hardyp@ballardspahr.com | 215.864.8838 | view full bio

Peter is a national thought leader on money laundering, tax fraud, and other financial crime. He is the author of Criminal Tax, Money Laundering, and Bank Secrecy Act Litigation, a well-reviewed and comprehensive legal treatise published by Bloomberg BNA.

He advises corporations and individuals from many industries against allegations of misconduct ranging from money laundering, tax fraud, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breaches.  He also advises on compliance with the Bank Secrecy Act and Anti-Money Laundering requirements.

Peter spent more than a decade as a federal prosecutor before entering private practice, serving as an Assistant U.S. Attorney in Philadelphia working on financial crime cases. He was a trial attorney for the Criminal Section of the Department of Justice’s Tax Division in Washington, D.C.

The Pennsylvania Department of Banking and Securities (“DoBS”) just released Guidance declaring that virtual currency, “including Bitcoin,” is not considered “money” under the Pennsylvania Money Transmission Business Licensing Law, otherwise known as the Money Transmitter Act (“MTA”).  Therefore, according to the Guidance, the operator of the typical virtual currency exchange platform, kiosk, ATM or vending machine does not represent a money transmitter subject to Pennsylvania licensure.

This Guidance is important because it has implications beyond merely the burdens imposed by Pennsylvania law for obtaining a money transmitter license.  As we previously have blogged (here, here and here), it is a federal crime under 18 U.S.C § 1960 to operate as an unlicensed money transmitter business, which is defined in part as a business “operated without an appropriate money transmitting license in a State where such operation is punishable as a misdemeanor or a felony under State law, whether or not the defendant knew that the operation was required to be licensed or that the operation was so punishable.”  Thus, a state law violation can become a federal violation.  Further, the Financial Crimes Enforcement Network (“FinCEN”) has issued Guidance declaring that administrators or exchangers of digital currency – including popular crypto currencies such as Bitcoin – represent money transmitting businesses which must register with FinCEN under 31 U.S.C. § 5330 as money services businesses (“MSBs”), which in turn are governed by the Bank Secrecy Act (“BSA”) and related reporting and anti-money laundering compliance obligations.  Moreover, a failure to register with FinCEN as a MSB when required also represents a separate violation of Section 1960.  Drawing on the FinCEN guidance, federal courts have upheld the convictions of individuals who ran virtual currency exchanges and consequently were convicted of violating Section 1960 for operating unlicensed or unregistered money transmitter businesses.

The Pennsylvania Guidance

The Guidance is short and direct.  Its application is also potentially very broad.  After concluding that virtual currency does not constitute “money” under Pennsylvania state law, the Guidance then in part explains why many virtual currency exchangers are not subject to licensure in Pennsylvania as money transmitters:

Several of the entities requesting guidance on the applicability of the MTA are web-based virtual currency exchange platforms (“Platforms”).  Typically, these Platforms facilitate the purchase or sale of virtual currencies in exchange for fiat currency or other virtual currencies, and many Platforms permit buyers and sellers of virtual currencies to make offers to buy and/or sell virtual currencies from other users.  These Platforms never directly handle fiat currency; any fiat currency paid by or to a user is maintained in a bank account in the Platform’s name at a depository institution.

Under the MTA, these Platforms are not money transmitters.  The Platforms, while never directly handling fiat currency, transact virtual currency settlements for the users and facilitate the change in ownership of virtual currencies for the users.  There is no transferring money from a user to another user or 3rd party, and the Platform is not engaged in the business of providing payment services or money transfer services.

The Guidance then provides a similar analysis regarding virtual currency kiosks, ATMs and vending machines, focusing again on the concept of whether the business “touches” fiat currency.

The DoBS’s conclusion was not necessarily compelled as a matter of logic.  The MTA prohibits any person from “engag[ing] in the business of transmitting money by means of a transmittal instrument for a fee or other consideration with or on behalf of an individual without first having obtained a license from the department.”  The DoBS focused entirely on the definition of “money.”  Arguably, it could have chosen to focus instead on the defined term “transmittal instrument,” which the MTA more broadly defines as “any check, draft, money order, personal money order, debit card, stored value card, electronic transfer or other method for the payment of money or transmittal of credit[.]”  Other States may take a similar approach and focus on a single statutory term with a traditional definition, such as “money,” rather than choosing to focus on broader and more opaque verbiage in their respective statutes that is susceptible to more modern applications.

