January 10, 2000
Dear [ ]:
Your letter to the Licensed Financial Services Division dated November 11, 1999, which concerns the sale of prepaid phone cards, has been referred to me for reply. In your letter, you ask several questions concerning the ability of check cashers and other retailers such as pawn brokers to assist the issuer of the prepaid phone cards in selling such cards and receiving the funds from the purchasers of those cards. In response to your questions, I note the following:
1. The New York Banking Department licenses and regulates check cashers but not pawn brokers or the other retail establishments mentioned in your letter. The complete list of the types of entities licensed or registered by this Department may be found in the New York Banking Law.
2. Under the scenario set forth in your letter, the check cashers would enter into an agency agreement with your client, a telecommunications company authorized to resell local telecommunications services by the New York Public Service Commission. You indicate that this agreement authorizes check cashers to accept cash and money orders from the purchasers of the prepaid phone cards. If the agency agreement clearly and unconditionally indicates that payment to the check casher is, in effect, payment to your client, the check casher could be deemed to be an agent of a payee (your client) and would not be engaged in money transmission. The "bottom line" is that there can be no risk of loss to the customer. If the check casher fails to remit the proceeds from the sale of the cards, your client may not, from a legal standpoint, "cut off" service to the purchasers of the cards as it, in effect, received payment for the cards.
The provisions of Section 373(1) of the Banking Law prohibit check cashers from conducting money transmission activities but Section 641(1) states that an entity which acts as an agent of a payee is not engaged in money transmission and need not obtain a money transmission license. Consequently, if the check cashers would be, in this case, agents of a payee, there would be no legal objection to their assisting your client in collecting payments for its prepaid phone cards Agents of a payee must give customers a receipt which indicates that payment to the agent is deemed payment to the payee.
If the agency agreement does not make the check cashers an agent of the payee, the activity would not be legally acceptable for the check casher as the check casher would be engaged in illegal money transmission.
3. Departmental Regulations require that check cashers obtain the Departments approval prior to entering into an agency agreement with a licensed money transmitter. No such approval is required for agency agreements with payees. However, the Licensed Financial Services Division and the Legal Division of this Department must review the agreement with your client prior to its implementation to ensure that its provisions are consistent with the foregoing.
I trust that this letter is of assistance to you.
Very truly yours