The California Money Transmission Act: Boon to Consumers or Bane to Innovation?

By James Mariani*

I. Introduction

Recently California passed the Money Transmission Act (CA MTA), which some believe to be a threat to innovation in Silicon Valley and the death knell for certain types of startups.[1]  The CA MTA “prohibits a person from engaging in the business of money transmission in California or advertising, soliciting, or holding itself out as providing money transmission unless licensed [] or exempt from licensure,”[2] thus expanding California’s previous money transmission regulations and licensure requirements in broad terms while assigning regulation and licensing authority to the California Department of Financial Institutions (DFI).[3]  The Act now applies to domestic money transmitters and includes stored value device issuers, as well as other businesses that offer new types of alternative payment and mobile applications.

II. Background

Money transmission laws date back to 1936 in California after money transmitter businesses were created to take advantage of a new market of immigrants wishing to send money back to their native land.[4]  Regulations were originally designed to prevent money laundering, fraud, and other financial crimes, however after the events of September 11, 2001, the financing of terrorist activities jumped to the forefront prompting many states to pass money transmission laws. Congress responded with its own legislation, passing the USA PATRIOT Act, which among other things, amended 18 U.S.C. § 1960 criminalization of acting as an unlicensed money transmitting business in a state that requires such a license, by making the mens rea requirement one of general intent. The District of Columbia and 48 states have similar money transmitter laws, however none seem to be experiencing the uproar and criticism experienced in California.[5]  This can most likely be attributed to two issues: the CA MTA is broader and has more expensive licensing requirements than what is typical among the states and California has an environment of unique, highly entrepreneurial channels and a large startup volume.

III. The California Money Transmission Act

The CA MTA provides that “a person shall not engage in the business of money transmission in this state, or advertise, solicit, or hold itself out as providing money transmission in this state, unless the person is licensed or exempt from licensure . . . .”[6]  Based on findings that the failure of money transmission businesses to fulfill their obligations would cause harm to consumers and the state while undermining public confidence and general welfare, the legislature designed the act with the purported purpose of protecting the interest of persons in the state who use money transmission services, of providing for the safe and sound conduct of the business of licensees, and to maintain public confidence in licensees.

“Money Transmission” is defined broadly to mean selling or issuing payment instruments, selling or issuing stored value, or receiving money for transmission.[7]  A “payment instrument” is defined as an instrument for the transmission or payment of money or monetary value, whether or not negotiable, excluding issuers who also redeem the instrument for goods or services provided by the issuer.[8]  “Stored value” means monetary value representing a claim against the issuer that is stored on a digital or electronic medium and accepted as means of redemption for money or as payment for goods or services excluding cards issued by businesses that also redeem the card for goods or services provided by the issuer.[9]  Finally, “receiving money for transmission” broadly includes any transaction where money or monetary value is received for transmission within or outside the United States by electronic or other means—thus possibly including certain novel mobile payment applications and emerging payment platforms that are not offered by banks or other regulated depository institutions.[10]

These broad terms change existing regulations in several ways.  First of all, the Act combines three existing license regimes—traveler check issuers, money order sellers, and foreign money transmitters—into one. Secondly, it newly subjects domestic money transmitters and stored value, or open loop, issuers to licenses. Finally, it criminalizes engaging in money transmission in California without a license. It is important to note that this law applies to anyone who engages in its prohibitions in California or for California residents.

1. Licensure Requirements

Just as the CA MTA’s defining prohibition is seemingly broad and open-ended, likewise are its license requirements, which are more demanding than what is typical among the states.[11]  A license is only attainable by a corporation or limited liability company and is issued by the Commissioner of the California Department of Financial Institutions (Commissioner).[12]  An application requires a nonrefundable $5,000 fee along with a multitude of specified information provided “in a form and in a medium prescribed by the [C]ommissioner.”[13]  This section also includes a catchall provision entitling the Commissioner to “any other information the [C]ommissioner requires with respect to the applicant” as well as the ability to waive or replace specified information requirements.[14]  The Commissioner is authorized to conduct an examination of an applicant, at the applicant’s expense, and then approve its application if certain specific findings are made including that “the financial condition of the applicant is otherwise such that it will be safe and sound for the applicant to engage in the business of money transmission,” the applicant and its agents are of good character and sound financial standing, it is competent, its plan affords reasonable promise of successful operation, and it is reasonable to believe the applicant will be compliant once licensed.[15]  In addition to the broad terms of authorizing a license, § 2036 provides a supplementary and powerful catchall phrase entitling the Commissioner to “impose on any authorization, approval, license, or order issued pursuant to this chapter any conditions that he or she deems reasonable or necessary to the public interest,” including exemptions from the license requirement.[16]

