NYSBL 641 & 648
July 20, 2007
Dear Ms. [---]:
Your letter dated January 18, 2007, to the New York State Banking Department has been referred to me for reply. Please excuse the delay in responding.
In your letter, you asked whether any of three distinct, unidentified entities is required to be licensed as a money transmitter under Article XIII-B of the New York Banking Law in order to engage in a payment program under which consumers may pay for purchases at merchant locations via ACH debits by the entity to such consumers' checking accounts. The entity would make payments to the merchants for goods and services that the consumers purchased at such merchants by forwarding the funds to the merchants' accounts. The entities are 1) a nonbank entity that is your client (the "Client"), 2) an industrial bank and 3) a nonbank entity acting as an agent for an industrial bank.
Your letter does not state whether any of the entities has a New York office. In the event each of the entities' activities occur outside New York, the answer to your question is "no." 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.
In the event any of the entities' activities occur inside New York, the answer to your question will depend on the particular entity performing the activity as detailed further below.
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; provided, however, that nothing in this article shall apply to a bank, trust company, private banker, foreign banking corporation licensed pursuant to article two of this chapter or foreign banking company authorized to operate pursuant to the International Banking Act of 1978 (12 USC 3101 et seq.), as amended, savings bank, savings and loan association, an investment company, a national banking association, federal reserve bank, corporation organized under the provisions of section twenty-five-a of an act of congress entitled the "Federal Reserve Act", federal savings bank, federal savings and loan association or state or federal credit union. (Emphasis Added.)
1) The Client, which is a nonbank entity.
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 were an agent of the payees (i.e., the merchants), there would be no legal objection to its receiving of payments to be forwarded to them in the manner set forth above. From your letter, however, there is no indication that an agency relationship exists.
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 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 payee (the merchants), the activity would not be legally acceptable for the unlicensed 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, unless there is an agency agreement with each of the merchants and no risk to the payor.
2) An Industrial Bank.
An industrial bank, in the scenario you described, would not need to obtain a license to engage in the money transmission business because, in the opinion of the Department, an industrial bank is a "bank" for purposes of the highlighted language in the proviso quoted above and, thus, is exempted from licensing.
Article XIII-B of the Banking Law does not expressly define or limit the term "bank." We believe, however, that it is reasonable to conclude that a statechartered industrial bank is exempt from the licensing provisions of Article XIII-B of the Banking Law. Our view is supported by the interplay of another section of the Banking Law with a federal law that defines a bank to include a statechartered industrial bank.
Article 5-C of the Banking Law, which deals with interstate banking, sheds light on the term "bank."
The term "out-of-state state bank" means a state bank, as such term is defined in section 3(a)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(a)(2)). Banking Law Section 222.2.
In turn, section 3(a)(2) of the Federal Deposit Insurance Act (12 U.S.C. 1813(a)(2)) defines "state bank" as follows:
Thus, our view, based in part upon this definitional structure, is that the exemptions from licensing for a "bank" extend to an industrial bank chartered by a state other than New York in the same manner as the exemptions apply to any other out-of-state, state-chartered bank.
The term "State bank" means any bank, banking association, trust company, savings bank, industrial bank (or similar depository institution which the Board of Directors finds to be operating substantially in the same manner as an industrial bank), or other banking institution which -
(A) is engaged in the business of receiving deposits, other than trust funds (as defined in this section); and (B) is incorporated under the laws of any State or which is operating under the Code of Law for the District of Columbia (except a national bank)... (Emphasis Added.)
We further note that the Department has indicated informally in the past that the exemption from registration and licensing for a mortgage banker or mortgage broker under Article XII-D of the Banking Law for out-of-state, state-chartered banks with federal deposit insurance would extend to state-chartered industrial banks with FDIC insurance that meet the definition of "bank" under the Federal Deposit Insurance Act.
3) A Nonbank Entity Acting as an Agent for an Industrial Bank.
Given our determination that an industrial bank would not need to obtain a license to engage in the money transmission business because it is a "bank" for purposes of the highlighted language in the proviso quoted above, we must consider whether an agent of such a "bank" is likewise exempted. In our opinion, the answer to the question is "yes."
The highlighted language quoted above exempts an "agent of a licensee or an agent of a payee." We have determined that an agent of a bank is tantamount to an agent of a licensee within the meaning of the language of the statute. In this regard, we construed Banking Law Section 648 to allow banking organizations, which are exempt from the licensing requirements because they are highly regulated and supervised, to be able to use agents in essentially the same way as licensed money transmitters, whose agents are exempt from licensing except as provided in section 648. The Banking Department's opinion is that agents of a bank would be subject to, or exempt from, any requirement that they be licensed as money transmitters to the same extent as are agents of licensed money transmitters.
I trust that this letter is responsive to your inquiry.
Very truly yours,