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Mar 15, 2006

The Legal Line

Ed Maldonado

Dear Ed:I heard you speak several months ago to a group of Stored Value Card [SVC] providers, Processors and Banks and I have a follow-on question. At that time you mentioned that the Patriot Act and the Bank Secrecy Act have provisions that impose civil and criminal penalties for Money Service Businesses [MSB] and Money Transmitters that do not obtain federal and state licensure and registration. Audience questions and comments at the time focused on whether working with a Branded SVC or a Bank Product SVC required strict observation of these penalties as there had never been any recent enforcement. I noted at the conference that you did not back off the case-by-case analysis of each business model and that federal law reinforced state regulations and warned of inevitable enforcement of these provisions. My company‘s SVC business and operational model is that similar to Paypal. We use the Internet, a proprietary software, as well as point of sale vendors for our services. We are not associated with any “branded” Credit Card Provider and have MSB registration, Money Transmitter licensure in multiple states, and even Check Service Registration in a few states and have had so from the start. My job puts me in a position to analyze our competition. I have noticed that several small competitors have been “flying-under-the-radar” and have a “non-bank” product that allows for international transfers of funds (according to their website). They are also an open-loop provider, like us, and have hit the market hard with their promotional material and SVC. We are now feeling the effect and are adjusting our promotions to compensate.My problem and question is that my company has invested a considerable amount of money into licensure and registration for our services and I wonder if it has not really given us an advantage. Yes we are concerned about our liability and legal requirements but not to the point that smaller companies may take advantage of this. Is there any real bite to this or not?UN-BankedDear UN-B:The one problem when presenting regulations and licensure requirements in a conference setting is that audience questions and comments tend to challenge the presented materials and not much room is left to give examples. Usually I end up defending the black letter law or regulations just presented and spend less time discussing specific repercussions or examples. The Patriot Act and the Bank Secrecy Act do have “bite” and are being enforced particularly in the arena of unlicensed money transmission – although it usually is not widely publicized. While, to my knowledge, the application of criminal charges has not hit a SVC provider to date, unlicensed companies and persons engaged in the operation of money transmission have been hauled into federal court. One of the most recently tried criminal cases was out of Maryland/Virginia and really lays out the repercussions well. Although Court information on PACER indicates that there are still pending appeals, the details are public record if you wish to see for yourself. It is a compelling example.The case is United States v. Mohammad A. Bajwa, Case # AW-03-0156 found at 8:04-CR-00464-AW-1, which was tried and adjudicated on November 19th 2005 in the Maryland District Court, after being transferred from Virginia District Court. The long and short of this case is that pursuant to the Patriot Act money transmitters must obtain state licensure and register with FinCEN, a branch agency of the U.S. Treasury Department, before actually engaging in the money transmission business. In this case, Mr. Bajwa did not do so - and knowingly did not do so. From the record, trial testimony showed Mr. Bajwa actually ran a money transmission business in Virginia prior to March 2002 when the Virginia Bureau of Financial Institutions denied his money transmission application for Hashim Enterprises, Inc. - a company owned and managed by him. The Government then presented evidence connecting Bajwa to $6,000,000.00 USD ($6 million) he helped people wire to Pakistan and other countries from Virginia area clients. Prosecutors showed that Bajwa collected money from Virginia and then wired it to overseas banks and recipients. In the case of Pakistan, Bajwa’s own brother was the one who received the money and distributed it to its intended recipients. Prosecutors said Bajwa also illegally wired money to several other countries, including the United Arab Emirates, India, China, Taiwan, and Holland.While Bajwa’s case was also tried for other crimes, including wire fraud connected to a refinancing application he filed on a mortgage and immigration fraud, the federal convictions as to Illegal Money Transmission and Unlicensed Money Transmission cannot be downplayed. Public court records in Virginia show that Bajwa’s conviction for operating without a state money transmission license is now the third jury conviction since 2004. In the end, the federal judge sentenced Bajwa to 10 years in prison (120 months) for illegally transmitting more than $6,000,000.00 USD to Pakistan and other countries and ordered to give restitution in the amount of $3,500,000.00 USD (3.5 million) and forfeit his home in Herndon, Virginia. I don’t know about you, UN-B, but that’s “BITE” in my book.As far as your competitors that are under the “radar” as far as money transmission licensure – the bottom line is they’re on their own and will bear the consequence of their own actions. Hopefully, they have already sought legal counsel and are prepared to defend their lack of licensure, or apply ASAP. Likewise, there may be elements or parts of their SVC product or service that you don’t know of that shift the burden of licensure or compliance to another related entity. It really can be a case-by-case analysis. In your company’s case, these bases are covered and you can operate without fear of civil and criminal penalties for being unlicensed. As in the historic case of prepaid telecommunications providers, under-the-radar companies tend to be short-lived and unstable. Use this to your advantage over the long haul and don’t compete with it.Good Luck and Success in the Industry.Send your questions

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