Recently, the California Department of Financial Protection and Innovation released a new opinion letter covering aspects of the California Money Transmission Act related to certain agent of payee requirements. The redacted opinion letter examines whether the inquiring company’s product for donations to nonprofit organizations is exempt from the Money Transmission Act. DFPI also reviewed whether: (i) money held by the company in an operating account, related to MTA-exempt activities such as NPO donations, is stored value; and (ii) closed loop transactions, and specific bank-issued open-loop gift cards without cash access, are exempt from the MTA. The Washington state-headquartered company sells reward programs to businesses that are used to incentivize purchases by their customers, reward customer loyalty, and reward employee performance. The opinion letter does not address closed loop gift cards and open loop gift cards, as DFPI previously issued an opinion letter regarding these products on February 19, 2020, nor does it address a yet-to-be introduced reward program that deposits cash into a recipient’s account or provides credit to a specified credit card as the company already acknowledges that this service constitutes regulated activity under the MTA.
However, the opinion letter does address circumstances when an NPO donation is selected by a recipient from the company’s reward options. In this instance, the reward amount is transferred from the company’s operating account to its custodial bank account designated “For the Benefit Of Customers” held at a national bank. The company then “aggregates contributions to each NPO and distributes these amounts, less its 8% administrative fee, directly to the NPOs on a weekly basis.” According to the company, “[f]unds do not move out of the NPO Account until these payments are made and the NPO Account is not used for any purposes other than NPO Donations.” DFPI concluded that the company’s current NPO agreement satisfies the agent of payee requirements for exemption from the MTA, and that as such, NPO donations are not a regulated activity. Specifically, the company’s NPO agreement provides that the company is appointed as the NPO’s agent and is obligated to remit all funds collected on the NPO’s behalf to the NPO. Receipt of the funds from the company’s client “constitutes receipt by the NPO, even if the NPO does not receive the funds from [the client].” The company, and not the client or recipient, is solely responsible to the NPO, DFPI said, adding that “[c]lient funds temporarily being held in [the company’s bank] operating account in prepayment for closed loop gift cards, bank-issued open loop gift cards, and NPO donations are not stored value.”
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