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Move Over Feds — States May Spark “De-risking” Too

Post Categories: Blog

By: Dan Frechtling, SVP of Marketing and Chief Product Officer 


The unpredictability of five US bureaus governing financial institutions are nothing compared to the complexity 50 states can introduce. As complicated as the regulatory Olympics already are, rules are getting even more complex as US states enact laws that that may prompt de-risking.


State governments keep Operation Choke Point fresh

At the federal level, the House of Representatives passed a bill in February supported by the American Bankers Association to stop the Department of Justice from pursuing Operation Choke Point. But the states keep marching on.


In one example, Arizona Attorney General Mark Brnovich is relying on acquirers and payment processors to uphold a state prohibition on businesses engaging in tobacco sales without a state license. He bases his action on a state law that prevents anyone from offering “substantial assistance” to an entity disobeying a state ban on tobacco. This law now means payment processors that enable unlicensed merchants to sell tobacco products are guilty of “substantial assistance.” This interpretation deputizes such processors into law enforcement. According to Holli Targan of the law firm Jaffe, Raitt, Heuer & Weiss, “Arizona’s efforts are paying off.”


“On April 14, 2016, Visa released an announcement advising acquirers that they must take immediate action to ensure that their merchants comply with all applicable laws related to the sale and shipping of cigarettes. Visa advised that acquirers must identify and terminate merchants that engage in illegal online cigarette sales. The Visa bulletin further noted that it is the acquirers’ responsibility to confirm that all transactions introduced into the Visa system by their merchants are legal in both the buyers’ and sellers’ jurisdictions.”


Arizona tobacco businesses now have a higher risk profile for the Financial Institutions (FIs) that serve them. Continuing service to them is tantamount to “re-risking,” while discontinuing service is “de-risking.”


State money transmitter laws may choke payment processors and payment facilitators

A full 47 states have money transmitter laws in place. Says Heather Mark, director of compliance, ProPay: “at any given time, more than half a dozen may be considering changes to those regimes.” When Washington State’s Uniform Money Services Act became effective Jan 1, 2016, payment processors operating in the state took on a new burden. As explained by Sidley Austin,


“Persons engaged in merchant payment processing (including as bill payment processors on behalf of billers) are subject to licensing, regulation, supervision and oversight as a money transmitter by the Department under the Act.”


Once a firm has been categorized by a state as a money transmitter, it now may need to register with Financial Crimes Enforcement Network (FinCEN), because money transmitters are considered Money Service Businesses (MSBs). This means it needs to implement a compliance program and name a BSA/AML compliance officer, among other obligations.


Washington is not alone

A website called by Shikevich law firm allows you to click on all 50 states to see what legislation applies. Being a money transmitter means more than reporting to state authorities. It impacts the very nature of a payment processor’s business operations. As Mark states:


“It may become exceedingly difficult to find an acquirer. The current regulatory environment has led many acquiring banks to de-risk their portfolios, terminating relationships with businesses seen as too dangerous. As a result, MSBs may find it more difficult to successfully undergo due diligence with a potential acquiring bank.”


What to do

Both of these developments place an  even greater burden on FIs to know the types of businesses they are serving. A bank serving a tobacco business operating in Arizona without a license is on the hook — will it re-risk or de-risk? A processor with operations in Washington state has a new set of rules to abide by — will it continue or  withdraw from the state?


G2 KYC Solutions help banks ascertain if they have restricted or prohibited business customers in their portfolios — known or unknown — that could make them liable for violations of state law. These include not just tobacco and MSBs but also firearms, adult entertainment, gambling, illegal pharmaceutical, cannabis and many more. G2 KYC Solutions  also help processors and payment facilitators justify the health of their portfolios so they  can gain sponsorship from acquiring and commercial banks.


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