FinCEN: Escrow Company that transmits funds is not a MSB under Bank Secrecy Act

The Financial Crimes Enforcement Network (FinCEN) recently published five administrative rulings that considered the definition of “money transmitter” and the exemptions for certain business models under the Bank Secrecy Act (BSA).  

In one of these rulings, FIN-2014-R004 issued April 29, 2014, FinCEN determined that that providing escrow services to buyers and sellers in a internet sale of goods or services would not require the escrow agent to register with FinCEN as a money transmitter, even though the escrow services include transferring funds to the seller.  FinCEN reasoned that such activity fell under the exception provided under 31 CFR § 1010.100(ff)(5)(ii)(F):

The term “money transmitter” shall not include a person that only [...] [a]ccepts and transmits funds only integral to the sale of goods or the provision of services, other than money transmission services, by the person who is accepting and transmitting the funds.

 FinCEN ruled that such fund transfers were “integral” to the escrow services.  What we find interesting about this ruling is that FinCEN could have arrived at the same conclusion by determining that the escrowed fund transfers were integral to the ultimate sale of goods.  This suggests that a company can assess whether this  exception applies to its ecommerce business model by determining whether the fund transmissions in its model are integral to the other services provided by the company.   It’s hard to imagine an ecommerce model in which fund transmissions are not integral to the rest of the business — unless the entire business is nothing more than a fund transmission business.  When is the business nothing more than money transmission business?  FinCEN provided an example:

In FinCEN Ruling FIN-2008-R007, by contrast, FinCEN reached the opposite conclusion with respect to a company that accepted and transmitted funds in a confidential manner in order to protect a consumer’s personal and financial information from a merchant when the consumer purchased goods or services. This company, unlike the debt management company or the micro-lending clearinghouse, accepted any consumer and any merchant willing to use its confidential process, and played no active part in arranging, monitoring, verifying or endorsing the transactions that it processed. As a result, FinCEN concluded that this company did not provide a service independent of money transmission, notwithstanding its claim that it provided the service of security, but instead merely offered a secure method of money transmission.

As usual, FinCEN reaffirmed its broad interpretation what companies might fall under the definition of “money transmitter”, and limited this exception to the facts supplied by the Company.  

You can read the ruling here: FIN-2014-R004 issued April 29, 2014