          a.     The Net Worth or “Sound Financial Standing” Requirements

When designing the CA MTA, the California legislature found that “the failure of money transmission businesses to fulfill their obligations would cause loss to consumers, disrupt the payments mechanism in this state, undermine public confidence in financial institutions doing business in this state, and adversely affect the health, safety, and general welfare of persons in this state.”[17]  Based on this concern, the legislature added large security deposit requirements in order to ensure that licensees were of sound financial standing in order to prevent the failure of money transmission businesses and weed out “fly-by-night” company applicants.[18]  The security requirement however is ambiguous and broad—as is the trend throughout the Act—providing that as a security, a licensee will deposit cash, securities, or a surety bond in “such amount as the [C]ommissioner may find and order from time to time as necessary to secure the faithful performance of the obligations of the licensee . . . .” If a licensee sells or issues payment instruments or stored value, then it must maintain securities or a surety bond of at least $500,000 or 50 percent of the California average daily outstanding payment instrument and stored value obligations up to $2,000,000. A licensee that engages in receiving money for transmission must maintain a security or surety bond in an amount greater than the average daily outstanding obligations for money received for transmission in California ranging from $250,000 to $7,000,000. The security, money, bonds, and their proceeds are deposited with the State Treasurer and “shall constitute a trust fund for the benefit of persons in California” who were customers of the licensee in the event of its failure.[19]

          b.     Other Post-license Compliance Requirements

In addition to the security deposit requirements, the CA MTA also includes several regulatory compliance provisions such as paying an annual $2,500 fee (among other conditional licensee fees);[20] filing audit reports and specific informational reports—including total volume of activities, transactions, obligations, etc.;[21] and providing consumers with certain disclosures, notices, and records.[22]

2.    Noncompliance Penalties

The Commission has yet to exercise its enforcement capabilities, but they are broad and powerful as presented in the statute. The CA MTA authorizes the Commissioner to suspend or revoke a license if “the Commissioner finds that a licensee or agent of a licensee has, among other things, violated the provisions of the CA MTA or engaged in fraud or unsound practices . . . .”[23]  If a money transmitting business fails to attain a license and conducts business regardless, it could be faced with heavy civil penalties, criminal penalties, or both. Also frightening is the possibility that the CA MTA may, in conjunction with § 1960 of the USA PATRIOT Act, result in an unknowingly unlicensed money transmitting business being guilty of committing a federal general intent crime.  This fact is exceptionally worrisome, as many companies may not realize that they require a license due to the Act’s ambiguity.  Also, the expensive licensing requirements can be crippling to some startups that are unable to afford the license requirements.  As this Act only recently went into effect, it is difficult to predict the scope of the possible enforcement actions, the weight of their ensuing penalties, or how such actions will play out.

3.     Who Requires a License?

The breadth of the CA MTA has stirred sizeable criticism and prompted many to ask who exactly requires a license. “A spokewoman from the DFI advised companies to ask themselves simple questions:”

Do you take funds/value from A and agree to pay them to B on behalf of A; and/or Do you take funds/value from A, and store it so that A can make purchases from third parties or take cash out at a later date.[24]

This answer however, is no less broad than the language of the statute.  It could potentially cover a wide array of companies from Airbnb, for renting hosts’ rooms to travelers; to Apple, for taking money from customers and paying it to App developers; and to Zynga, for selling virtual currency. There has already been confusion between DFI and a company on the Act’s application; Airbnb believes the licensing requirements do not apply to them, and DFI believes the opposite. DFI has shown that it is willing to work with companies, like Square who didn’t even apply for a license until a year after the Act went into effect. This leniency though, might be temporary as the Act is relatively new and possesses penalties that are potentially crippling.  When interpretations between a company and DFI differ on the law’s application, litigation might be required.  In such cases, criminal enforcement and civil penalties may be at stake.  If a money transmitting business does fail, the security bond requirements of the Act are supposed to make consumers whole, which may or may not justify the high compliance cost.

FaceCash is a startup that stopped doing business in California because it couldn’t afford the security deposit requirements. The company was unable to receive an exemption from the state and embarked upon litigation against California. The CA MTA cannot be enforced against FaceCash because it discontinued its business in California, but what if it had not?  Companies that can’t afford the security deposits and aren’t sure whether the Act applies to them may be faced with asking themselves whether they should risk the potential penalties rather than try and comply with the Act’s high licensing requirements.

