FEDERAL PREEMPTION OF STATE LAW
Using the Bank Secrecy Act (BSA) as an example to show how Federal law and regulations preempt a Connecticut banking law. The context is whether Asker, an individual, is illegally operating as a money transmitter as defined in the BSA as well as under the Connecticut law.
The Original Question by the Asker on Avvo.com and the Response.ASKER: Am I considered a money transmitter if I received money from my dad overseas and allowed my brother in USA to use that money? My brother lives in IL and I live in CT on Visas. we are non-citizens. My brother needs some money for his college expenses. If my dad sent me money (about $5000) in my foreign account and I give it to my brother through the debit card associated with that account and he withdraws money in the USA, would I be considered a money transmitter in Connecticut?
ANSWER: That's an excellent and sophisticated question. You are referring to the federal law commonly referred to as the Bank Secrecy Act. The answer is NO, you are not regarded as a "money transmitter" as defined in the Act. My recollection is that there is an exception to this definition if you are only doing this transaction casually and not for profit. Otherwise, you would need to be registered, etc. If you email me at Avvo.com, I'll look up the statute and provide you with the citing authority.
The first email communication on Avvo.com by the Asker and the Response.ASKER: Thank you for your answer for my question on "Money Transmitter". You mentioned that since I am doing this not for profit, I will not be considered a Money transmitter. Can you provide me more information about this (you mentioned that you will look up the statute and the citing authority)? Thank you.
ANSWER: The operative terms of the regulations promulgated pursuant to the Bank Secrecy Act can be found at 31 C.F.R. § 1010.100(ff)(5)(i) and (ff)(8)(iii), read together. Subsection (ff)(5) states that a Money Transmitter is in the money services business. But Subsection (ff)(8)(iii) excludes natural persons who are involved as a Money Transmitter when done infrequently and not for gain or profit. I know that this is not obvious, even to many bank regulatory lawyers, but this situation is to your benefit, which I'm sure gives you a feeling of relief.
Below is the actual regulation in the Code of Federal Regulations.
(5) Money transmitter -
(i) In general.
(A) A person that provides money transmission services. The term “money transmission services” means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. “Any means” includes, but is not limited to, through a financial agency or institution; a Federal Reserve Bank or other facility of one or more Federal Reserve Banks, the Board of Governors of the Federal Reserve System, or both; an electronic funds transfer network; or an informal value transfer system; or
(B) Any other person engaged in the transfer of funds.
. . .
(8) Limitation. For the purposes of this section, the term “money services business” shall not include:
. . .
(iii) A natural person who engages in an activity identified in paragraphs (ff)(1) through (ff)(5) of this section on an infrequent basis and not for gain or profit.
I trust this is what you need.
The second email communication on Avvo.com by the Asker and the Response.ASKER: Thank you for your detailed explanation. I understood the federal statute. However, what about the Connecticut state law? am I in violation of any of Connecticut state law? This is what I came across:
Sec. 3. Section 36a-597 of the general statutes is repealed and the following is substituted in lieu thereof (Effective October 1, 2013):
(a) No person shall engage in the business of [issuing Connecticut payment instruments, or engage in the business of] money transmission in this state, or advertise or solicit such services, without a license issued by the commissioner as provided in [section 36a-600. No person shall engage in such business or in the business of selling Connecticut payment instruments as an agent] sections 36a-595 to 36a-610, inclusive, as amended by this act, and sections 18 and 19 of this act, except as an [agent] authorized delegate of a person that has been issued a license by the commissioner [as provided in section 36a-600 or an entity or a person exempt under section 36a-609] and in accordance with section 36a-607, as amended by this act. A person shall be deemed to be engaged in the business of money transmission in this state if such person: (1) Has a place of business in this state, (2) receives money or monetary value in this state or from a person located in this state, (3) transmits money or monetary value from a location in this state or to a person located in this state, (4) issues stored value or payment instruments that are sold in this state, or (5) sells stored value or payment instruments in this state. The licensee [and the agent] shall promptly notify the commissioner, in writing, of the termination of the contract between such licensee and [agent] authorized delegate.
Will I be considered as a business according to Connecticut laws? It would be great if you can clarify the above.
ANSWER: You are not in the money transmission business in the United States. Plain and simple. So, this Connecticut statute doesn't apply to you. You must look at the definition of "Money transmission" in § 36a-596 (9), which means "engaging in the business of issuing or selling payment instruments or stored value, receiving money or monetary value for current or future transmission or the business of transmitting money or monetary value within the United States or to locations outside the United States by any and all means including, but not limited to, payment instrument, wire, facsimile or electronic transfer." Read in context, § 36a-597 (a) (1) - (5) is intended to give the State of Connecticut the jurisdictional predicate for enforcing this law, but only if you are conducting a money transmission business in the United States, which, under the Bank Secrecy Law regulations, by definition you are not. In other words, this Connecticut law governs those in the money transmission business that are "found" within the State.
I know this is obscure but I hope this clarifies the answer for you.
The third email communication on Avvo.com by the Asker and the Response.ASKER: Thank you for the detailed explanation. So basically the federal law dictates what a "money transmission" business is. Connecticut law § 36a-597 (a) (1) - (5) defines when the state can claim that this happened in Connecticut. Am I getting this correct?
ANSWER: In a nutshell, YES, you got it. The banking system in the U.S. is very fragmented. No other country has so many federal agencies regulate banking, and then with each of the States regulating banking within its borders. But in this regard, under the Preemption Doctrine, the Federal laws and regulations pre-empt its State counterpart to the extent they are inconsistent.
Having said this, the Bank Secrecy Act of 1970 (BSA), also known as the Currency and Foreign Transactions Reporting Act, is a U.S. law requiring financial institutions in the United States to assist U.S. government agencies in detecting and preventing money laundering. Specifically, the act requires financial institutions to keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity that might signify money laundering, tax evasion or other criminal activities. Therefore, the BSA empowers the U.S. government to regulate the money transmission business. And many States have enacted into law their mini-BSA legislation to enable criminal prosecution for State offenses. This is not uncommon for States to do in non-banking legislation such as pertaining to environmental, consumer protection, and healthcare laws.
I hope this helps.
The fourth email communication on Avvo.com by the Asker and the Response.ASKER: Thank you, that was very helpful. So, not just in Connecticut, but I will not be a money transmitter in any state. right?
ANSWER: Yes, the federal Preemption Doctrine will apply to every State law that conflicts with the federal banking system unless the activities are wholly intrastate.
The fifth and final email communication on Avvo.com by the Asker and the Response.ASKER: Can you elaborate more on "unless the activities are wholly intrastate"?
Do you mean that if all the activities were done in California, then only California state laws apply rather than the federal laws?