Executive Summary:
- Attempting to circumvent money transmission laws is a common but flawed approach in fintech.
- No client in 18 years has successfully obtained a legal memo or bank approval proving exemption from money transmitter licenses.
- Regulators, not individuals or companies, ultimately decide compliance requirements.
- Seeking formal approval from regulators is the only way to ensure compliance, yet few take this step.
- Compliance is a necessary burden that ensures long-term sustainability and trust in the financial system.
Introduction: The Allure of Regulatory Loopholes
In the fast-paced world of fintech and payments, innovation often outpaces regulation. This dynamic has led many companies and individuals to believe they can outsmart the law—or at least find a way around it. The idea of structuring transactions to avoid the need for a money transmitter license is a common refrain. But after nearly two decades in the industry, I can confidently say: it doesn’t work.
This article explores why attempting to circumvent money transmission laws is not only futile but also dangerous. It’s a cautionary tale for those who think they can outwit regulators—and a reminder that compliance is not just a legal requirement but a cornerstone of trust in the financial system.
The Flawed Logic of “Eureka Moments”
Every so often, a client comes to me with what they believe is a groundbreaking idea. “We’ve structured the transaction in such a way that we’re not a money services business,” they say. “We’re touching the money, but not in a way that requires a license.”
At first glance, their funds flow diagrams might seem clever. But upon closer inspection, the flaws are glaring. The reality is that these “eureka moments” are often based on a myopic understanding of the law. They fail to account for the broader regulatory framework and the fact that regulators, not individuals or companies, have the final say.
The truth is, if your business involves handling money in any capacity, you’re likely subject to money transmission laws. No amount of creative structuring can change that.
The Myth of Legal Exemptions
When clients insist their approach is sound, I challenge them to prove it. “Go get a legal memo from your lawyer,” I say. “Have them confirm that your funds flow doesn’t require a money transmitter license.”
In my 18 years in this business, not a single client has returned with such a memo. Not one.
This isn’t because lawyers are unwilling to provide opinions. It’s because the law is clear: if you’re handling money, you need a license. No legal maneuvering can change that fundamental truth.
The Bank’s Role: A Reality Check
Another litmus test I often propose is seeking approval from the compliance officer of the bank the client plans to work with. “If you’re so confident,” I say, “get the bank to sign off on your structure.”
Again, the result is always the same. Banks, with their deep understanding of regulatory risks, refuse to endorse such arrangements. They know that any misstep could result in severe penalties—not just for the client but for the bank as well.
This should be a wake-up call for anyone trying to bypass compliance. If the bank won’t back you, why would you think the regulator will?
The Regulator’s Perspective: Why You Can’t Outsmart the System
The ultimate authority on compliance is the regulator. If you’re truly confident in your approach, I advise clients to go straight to the source. “Ask the regulator for an official note confirming you’re exempt from money transmission laws,” I say.
This process can take two to three months, but it’s the only way to be certain. Yet, no client has ever taken this step.
Why? Because deep down, they know the answer. Regulators exist to protect the integrity of the financial system. They’re not in the business of granting exemptions to those trying to skirt the rules.
The Cost of Non-Compliance
Trying to outsmart the regulator isn’t just futile—it’s risky. The penalties for non-compliance can be severe, ranging from hefty fines to criminal charges. Beyond the financial cost, there’s the reputational damage. Trust is the foundation of the financial system, and once it’s lost, it’s nearly impossible to regain.
Moreover, the time and resources spent trying to circumvent the law could be better spent building a compliant, sustainable business. Compliance may be a nuisance, but it’s a necessary one.
Conclusion: Embrace Compliance as a Competitive Advantage
The idea of outsmarting the regulator is a seductive one, but it’s ultimately a fantasy. Compliance isn’t just a legal requirement—it’s a competitive advantage. Companies that embrace compliance demonstrate their commitment to integrity and trust, qualities that are invaluable in the financial sector.
So, the next time you’re tempted to cut corners, remember: the regulator is always one step ahead. Instead of trying to outsmart them, work with them. Build a business that’s not just innovative but also compliant. In the long run, it’s the only way to succeed.
Final Thoughts
The financial industry thrives on innovation, but innovation must be grounded in compliance. Trying to outsmart the law is a losing game—one that no one has ever won. By embracing regulation, fintechs and banks can build a stronger, more trustworthy financial system for everyone.
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This page was last updated on February 3, 2025.
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