United States: Are You A Money Transmitter In Michigan? In California?

Last Updated: January 9 2019
Article by Sean M. Ruff and Adam J. Fleisher

The payments and money transmission regulatory landscape continues to evolve. A key new development is that Michigan has affirmed by legislation that "agent of a payee" transactions meeting certain criteria are not subject to regulation under the state's money transmission licensing law. However, the California Department of Business Oversight (the DBO), which regulates money transmission in California, continues to scrutinize the scope of what constitutes payee-agency activity exempt from money transmission licensing.

WHAT IS AN AGENT OF A PAYEE IN MICHIGAN?

On December 31, 2018, Michigan governor Rick Snyder signed S.B. 729 into law, effective 90 days from signature (i.e., April 1, 2019). S.B. 729 makes a number of changes to the Michigan Money Transmission Services Act, Mich. Comp. Laws §§ 487.1001 et seq. (the "Act"). One important change excludes from the applicability of the Act "an agent of a payee," provided certain conditions are met.

First, S.B. 729 defines an agent of a payee as a "person appointed by a payee to collect and process payments as the bona fide agent of the payee." Second, a covered "payee" under the Act is defined as the "provider of goods or services, not including money transmission services, that is owed payment of money or other monetary value from the person that is paying for the goods or services."1 Third, a person acting as agent of a payee is exempt if the person can "demonstrate[e]" to the director of the Michigan Department of Insurance and Financial Services (the "Director") that "all of the following" criteria are met:

  • There is a written agreement between the agent and the payee "directing the agent to collect and process payments on the payee's behalf";
  • "The payee holds the agent out to the public as accepting payments on the payee's behalf"; and
  • When the agent receives the payment it is "treated as received by the payee."2

These provisions are generally consistent with "agent of a payee" exemptions affirmed by other states. However, because S.B. 729 states that an entity is exempt if it "demonstrates to the Director" that it meets the aforementioned criteria, companies seeking to avail themselves of the payee agency exemption in Michigan may need to affirmatively reach out to confirm the exemption.

S.B. 729 – OTHER CHANGES

S.B. 729 also makes changes to provisions in the Act relating to stored value, which is re-characterized as "prepaid access" and defined in a manner similar to—though not the same as—the federal Bank Secrecy Act (BSA).3 Specifically, S.B. 729 defines "prepaid access" as "access to funds or the value of funds that have been paid in advance and can be retrieved or transferred at some point in the future through a device or vehicle [e.g., a card, code, electronic serial number, mobile identification number, etc.]."4 In addition, prepaid access that meets the following definition of "closed loop" (again, similar to but not the same as the BSA) is not subject to regulation under the Act:

[A]ccess to funds or the value of funds that is paid in advance, may be retrieved or transferred at some time in the future through a device or vehicle, and may be used only to acquire goods or services in transactions that involve 1 or more specific merchants or 1 or more specific locations.

Of particular significance is that covered—and therefore exempt—closed loop includes devices that can be used at "1 or more specific merchants or 1 or more specific locations." This aspect of the definition differs from the approach taken in other U.S. states, which tend to define closed loop prepaid access (or its statutory equivalent) as an instrument, device, etc., that is redeemable by the issuer of the device for goods or services. By contrast, S.B. 729 appears to indicate that any device redeemable at "specific merchants" or "specific locations" could come within the definition of "closed loop" in Michigan, regardless of whether such a merchant or set of merchants is also the issuer of the device.

Additionally, S.B. 729 does not provide for a simple exclusion for such closed loop prepaid access, as do other U.S. state money transmission licensing regimes. The definition of "money transmission services"—the regulated activity under the Act—includes among other things "selling or issuing . . . closed-loop prepaid access." S.B. 729 also amends the Act such that it does not apply to a person who "issues, sells, or distributes . . . closed-loop prepaid access . . . if the funds associated with that [prepaid access] do not exceed $2,000.00 maximum value on any day." This exclusion imports the BSA concept of a ceiling on the amount of funds that can be associated with a particular device or vehicle for it to be excluded from the BSA regulations. This type of dollar-limitation structure has not previously been used by state money transmission regimes to differentiate between regulated and unregulated money transmission activity.

Finally, S.B. 729 adds an exemption for an agent of a depository financial institution that is exempt under the Act, provided that certain specific criteria are met.

AGENT OF A PAYEE TRENDS, AND MORE CALIFORNIA DEVELOPMENTS

Almost all U.S. states regulate money transmitters under state-specific licensing regimes. Statutory definitions of money transmission are quite broad and typically cover any entity that receives money for transmission. Thus, one of the most important regulatory issues for non-bank payments service providers is the extent to which money transmission laws apply to transactions where the intermediary acts as an agent to facilitate the receipt of payments by merchants and other payees, such as public utilities (as opposed to acting on behalf of a sender to transmit the sender's funds to a beneficiary designated by the sender.) And, the applicability of state money transmission laws can dictate whether and to what extent payments services can be offered, and whether money transmission licenses may be required.

In light of the salience of the issue, we have been closely tracking recent regulatory developments relating to exemptions for payee-agency transactions (see, for example, our previous client alerts on Hawaii and Connecticut, and Washington). Michigan now joins the growing list of states that have determined — whether through legislation, regulation, guidance, opinion letter, or otherwise — that, subject to certain conditions, state money transmission licensing laws do not apply to services provided as an agent of a merchant or other payee pursuant to a direct contractual agreement.

However, there have been some countervailing developments. (See our prior discussions of these issues in Vermont and California.) For example, the California DBO responded unfavorably to a request for an interpretive opinion regarding the scope of the state's payee agency exemption. In a letter dated October 4, 2018, the DBO rejected a payment processor's contention that it was exempt under California's statutory agent of a payee exemption, Cal. Fin. Code § 2010(l). The company asserted that it was exempt because it "receives funds from a consumer/payor and delivers the funds to a merchant/payee pursuant to a preexisting written contract," and because "as soon as a payment transaction is authorized by a card company, the merchant's right to receive payment from the consumer purchasing the goods or services is replaced by the merchant's right to receive payment from [the payment processor]."

The DBO concluded that this activity was not exempt under Cal. Fin. Code § 2010(l). First, the DBO found that the written agreement governing the processing services did not include an express appointment of the processer as agent of the merchant. Second, the DBO found that the agreement did not expressly indicate that the authorization of the payment card transaction from the processor's financial institution to the processor satisfied the consumer's obligation to the merchant. Thus the DBO concluded that the elements of the exemption set forth at Cal. Fin. Code § 2010(l) were not met.

In light of these developments, businesses that rely on payee-agency exemptions should closely evaluate the structure of their arrangements—including the underlying contractual agreements—to assess whether they come within specific state exemptions and whether any affirmative steps need to be taken to confirm compliance with specific regulators.

Footnotes

1 Mich. Comp. Laws § 487.1003(e), as amended.

2 Id. at § 487.1004(f).

3 See 31 C.F.R. 1010.100(ww).

4 Mich. Comp. Laws § 487.1003(h).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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