IV. Conclusion

The DFI publishes a list of the companies that currently are licensed under the CA MTA as a money transmitting business.[25]  The best strategy for a company presently is to look at this list and determine if its business model is similar to those companies that require and have attained a license. If its business model is innovative, using the plain English test passed down by the DFI is the next best choice. However, until the scope of the Act’s enforcement and penalties are clearer, many startup companies will be dissuaded from conducting possible money transmission business and risking high penalties and possible criminal prosecution. In this sense, the CA MTA is detrimental to innovation, and a new, expensive burden for the many startups that make their home in California.


*J.D., College of Law, University of Illinois, expected 2013

[1] Money Transmission Act, Cal. Fin. Code § 2000 (West 2012); see Chris Hinyub, The Money Transmission Act: A Boon to Banks, a Bane of Small Businesses, IVN.us (May 25, 2011), http://ivn.us/2011/05/25/money-transmission-act-boon-banks-bane-small-businesses/ (“[T]he Money Transmission Act is designed to kill innovation.”); Owen Thomas, This Innovation-Killing California Law Could Get A Host of Startups in Money Trouble, Business Insider (July 11, 2012, 6:21 PM), http://www.businessinsider.com/california-money-transmitter-act-startups-2012-7 (“[Startups’] entrepreneurial impulse could be stifled by a surprisingly broad statute governing money transmission in California . . . .”).

[2] Marie Hogan, California’s New Money Transmission Law Sweeps Up, Joseph & Cohen (May 19, 2011), http://josephandcohen.com/2011/05/californias-new-money-transmission-law-sweeps-up/.

[3]Jonathan Pompan, California Enacts Sweeping New Law Targeting Money Transmitters, Venable LLP (Oct. 2010), http://www.venable.com/california-enacts-sweeping-new-law-targeting-money-transmitters-10-05-2010/.

[4] Andrea Lee Negroni, Risky Business: State Regulation of Money Transmitters, CLEAR News (Goodwin Proctor LLP, Bos., Mass.) Spring 2003, at 1–2, available at http://www.goodwinprocter.com/~/media/Files/Publications/Attorney%20Articles/2003/Risky_Business_State_Regulation_of_Money_Transmitters.ashx.

[5] Jonathan L. Pompan, Understanding the Relationship Between Money Transmitter Laws and Regulations and Debt Management Plans, Venable LLP (Jan. 20, 2012, 9:30 AM), http://www.aiccca.org/images/AICCCA%20Presentation%20-%20Understanding%20the%20Relationship%20between%20Money%20Transmitter%20Laws%20and%20Regulations%20and%20Debt%20Management%20Plans%20(January%2020%202012).pdf.

[6] Money Transmission Act, Cal. Fin. Code § 2030 (West 2012).

[7] Id. § 2003(o).

[8] Id. § 2003(q); see Hogan, supra note 2 (listing as examples: a check, draft, or money order).

[9] Fin § 2003(v); see Hogan, supra note 2 (distinguishing Visa gift cards, which are included; from cards issued by leading coffee chains, which are excluded).

[10] Fin § 2003(s); Hogan, supra note 2.

[11] See Pompan, supra note 9 (explaining that typical requirements for state licensing include “good moral character”, “sufficient financial responsibility”, “business experience”, “confidence of the public”, “a minimum net worth of [e.g.] $150,000”, and “3 years experience in money transmission or other related financial services”).

[12] Money Transmission Act, Cal. Fin. Code § 2031 (West 2012); Pompan, supra note 2.

[13] See Fin. § 2032 (listing specified information requirements from § 2032(c)(1)–(22)).

[14] Id.

[15] See id. § 2033 (listing specific findings from  § 2033(b)(1)–(5)).

[16] See id. § 2036.

[17] Id. § 2001(c).

[18] Id. §§ 2033, 2037; Danielle Rodabaugh, California Money Transmitter Company Closes, Possibly to Avoid $750,000 Surety Bond, Suretybonds.com (July 8, 2011), http://www.suretybonds.com/blog/california-money-transmitter-company-closes-possibly-to-avoid-750000-surety-bond/1411 (“The state established the high surety bond requirement to keep fly-by-night companies out of the market.”).

[19] Fin. § 2037; Pompan, supra note 2.

[20] Fin. § 2038. See § 2038(e)–(h) for additional conditional fees.

[21] Id. § 2039 (listing specific requirements for respective required reports); Pompan, supra note 2.

[22] Fin. §§ 2100–2106; Pompan, supra note 2.

[23] Fin. § 2035; Pompan, supra note 2.

[24] Id.

[25] Directory of Money Transmitters, CA.gov, http://www.dfi.ca.gov/directory/mt.asp (last updated Sept. 5, 2012, 9:31:16 AM).