Exemption for Operator of Payment System

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IN REPLY REFER TO: _________

FILE NO: _________

June 29, 2020

VIA E-MAIL ONLY

Re:       __________________ – Opinion Request

 

Dear Ms. _____:

Thank you for your letter dated September 30, 2019 to Jonathan Lee, Assistant Deputy Commissioner of the Money Transmitter Division in the Department of Business Oversight. Your letter on behalf of ______________________ (“____”) and its wholly-owned subsidiary ___________________ (“________”) requests an interpretive opinion regarding the applicability of the Money Transmission Act (“MTA”) to ________’s __________ Transactions. You assert that the __________ Transactions are exempt from the MTA because ________ acts as an agent of an exempt entity and ________ operates a payment system between exempt entities.

BACKGROUND

________ provides automated technology and payment solutions to state and county correctional facilities and sheriff’s offices in California (“California Governmental Entities”). One of ________’s products is an __________ which facilitates the transfer of a detainee’s cash from a detention facility to that detention facility’s bank account (“__________ Transaction”).

The following is a description of an __________ Transaction: After being arrested, a detainee goes through a booking process at a correctional facility. During the booking process, a detainee must surrender all personal belongings, including any cash, to the police officer conducting the booking (“Intake Officer”). The Intake Officer catalogs the detainee’s property which will be returned to the detainee when he or she is released. This process is not optional for the detainee.

During a traditional booking process, the Intake Officer catalogs and places the detainee’s property in a physical box or bin for safekeeping until the detainee is released. When California Governmental Entities use __________, the Intake Officer creates a sub-account for the detainee in the correctional facility’s accounting system. Then, the Intake Officer takes possession of the cash, inserts it into an __________, and assigns the funds to the detainee’s sub-account. Simultaneously, the __________transmits a record of the transaction to __________, which notifies the correctional facility’s accounting database of the transaction. Later, the funds are retrieved from the __________ and delivered to ________’s bank account. ________ then transfers the money to the correctional facility’s bank account. The correctional facility is responsible for maintaining its account, including a detainee’s sub-account. When the detainee is released, the correctional facility returns any cash and other property initially surrendered back to the detainee.

MONEY TRANSMISSION ACT

The MTA prohibits a person from engaging in the business of money transmission in California, unless the person is licensed or exempt from licensure or is an agent of a person licensed or exempt from licensure.[1] Financial Code section 2003, subdivision (q)(3) defines “money transmission” to include receiving money for transmission. Financial Code section 2003, subdivision (u) defines “receiving money for transmission” to mean receiving money or monetary value in the United States for transmission within or outside the United States by electronic or other means.

_________ receives money in __________ located in California and transfers the money to bank accounts of California Governmental Entities. This constitutes receiving money for transmission pursuant to Financial Code section 2003, subdivision (u).

  1. Exempt as an Agent of Exempt Governmental Entities

    Financial Code section 2010, subdivision (c) exempts a state, county, city, or any other governmental agency or governmental subdivision of a state from the MTA. To provide __________, ________ contracts with the State of California through the California Department of Corrections and Rehabilitation or California counties via county correctional facilities or county sheriff’s offices. These governmental entities are exempt from licensure under the MTA.You argue that ________ is exempt from the MTA as an agent of an exempt entity, namely the California Governmental Entities that ________ contracts with. You provided an example of an agreement between ________y and a California Governmental Entity and highlighted the following language:

    “ A. The [California Governmental Entity] wishes to obtain services of [________] to provide an inmate money handling kiosk service at one or more correctional facilities; and

    B. [________] represents that it is a duly qualified service provider and licensed money services business, experienced in the installation and operation of equipment and software programs for payment and deposit systems and other related services which will benefit users by providing certain deposit and transfer options through the facilitation of electronic deposits into government accounts via the internet, telephone, free-standing payment kiosks and retail locations; and

    C. [California Governmental Entity] wishes to implement and make available the proposed services for its own benefit and that of its Senders.”

    However, this language does not establish an agency relationship.

