reference to state classification] felony.

Source: President's Commission Act Section 22.

General criminal penalties for all violations are typical of regulatory codes. False statements and other misrepresentations are at the core of the regulatory process and therefore are listed separately. Although the Drafting Committee expressed some concern about the inclusion of criminal penalties in a civil licensing statute, Observers who represented law enforcement emphasized the need for criminal penalties in connection with serious violations of the Act. The Committee supports the inclusion of those provisions in Section 806 because they relate to very serious, specific and tangible violations of the Act.

SECTION 807. UNLICENSED PERSONS.

(a) If the [superintendent] has reason to believe that a person has violated or is violating Section 104 of this [Act] the [superintendent] may issue an order to show cause why an order to cease and desist should not issue requiring that the person cease and desist from the violation of Section 104.

(b) In an emergency, the [superintendent] may petition the [appropriate court] for the issuance of an ex parte temporary restraining order pursuant to the rule of civil procedure.

(c) An order to cease and desist becomes effective upon service of it upon the person.

(d) An order to cease and desist remains effective and enforceable pending the completion of an administrative proceeding pursuant to Section 901 and 902.

(e) A person that is served with an order to cease and desist for violating Section 104 may petition the [appropriate court] for a judicial order setting aside, limiting, or suspending the enforcement, operation, or effectiveness of the order pending the completion of an administrative proceeding pursuant to Section 901 and 902.

(f) The [superintendent] shall commence an administrative proceeding within [10] days after issuing an order to cease and desist.

Source: New.

At the March 2000 meeting, the Drafting Committee decided that the superintendent needed specific enforcement and regulatory authority with respect to unlicnsed persons. Previously, the UMSBA only provided the superintendent with authority to issue a cease and desist order against licensees and their delegates. The Drafting Committee noted, however that it was equally important that regulators have the ability potentially to issue a cease and desist order in the event that the unlicensed person's activities posed a serious risk to the public.

SECTION 901. ADMINISTRATIVE PROCEDURES. All administrative proceedings under this [Act] must be conducted in accordance with [the state administrative procedure act].

Source: Florida Money Transmitter's Code Section 560.108(2) (with modifications), Fla. Stat. Ann. ch. 560 Section 560.108(2) (West, Westlaw through End of 1999 1st Regular Session).

The Drafting Committee noted that the Act should generally conform to the Model State Administrative Procedure Act. MTRA members also expressed their position that the Act should conform to state administrative procedure laws.

SECTION 902. HEARINGS. Except as otherwise provided in Sections 205(c), 304(c), 404(c), 803, and 807, the [superintendent] may not suspend or revoke a license, [place a licensee in receivership,] issue an order to cease and desist, suspend or revoke the designation of an authorized delegate, or assess a civil penalty without notice and an opportunity to be heard. The [superintendent] shall also hold a hearing when requested to do so by an applicant whose application for a license is denied.

Source: President's Commission Act Section 12 (with modifications).

Except for the automatic lapse of licenses that are not renewed and the issuance of cease and desist orders pursuant to Sections 803 and 807, the superintendent is required to provide notice and have a hearing before taking any disciplinary or enforcement actions against a licensee or its authorized delegates. The President's Commission Act only refers to suspension, revocation and denial of licenses. Section 802 has been also been extended further to include cease and desist authority and the ability to assess civil penalties.

SECTION 1001. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this Uniform Act, consideration must be given to the need to promote uniformity of the law with respect to its subject matter among States that enact it.

SECTION 1002. SEVERABILITY CLAUSE. If any provision of this [Act] or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this [Act] which can be given effect without the invalid provision or application, and to this end the provisions of this [Act] are several.

SECTION 1003. EFFECTIVE DATE. This [Act] takes effect ........................................ .

SECTION 1004. REPEALS. The following acts and parts of acts are repealed:

(1) ........................................

(2) ........................................

(3) ........................................

Existing state licensing laws that govern payment instrument sellers (check sellers) money transmitters, currency exchanger and check cashers should be repealed.

SECTION 1005. SAVINGS AND TRANSITIONAL PROVISIONS. A license issued under [name of existing money services licensing statutes] that is in effect immediately prior to [Effective Date of this Act] shall remain in force as a license under [name of existing money services statutes] until the license's expiration date. Thereafter, the licensee shall be treated as if it had applied for and had received a license under this [Act] and shall be required to comply with the renewal requirements set forth in this [Act].

As a matter of policy, the Drafting Committee decided that existing licensees should be grandfathered in under the UMSBA and have their existing licenses (which are in force prior to the effective date of UMSBA) to remain in force under the previous money services statutes. Thus, for some time the previous statutes will govern existing licensees whereas the UMSBA will govern newly created licenses. At the time that previously-granted licenses expire, those licensees will be treated as if they had applied for and received a new license under the UMSBA and will be required to submit renewal information rather than a do novo license application.

SECTION 1006. APPLICATION TO EXISTING RELATIONSHIPS.

1. Coopers & Lybrand, "Non Bank Financial Institutions: A Study of Five Sectors for the Financial Crimes Enforcement Network," Final Report (February 1990), at 2.

2. The term "money laundering" refers to the need for criminals to somehow disguise the source and origin of illegally obtained cash and to inject it into the legitimate stream of commerce.

