Operator of a Payment System, Payroll Processing, Public Interest Exemption

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February 27, 2018

Via Email & U.S. Mail

Re:       ____________________ – Opinion Request

Dear ____________________:

Thank you for your letter dated January 29, 2018, in which you responded on behalf of _________________________ (“______________”) to the Department of Business Oversight’s letter dated December 11, 2017. In the letter, you assert that ____________________ should be exempt from the licensure requirements of the California Money Transmission Act (“MTA”) 1 under Financial Code section 2010, subdivisions (h) and (j). In the alternative, ____________________ requests that the Department exempt it under Section 2011.

BACKGROUND

On June 6, 2017, the Department issued an opinion letter to ____________________’s counsel,

____________________, wherein the Department concluded that the MTA applies to

_________________________ activities. The Department’s June 6 letter was in response to ____________________’s prior arguments that ____________________ credit is not “stored value” as that term is defined in Financial Code section 2003, subdivision (x).

In the January 29 letter, ____________________ does not indicate that its current

____________________ activities are different from its prior activities, which were previously considered by the Department.

Nonetheless, ____________________ is now arguing that it should be exempt as an operator of a payment system 2 and as a company that provides payroll processing services.3

Alternatively, ____________________ requests an exemption under Financial Code section 2011

if the Department disagrees with ____________________’s assertion that it is exempt under Section 2010.

MONEY TRANSMISSION ACT

A. Operator of a Payment System

Financial Code section 2010, subdivision (h) excludes from the MTA an “operator of a payment system to the extent that it provides processing, clearing, or settlement services, between or among persons excluded by this section,” in connection with funds transfers.[4] In other words, a person can only qualify under this subdivision if it provides processing or settlement services only between or among persons otherwise excluded under Section 2010. The sender and receiver of the funds must each be an excluded entity. For example, a person who provides settlement services between two banks would qualify for the exemption. This is because a bank is excluded under Section 2010, subdivision (d). In ____________________’s case, the sender is not an excluded entity. Rather, the sender is a merchant. Therefore, ____________________ does not qualify for an exclusion under Section 2010, subdivision (h) because it is not providing settlement services between excluded entities.

B. Payroll Processing

 

Financial Code section 2010, subdivision (j) excludes from the MTA a person that (1) delivers wages or salaries on behalf of employers to employees or (2) facilitates the payment of payroll taxes to state and federal agencies, or (3) transmits other funds on behalf of an employer in connection with transactions related to employees. However, such person is still subject to the MTA for other money transmission services that it offers.

Therefore, this subdivision provides for an exclusion from the MTA for a person who facilitates payroll-related or employer-employee transactions. It does not exclude the payment of other types of taxes.

According to your January 29 letter, ____________________ facilitates not just the payment of payroll taxes but also the payment of sales tax and other indeterminate “associated fees.” Accordingly, ____________________’s delivery of wages/salaries and payroll taxes would qualify for the exclusion under Section 2010, subdivision (j). However, ____________________’s payment of all other types of taxes and fees would not qualify. ____________________ would need to be licensed to transact those other money transmission services.

C. Public Interest Exemption

Financial Code section 2011 authorizes the Commissioner to exempt from the MTA any person or transaction if such action is in the public interest, and the regulation of such persons or transactions is not necessary. Section 80.3002 of Title 10 of the California Code of Regulations specifies the factors that an applicant should discuss when requesting an exemption under Financial Code section 2011.

Your letter did not address the factors in Section 80.3002. ____________________ has instead asserted that its operations are in the public’s interest because they: (1) benefit the unbanked and underbanked businesses and consumers; (2) provide transparency, compliance, and a common network among members and participating government agencies; (3) offer efficient, dependable, and safe cash management solutions; and (4) assist government agencies in the collection of tax revenue.

While the stated purposes of ____________________’s operations may provide benefits to the public, ____________________ has not offered any facts to support a finding that the regulation of ____________________ is not necessary or that the exemption of ____________________ from the MTA licensing requirements would itself be in the public interest. For example, ____________________ has not suggested that it is regulated and examined by another governmental entity in a satisfactory manner, which could be a factor in determining whether ____________________ would also need to be regulated by the Department. The Department does not view registration with the Financial Crimes Enforcement Network (“FinCEN”) as the equivalent of being licensed and regulated under the MTA.

In addition, based on the facts provided by ____________________, its business operations are not unlike many of the Department’s money transmitter licensees. Therefore, the

Commissioner declines to issue an order exempting ____________________ under Financial Code section 2011.

CONCLUSION

With the exception of ____________________’s payroll processing operations to the extent they meet the requirements of Financial Code section 2010, subdivision (j), the Department again concludes that the MTA does apply to ____________________’s ____________________ activities. Therefore, ____________________ should not conduct these activities in California unless and until it has obtained a license from the Department.

This opinion is limited to the facts and circumstances described above regarding the application of the MTA. If any of the facts or circumstances change, the Department’s opinion could also change.

If you have any questions, please contact me at ____________________.

Sincerely,

Jan Lynn Owen

Commissioner

Department of Business Oversight

By

Jennifer L.W. Rumberger

Senior Counsel


 

  • [1] Fin. Code, § 2000 et seq.
  • [2] Fin. Code, § 2010, subd. (h).
  • [3] Fin. Code, § 2010, subd. (j).
  • [4] Emphasis added.