    Furthermore, the contract states that “This Agreement is entered into by both parties with the express understanding that [________] will perform all services required under this Agreement as an independent contractor. Nothing in this Agreement shall be construed to constitute [________] or any of its agents, employees or officers as an agent, employee or officer of [California Governmental Entity].” This clause specifically states that ________ is not an agent of the California Governmental Entity. Therefore, the requirements of Section 2030, subdivision (a) are not satisfied.

  2. Exemption for Operators of Payment Systems

    Financial Code section 2010, subdivision (h) exempts 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 Section 2010, 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 a provider. Financial Code section 2010, subdivision (c) exempts a state, county, city, or any other governmental agency or governmental subdivision of a state from the MTA.You assert that ________ operates a payment system between a California Governmental Entity and itself because the Intake Officer, as an employee of the California Governmental Entity, initiates the __________ Transaction by inserting the detainee’s cash into the __________. Once the funds are deposited into ________’s bank account, ________ transfers the funds to the correctional facility’s bank account. You argue that the detainee is not a customer of ________ for purposes of an __________ Transaction because the detainee has no choice regarding how the Intake Officer processes his or her cash and the detainee does not have access to the __________.

    You cite the following information from the Fresno County Sheriff’s Office website:

    The arresting/transporting officers are required to inventory the arrestee’s personal property and seal it into a bag. In most cases, this makes it unnecessary for Jail personnel to handle the inmate’s property. The transporting officer will deposit the inmate’s cash into an automated electronic ________ kiosk located in the intake area. (emphasis added).

    You also cite this excerpt from the Manual of Policies and Procedures from the San Diego County Sheriff’s Department Detention Services Bureau:

    It will be the responsibility of the arresting/transporting officer to accurately inventory the arrestee’s money. The officer will count and verify the money amount in the presence of the arrestee. The officer will deposit cash into the intake cash kiosk machine. All coin currency will be placed in the arrestee’s plastic property bag and will not be placed on an inmate’s funds account. The machine will generate a receipt, which will be placed in the inmate’s sealed property bag. Cash deposited into the kiosk machine will be immediately reflected on the inmate’s funds account. (emphasis added).

    Therefore, you argue that ________ is not receiving funds from or transferring funds to any person other than the same exempt California Governmental Entity for its own governmental purpose.

    The Department agrees the detainee is not a customer of ________ when it processes an __________ Transaction, regardless of who holds legal title to the money. Intake Officers are required to inventory a detainee’s personal property including any cash. A detainee does not have the option to keep personal property or transfer it to someone other than the Intake Officer. __________ Transactions are initiated by the Intake Officer for the purpose of sending funds to the correctional facility’s bank account which has sub-accounts for each detainee. Thus, ________ is providing payment processing services between a California Governmental Entity and itself for purposes of __________ Transactions. Since California Governmental Entities are exempt from the MTA under Financial Code section 2010, subdivision (c), ________ is operating a payment processing system between or among persons exempt from the MTA when it processes __________ Transactions. Therefore, the requirements of Financial Code section 2010, subdivision (h) are met and __________ Transactions are exempt from the MTA.[2]

This letter is limited to the facts and circumstances presented to the Department in the correspondence listed above. Should any of the facts or circumstances change, the Department’s position may also change.

If you have any questions, please contact the undersigned at (___) ________.

 

Sincerely,

 

Manuel P. Alvarez

Commissioner

Department of Business Oversight

 

By

____________________

Pamela F. Hernandez

Counsel

 

PFH:ss

cc:        Robert Venchiarutti, Deputy Commissioner, Money Transmitter Division


[1] Fin. Code, § 2030, subd. (a).

[2] It may be noted that this application of the exemption in Financial Code section 2010, subdivision (h) is somewhat unique because ________ is processing payments between a California Governmental Entity and itself and Financial Code section 2010, subdivision (h) states “between or among persons” which may imply payment processing between or among different persons. However, if the legislature intended to exempt a payment processor operating between two different exempt governmental entities because such entities and their payment processors do not require regulation, then the same reasoning would apply to a payment processor operating between a governmental entity and itself.

Last updated: Jul 6, 2020 @ 3:52 pm