In the rapidly evolving world of financial services, businesses often find themselves navigating complex regulatory landscapes. This is particularly true for foreign Money Services Businesses (MSBs) looking to expand their operations into the United States. This article aims to provide a comprehensive understanding of the regulatory requirements for foreign MSBs operating in the U.S., the costs associated with compliance, and potential alternatives for conducting business.
Regulatory Requirements for Foreign MSBs in the U.S.
In 2012, the Financial Crimes Enforcement Network (FinCEN) issued a ruling stating that foreign MSBs, whether financial or non-financial entities, conducting business in the U.S. would be subject to the same licensing requirements as domestic entities. This means that foreign MSBs must obtain licenses in each state where they intend to do business, including all 50 states and the District of Columbia.
The Cost of Compliance
Obtaining licenses in the U.S. is a costly and time-consuming process. Depending on the nature of the business, the total cost, including demonstrating sufficient net worth, hiring a compliance officer, establishing a physical office, and undergoing audits, can reach upwards of $2.5 million. The process can take anywhere from one to two years to complete.
Business Model Considerations
The specific nature of an MSB’s operations can significantly impact its regulatory obligations. For instance, a business that exclusively deals in cryptocurrency and does not handle fiat currency may be exempt from licensing requirements in several states. However, this exemption is subject to two important caveats:
- The exemption only applies to businesses that facilitate cryptocurrency transactions via a licensed provider and do not directly handle fiat currency.
- The exemption does not cover all states. For example, while California may exempt such businesses, New York does not.
It’s important to note that these exemptions pertain only to money transmission laws and do not extend to regulations enforced by the Securities and Exchange Commission.
The Importance of Legal Opinions
Given the complexity and variability of regulatory requirements, it is highly recommended that businesses obtain a legal opinion from an attorney before proceeding. This legal memo serves as a form of insurance, providing a detailed analysis of the business’s regulatory obligations based on its specific operations and the current legal landscape. It’s crucial that businesses own this opinion and are able to publish it on their website.
In addition to a legal opinion, businesses may also seek a “no action” letter from the regulator, which essentially states that the regulator will not take enforcement action based on the business’s current operations.
Alternatives to Licensing
For businesses seeking a faster and potentially less costly route to market, partnering with an existing license holder can be an attractive option. This approach, often referred to as “white labeling,” allows the business to operate under the license holder’s brand, thereby bypassing the need for individual state licenses. However, this approach comes with its own set of considerations:
- The U.S. does not allow “passporting” of clients. This means that if a business eventually obtains its own licenses and wishes to transition its clients from the license holder, it may need to re-verify the clients’ identities.
- The license holder will likely require a revenue share agreement, which may not be agreeable to all businesses.
Navigating the U.S. regulatory landscape as a foreign MSB can be likened to traversing a complex maze. Each turn represents a different state with its own set of rules and requirements. The journey can be long and costly, but with careful planning, sound legal advice, and strategic partnerships, it is possible to reach the end successfully. As the financial services landscape continues to evolve, so too will the regulatory environment, making it all the more important for businesses to stay informed and adaptable.
This page was last updated on August 3, 2023.