A Regulatory Patchwork Quilt

The DoBS Guidance is relatively clear, although the devil often lurks in the details.  In contrast, the approach of the various States regarding whether virtual currency exchangers represent “money transmitters” subject to state licensure frequently represents a confusing and fractured regulatory landscape, sometimes made more difficult by vague and old statutes, and/or lack of administrative guidance. We note here just a few examples of the potential conflicting approaches.  Our point here is not to resolve nuances, but rather to emphasize the current state of complexity:

  • New Hampshire: The selling, issuing, or transmitting of “convertible virtual currency,” even if the state considers it a “payment instrument” or “stored value,” is exempt from money transmitter regulations.  The New Hampshire Banking Department issued a statement saying it would no longer regulate businesses solely engaged in virtual currency transactions.  However, the statement also declared that “those who transmit money in fiat and cryptocurrency are still required to be licensed.”
  • Texas: The Texas Department of Banking issued in January 2019 a revised Supervisory Memorandum, which in part states as follows.  Ultimately, in Texas, “it depends.”

Because factors distinguishing the various centralized virtual currencies are usually complicated and nuanced, to make money transmission licensing determinations the Department must individually analyze centralized virtual currency schemes.  Accordingly, this memorandum does not offer generalized guidance on the treatment of centralized virtual currencies by the Money Services Act’s money transmission provisions.  On the other hand, money transmission licensing determinations regarding transactions with cryptocurrency turn on the single question of whether cryptocurrencies should be considered “money or monetary value” under the Money Services Act.

            . . . .

Because cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location is not money transmission.  Consequently, absent the involvement of sovereign currency in a transaction, no money transmission can occur.  However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled.  A licensing analysis will be based on the handling of the sovereign currency.

  • Washington: Under Washington State law, “[m]oney transmission” is specifically defined to mean “receiving money or its equivalent value (equivalent value includes virtual currency) to transmit, deliver, or instruct to be delivered to another location[.]”  The Washington Department of Financial Institutions has posted its guidance on virtual currency regulation, which states that the transmission of virtual currencies could make a company subject to Washington’s money transmission regulations, regardless of whether the company deals in fiat currency.

(This blog post was also published in Ballard Spahr’s Money Laundering Watch, a blog focused on covering the latest trends and developments in enforcement, compliance, and policy involving money laundering, fraud, and other criminal activity.  Click here to subscribe to Money Laundering Watch.)

The Federal Banking Agencies (“FBAs”) — collectively the Office of the Comptroller of the Currency (“OCC”); the Board of Governors of the Federal Reserve System (“Federal Reserve”); the Federal Deposit Insurance Corporation (“FDIC”); and the National Credit Union Administration (“NCUA”) — just issued with the concurrence of FinCEN an Order granting an exemption from the requirements of the customer identification program (“CIP”) rules imposed by the Bank Secrecy Act (“BSA”) under 31 U.S.C. § 5318(l) for certain premium finance loans. The Order applies to “banks” — as defined at 31 C.F.R. § 1010.100(d) — and their subsidiaries which are subject to the jurisdiction of the OCC, Federal Reserve, FDIC, or NCUA.

The Order generally describes the CIP rules of the BSA, which at a very high level require covered financial institutions to implement a CIP “that includes risk-based verification procedures that enable the [financial institution] to form a reasonable belief that it knows the true identify of its customers.” This process involves gathering identifying information and procedures for verifying the customer’s identity. Further observing that, under 31 C.F.R. § 1020.220(b), a FBA with the concurrence of the Secretary of the Treasury may exempt any bank or type of account from these CIP requirements, the Order proceeds to exempt loans extended by banks and their subsidiaries from the CIP requirements when issued to commercial customers (i.e., corporations, partnerships, sole proprietorships, and trusts) to facilitate the purchases of property and casualty insurance policies, otherwise known as premium finance loans or premium finance lending.

The key to the exemption — similar to other narrow exemptions previously issued by FinCEN in regards to the related beneficial ownership rule (as we have blogged, see here and here) — is that these transactions are perceived as presenting a “low risk of money laundering.” This finding is repeated throughout the Order, and is rooted in arguments made in letters submitted to FinCEN and the FBAs by a “consortium of banks.”

