California Department of Business Oversight Issues Opinion Letter Declaring Foreign Check Clearing Services Not Subject to State’s Money Transmission Act

On August 24, the California Department of Business Oversight issued a redacted opinion letter clarifying that foreign check clearing services are not considered money transmission subject to the Money Transmission Act. In order to fall under the state’s Financial Code’s definition of money transmission, a financial institution must receive money or monetary value for transmission within the United States. Emphasizing the domestic prerequisite outlined in the code, the DBO’s opinion indicates that if a bank establishes an exchange rate for an American financial institution that has received a check for deposit written against a foreign bank, the exchange rate service provided by the bank is considered a foreign check clearing service and not “receiving money or monetary value in the United States.” Accordingly, such check clearing activity does not fall under the California Financial Code’s definition of money transmission.

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FinCEN Issues Geographic Targeting Order to Combat Stolen Identity Tax Refund Fraud in South Florida

On July 13, FinCEN issued a Geographic Targeting Order (GTO) requiring check cashers in two South Florida counties to strengthen identification requirements for customers cashing certain Federal tax refund checks. According to FinCEN, Miami-Dade and Broward Counties have become a haven for criminals who, using stolen identities, file fraudulent Federal tax returns and then cash the refund checks at a local check casher. Effective August 3 through January 30, 2016, the GTO will require check cashers located in those counties to obtain additional identifying information from customers seeking to cash Federal tax refund checks (including refund anticipation loan checks from third parties) that exceed $1,000. Issued in coordination with the IRS and the U.S. Attorney’s Office for the Southern District of Florida, the GTO will require customers to provide the following: (i) a valid government-issued identification; (ii) a digital photograph at the time of the transaction; (iii) a valid phone number; and (iv) a thumbprint. The GTO is intended to put a “roadblock in the path of those who would steal another person’s identity,” making it more difficult for the criminals to evade anti-money laundering controls and “reap the rewards of their actions.”

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OIG for U.S. Postal Service Probes Expansion Into Financial Services

On May 21, the Office of Inspector General for the U.S. Postal Service (OIG) issued a report titled, “The Road Ahead for Postal Financial Services.” The report follows a January 2014 white paper issued by the OIG, which explored how the U.S. Postal Service could expand its provision of financial products to underserved Americans. The report summarizes five potential approaches for increasing the Postal Service’s financial services offerings, including: (i) expand current product offerings, which include paper money orders, international remittances, gift cards, and limited check cashing, as well as adjacent services  (e.g., bill pay, ATMs); (ii) develop one key partner to provide financial services offerings, including possible expansion to general purpose reloadable prepaid cards, small loans, and/or deposit accounts; (iii) develop different partners for each product; (iv) make the Postal Service a “marketplace” for distribution of financial products of an array of providers; and/or (v) license the Postal Service as a financial institution focused on the financially underserved (although the OIG is not recommending this approach). Factors to consider when determining which approach to take, if any, include the legal and regulatory landscape; the effectiveness of cash management systems; dedication of the internal team, and public awareness of existing and potential services offered.

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Eleventh Circuit Holds Federal Law Preempts Florida’s Check-Cashing Fee Restriction For Out-Of-State Banks

On May 30, the U.S. Court of Appeals for the Eleventh Circuit held that with regard to out-of-state state banks, federal law preempts Florida’s prohibition on financial institutions settling checks for less than par value. Pereira v. Regions Bank, No. 13-10458, 2014 WL 2219166 (11th Cir. May 30, 2014). The ruling broadens a prior ruling that federal law preempts the same restriction with regard to national banks. Plaintiffs in this case filed suit on behalf of a putative class after the bank charged them a fee for cashing a check, claiming they received less than par value because of the bank’s fee. Florida law prohibits a financial institution from settling “any check drawn on it otherwise than at par.” The court explained that 12 U.S.C. 1831a(j) provides that the laws of a host state apply to any branch in the host state of an out-of-state state bank to the  same extent as such state laws apply to a branch in the host state of an out-of-state national bank. The court held that, based on 12 U.S.C. 1831a(j) and the court’s prior ruling regarding national bank preemption, the plaintiffs’ claims were clearly preempted. The court explained that assuming the relevant Florida law would prohibit Florida branches of out-of-state state banks from charging a fee to cash a check presented in person, that law would apply “to the same extent” that it applies to out-of-state national banks, and as such, is preempted.

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House Committee Members Express Concerns About Operation Choke Point

On April 8 the House Financial Services Committee held a hearing with the general counsels of the federal banking agencies regarding, among other things, Operation Choke Point, the federal enforcement operation reportedly intended to cut off from the banking system certain lenders and merchants allegedly engaged in unlawful activities. Numerous committee members from both sides of the aisle raised concerns about Operation Choke Point, as well as the federal government’s broader pressure on banks over their relationships with nonbank financial service providers, including money service businesses, nonbank lenders, and check cashers. Committee members asserted that the operation is impacting lawful nonbank financial service providers, who are losing access to the banking system and, in turn, are unable to offer needed services to the members’ constituents. The FDIC’s Richard Osterman repeatedly stated that Operation Choke Point is a DOJ operation and the FDIC’s participation is limited to providing certain information and resources upon request. Mr. Osterman also asserted that the FDIC is not attempting to, and does not intend to, prohibit banks from offering products or services to nonbank financial service providers operating within the law, and that the FDIC’s guidance is clear that banks are neither prohibited from nor encouraged to provide services to certain businesses, provided they properly manage their risk. Similarly, the OCC’s Amy Friend stated that the OCC wants to ensure that banks conduct due diligence and implement appropriate controls, but that the OCC is not prohibiting banks from offering services to lawful businesses. She stated the OCC has found that some banks have made a business decision to terminate relationships with some nonbank providers rather than implement additional controls.

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