3. The federal Bank Secrecy Act, codified at 12 U.S.C. Section 1829(b), 12 U.S.C. Sections 1951-1959 and 31 U.S.C. Sections 5311-5330, authorizes the Secretary of the Treasury to issue regulations requiring financial institutions to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax and regulatory matters, and to implement counter-money laundering programs and compliance procedures. Regulations implementing Title II of the Bank Secrecy Act, codified at 31 U.S.C. Sections 5311-5330, appear at 31 C.F.R. Part 103.

4. See Special Currency Transaction Reporting Requirements for Money Transmitters, 62 Fed. Reg. 27,909 (May 21, 1997), at 27,912.

5. Money Laundering Trends Before United States House of Representatives, Committee on Banking and Financial Services, Subcommittee on General Oversight and Investigations (April 15, 1999) (Statement of Assistant U.S. Attorney Jodie Levine Avergun), 1999 WL 16946054.

6. United States Department of Treasury, Financial Crimes Enforcement Network, Money Laundering in the United States, U.S. Submission to the Financial Action Task Force for the Meeting of the Experts Group on Money Laundering Typologies (November 1997), at 10.

7. Financial Action Task Force, Report on Money Laundering Typologies (1997-1998), 15 app. (visited May 14, 2000) <http://www.oecd.org/fatf/reports.htm>.

8. Id. at 16. FATF states that "these features pose difficulties as regards of traceability of payments and law enforcement intervention only after the event." Id.

9. Pub. L. N. 103-225.

10. National Money Laundering Strategy, (visited May 17, 2000) <http://www.treas.gov/press/releases/docs/money.pdf>.

11. Id.

12. Id. (emphasis supplied).

13. 31 C.F.R. Section 103.22(a) imposes a general reporting and recordkeeping threshold of $10,000 for domestic financial institutions.

14. 31 C.F.R. Section 103.33.

15. Proposed Rules of the Department of Treasury, 31 CFR Part 103 Financial Crimes Enforcement Network; (1) Proposed Amendment to the Bank Secrecy Act Regulations - Definitions and Registration of Money Services Businesses, Wednesday, May 21, 1997, 62 Fed. Reg. 27,890-01; (2) Proposed Amendment to the Bank Secrecy Act Regulations - Requirement of Money Transmitters and Money Order and Traveler's Check Issuers, Sellers, and Redeemers to Report Suspicious Transactions, Wednesday, May 21, 1997, 62 Fed. Reg. 27,900-01; (3) Proposed Amendments to the Bank Secrecy Act Regulations - Special Currency Transaction Reporting Requirement for Money Transmitters, Wednesday, May 21, 1997, 62 Fed. Reg. 27,909-01.

16. 64 Fed. Reg. 45,438.

17. 62 Fed. Reg. 27,890.

18. Treasury Strengenthens Anti-Money Laundering Proposal (visited May 12, 2000) <http://www.treas.gov/press/releases/ps57.htm>.

19. 65 Fed. Reg. 13683.

20. The rule includes two different dollar thresholds depending on the stage and type of transaction involved: for transactions conducted or attempted by, at or through a money service business or its agent, the threshold of $2,000 applies; for transactions identified by issuers of money orders or traveler's checks from a review of clearance records or other similar records of instruments that have been sold or processed, the threshold of $5,000 applies.

21. The National Conference of Commissioners on Uniform State Laws Drafts of Uniform and Model Acts Official Site (visited May 15, 2000) <http://www.law.upenn.edu/bll/ulc/ulc_frame.htm>.

22. Electronic Funds Transfers (Regulation E), 61 Fed. Reg. 19, 696 (1996).

23. Conn. Gen. Stat. Ann. Section 36a-596 (West Westlaw through Gen. St. Rev. to 1-1-00). Connecticut defines electronic payment instrument as stored value, not the reverse.

24. W. Va. Code Section 32A-2-1(6) (Lexis, Westlaw through End of 1999 2nd Ex. Session).

25. See Remarks of Catherine A. Ghiglieri, Texas Department of Banking to the PULSE EFT Assoc. Member Conference (October 11, 1996) located at <www.banking.state.tx.us/exec/speech10a>.

26. Or. Rev. Stat. Section 717.200(7) (West, Westlaw through End of 1999 Regular Session).

27. Id.

28. United States Consumer Electronic Payments Task Force, 44 (April 1998) (visited May 15, 2000) <http://www.occ.treas.gov/emoney/ceptfpap.htm>.

29. Tex. Fin. Code Ann. Sections 152.001 et seq. (West, Westlaw through End of 1999 Regular Session).

30. Tex. Fin. Code Ann. Sections 152.002(1) (West, Westlaw through End of 1999 Regular Session).

31. State of California, Department of Financial Institutions (visited May 15, 2000) <http://www.sbd.ca.gov/>.

32. When discussing stored-value, commentators refer to "closed" and "open" systems. A closed system is one where the stored-value card can be used only for goods and services provided directly by the card issuer. For example, a university may issue a stored-value card which students may use to purchase books, cafeteria food, and fares on the university's bus system. An "open" system is one where the issuer is not the provider of goods and services but is perhaps part of a group of issuers whose stored-value cards are accepted as a form of payment by a host of merchants.

33. Opinion 98-11 (February 19, 1998) of the Texas State Banking Commissioner (visited May 15, 2000) <http://www.banking.state.tx.us/legal/opinions/98-11.htm>.