What is Money Transmission?
Increasingly, state legislatures have drafted new laws aimed at defining a money transmitter. Some of these laws directly impact the payroll processing industry and, in a few cases, have resulted in heavy fines levied against certain processors for operating as an “unlicensed Money Services Bureau”.
Some states have worked together to have the same definition of a money transmitter, but many others have different definitions and licensing requirements. The process to become licensed is often burdensome and costly. Here’s what you need to know to protect yourself and your company from money transmission requirements.
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What is the definition of a money transmitter?
According to FinCEN, a person who engages as a business in the transfer of funds is considered a money service business (MSB) as a money transmitter. From our perspective, any client funds held for any period of time, for any reason in a processor's account may be subject to money transmitter licensing requirements.
In our processing experience, the most common type of transaction that would trigger this requirement would be if you are impounding tax monies and holding those funds for your clients. However, this can cover any funds that are held by the payroll service bureau, not just taxes.
How Can Kotapay Help?
Financial Institutions are exempt from money transmission licensing requirements. Therefore, as a division of First International Bank & Trust, Kotapay is not defined as a money transmitter. This allows us to operate with fewer restrictions and simplify things for your business. The best way for us to do that, is to set up a For-Benefit-Of, or FBO, account.
What is an For-Benefit-Of (FBO) account?
An For-Benefit-Of (FBO) account allows a company to manage funds on behalf of its clients without direct ownership of any account holding client funds. Kotapay will set up a FBO account, which is owned by Kotapay for the benefit of the company’s customers. The company is removed from having any direct ownership of client funds maintained in the FBO account, but the company is provided online access to the account balance and a transaction history for purposes of reconciliation. Kotapay holds the funds in the FBO account until it receives payment instructions from the company on behalf of its customers.
You must make your own determination whether usage of an FBO account eliminates the needs for your company to obtain a Money Transmission License (MTL) or similar license under applicable state law. Kotapay does not make any warranty or guarantee related to how laws and regulations in different states affect your business, whether your business requires a MTL or other license in any state, or the impact that the use of an FBO account may have on such licensure requirements
Will I be able to reconcile my account?
Yes, access to online banking will be given to view all transactions and balances in the account.
Will this process work for paper check payments?
Yes. If you have agencies that do not accept an electronic deposit, checks can be written from the FBO account for remittance to the taxing agency.
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