More specifically, the Order explains that premium finance loans present a low risk of money laundering, and therefore are exempt from the CIP rules, because of the following considerations and “structural characteristics,” raised either by the consortium of banks and/or the government itself:

  • The process for executing a premium finance loan is highly automated, because “most . . . loan volume is quoted and recorded electronically.”
  • These loans typically are submitted, approved and funded within the same business day and are conducted through insurance agents or brokers with no interaction between the bank and borrower — which means that this process renders it difficult for banks to gather CIP-related information efficiently.  These practical problems are exacerbated by the frequent reluctance of insurance brokers and agents — driven by data privacy concerns — to collect personal information.
  • Property and casualty insurance policies have no investment value.
  • Borrowers cannot use these accounts to purchase merchandise, deposit or withdraw cash, write checks or transfer funds.
  • FinCEN previously exempted financial institutions that finance insurance premiums from the general requirement to identify the beneficial owners of legal entity customers.
  • FinCEN previously exempted financial institutions that finance insurance premiums that allow for cash refunds from the beneficial ownership requirements.
  • FinCEN previously exempted commercial property and casualty insurance policies from the general BSA compliance program rule for insurance companies.
  • The exemption “is consistent with safe and sound banking.”

Although this exemption is narrow and somewhat technical, it represents yet another step in an apparent trend by FinCEN and the FBAs to ease the regulatory demands, albeit in a very targeted fashion, imposed under the BSA.  Clearly, the key argument to be made by other financial institutions seeking similar relief is that the particular kind of financial transaction at issue presents a “low risk of money laundering.”

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

The CFPB has issued a new elder financial abuse report, “Report and Recommendations: Fighting Elder Financial Exploitation through Community Networks,” and a related resource guide, “A Resource Guide for Elder Financial Exploitation Prevention and Response Networks.”

While the CFPB found that hundreds of counties around the country have developed strong, collaborative elder financial exploitation prevention and response networks, it also found that networks do not exist in most communities with only 25 percent of all U.S. counties currently having a network for addressing elder abuse issues.  In developing the report, the CFPB attended network meetings and interviewed representatives from 23 elder protection networks and various experts in the field.  In the report, the CFPB highlights “what such networks do, how they work, how they can work even better, and how they can be established.”  The report found that these collaborative networks improve the prevention, detection, reporting of, and response to elder financial exploitation.

In the report, the CFPB makes recommendations to existing networks and key stakeholders for how to develop and improve their communities’ efforts to combat elder financial abuse.  These recommendations include:

  • Professionals and volunteers working with or serving older adults, such as bankers, lawyers, law enforcement officers, prosecutors, and social workers, should create networks in communities where they currently do not exist, especially in communities with a large number of older people.  Networks should seek participation of law enforcement as network members.
  • Because financial institutions “are uniquely positioned to detect that an elder account holder has been targeted or victimized and to take action,” networks should seek to include financial institutions as members and financial institutions should seek to join and participate in local networks.
  • Networks in areas with older populations of diverse linguistic, ethnic, and racial backgrounds should seek to engage stakeholders that can serve these populations and deliver appropriate educational and case review services.

The resource guide covers the steps involved in starting and operating a network, such as the role of coordinators, finding network members, funding, and activities.  The guide also describes available CFPB resources.  In the guide, the CFPB again highlights the role of financial institutions as network participants and includes the American Bankers Association’s website as a source of contact information for local, regional and state entities to help networks seeking to partner with banks.

Earlier this year, the CFPB issued an advisory and a report with recommendations for banks and credit unions on how to prevent, recognize, report, and respond to financial exploitation of older Americans.  The advisory and report were the focus of a webinar conducted by Ballard attorneys.

As we have previously observed, elder financial abuse prevention can be viewed to fall within a financial institution’s general obligation to limit unauthorized use of customer accounts as well as its general privacy and data security responsibilities.  As a result, a financial institution that fails to implement a robust elder financial abuse prevention program could be targeted by the CFPB for engaging in unfair, deceptive, or abusive acts or practices.  In addition, a bank or credit union subject to CFPB supervision should expect CFPB examiners to look at its program for preventing elder financial abuse.  Many states have laws that address elder financial abuse.