July 9, 2007
Dear Ms. [---]
Your letter dated December 12, 2006, to the attention of Ms. Regina Stone, Deputy Superintendent, has been referred to me for reply.
In your letter, you requested the concurrence of the Banking Department with your opinion that your client, [---] (the "Client"), is not required to be licensed as a money transmitter under Article XIII-B of the New York Banking Law in order for it to engage in its current business activities in this state.
On this question of whether the Client would need to be licensed, the Department essentially disagrees with your conclusion and believes, for the reasons discussed below, that the Client would have to be licensed as a money transmitter based upon the information you supplied, except in the situation where credit card payments go directly from credit card accounts to accounts owned by the intended payees.
Your letter states that the Client is incorporated in Delaware and is a whollyowned subsidiary of a publicly traded company. The Client's primary business is facilitating electronic payments to the United States Internal Revenue Service, state governments, municipalities and counties through proprietary internet and telephone Interactive Voice Response ("IVR") systems.
You describe the following three activities of Client in New York:
- Payment Processing. Client's principal business, pursuant to contracts with government entities, is the operation of websites and IVR systems that permit individuals and companies to pay bills and obligations to the government entities for taxes, fines, etc. You indicate that payments are accepted via credit card and ACH transaction and that virtually all taxing authorities, including the IRS, consider payments made upon authorization of the transaction. When payment is made via credit card, the funds for payment are credited by the card companies directly into accounts owned by the government entities except that funds to pay a convenience fee to Client are credited directly into an account owned by Client.
- University Payments. Pursuant to contracts with colleges and universities, Client accepts payments from students and parents for tuition, books, etc. via the internet or through IVR systems on behalf of the colleges and universities. You indicate that payments are accepted via credit card and ACH transaction and that when payment is made via credit card, the funds for payment are credited by the card companies directly into accounts owned by the schools. The fees to Client are credited directly into an account owned by Client or remitted to it by the schools.
- Prepaid Meals. The Client offers a service allowing parents of secondary school students to pre-fund their childrens' school meals using credit cards or ACH transfers via the internet or using IVR systems. Funds are placed initially into a Client account before being disbursed to the schools at intervals set out in contracts.
At the outset, it is worth noting that your letter described the above activities occurring "in New York." Were that not the case, the conclusions we express would be different inasmuch as the opinion of the Banking Department is that money transmission activity conducted with New York State residents does not require a money transmission license under New York's Banking Law where the money transmitter itself or through agents has no physical presence in New York State. In such a case, there is no money transmission activity in New York State over which the Banking Department could establish jurisdiction.
The business of money transmission in New York State, as contemplated under Article XIII-B of New York's Banking Law, requires that one apply for a license. Banking Law, Section 641.1 provides that:
No person shall engage in the business of selling or issuing checks, or engage in the business of receiving money for transmission or transmitting the same, without a license therefor obtained from the superintendent as provided in this article, nor shall any person engage in such business as an agent, except as an agent of a licensee or as agent of a payee ... (Emphasis Added.)
The receipt of funds by the Client is within the meaning of the term "in the business of receiving money for transmission" as used in Section 641, quoted and highlighted above, and the Client is prohibited from engaging in this activity without a license, under Section 641, unless it were considered an "agent of a licensee or an agent of a payee" within the meaning of the language of the statute, also highlighted above.
The Department believes that, if the arrangement were structured so that the Client would be an agent of the payees (i.e., the government entities or schools), there would be no legal objection to their assisting in the collecting of payments in the manner set forth above. From your letter of December 12, 2006, however, there is no indication that an agency relationship exists (despite your conclusions to that effect) or that receipt of funds by the government entities or the schools unconditionally satisfies the obligations owed to the payees or operates as meal prepayments intended to be made to and binding upon the payee. Indeed, in connection with the "payment processing" service you describe, but not elsewhere, you state that "virtually all taxing authorities, including the IRS, consider payments made upon authorization of the transaction." Even this, however, falls far short of the standards we have required under the "agency exception" to the licensing requirement.
We observed in the past that, as part of agency agreements, agents of payees must give customers a receipt which indicates that payment to the agent is deemed payment to the payee. There can be no risk of loss to the payor if any of the transmitter fails to remit the funds. Whether or not the payee receives the funds, the payees must treat the payors as if, in effect, the payees received payment. If that treatment does not occur and if the transmitter (the Client, in this case) is not clearly made the agent of the payees, the activity would not be legally acceptable for the transmitter as it would be engaged in illegal money transmission.
Essentially, the Department's view is that, in delivering funds to the agent in connection with a money transmission program, there ought to be no greater risks than if the funds were delivered directly to the payee. Thus, based upon the information you supplied, the Client would have to be licensed as a money transmitter, except in the situation where credit card payments go directly from the credit card account to an account owned by the intended payee. Since these credit card payments go directly from the credit card account to an account owned by the intended payee, there appears to be no risk to the payor and it appears that there is no receipt of money for transmission by the Client within Banking Law, Section 641, cited above.
We also note that in your letter you indicated to us that, in connection with the program you described, you believe that the Client will not be required to register as a money transmitter under generally applicable state statutes. If you can supply us with persuasive opinions to that effect from other state banking departments or if you can give us evidence to show that the Client is, in fact, the agent of the payees, we would be willing to reexamine our conclusions above.
The opinion rendered herein is based on the facts set forth in your letter and may not be applicable to any other situation.
I trust that this letter is responsive to your inquiry.
Very truly yours,
cc: R. Stone