In the money transmission industry, permissible investments’ (PI) regulations provide essential liquidity requirements to protect customers. Unfortunately, the variety and disparity in states’ PI regulations create confusion for licensees, and money transmitters’ compliance programs often overlook PI requirements. State money transmitter examiners observe frequent non-compliance in PI reporting and adequate maintenance of PI. Examiners often cite PI related findings with licensees in new industries, such as fintechs and virtual currency service providers. However, long-licensed money transmitters also exhibit difficulty in PI compliance. Despite the obstacles, state regulators prioritize PI as an essential component of oversight, with which money transmitters must prioritize compliance.

Licensees often fail to understand the purpose or applicability of PI, resulting in deficient reporting and, in some cases, insufficient maintenance. So what is PI, and why do state regulators place so much emphasis on it? Basically, PI regulations enforce liquidity requirements for licensed money transmitters to safeguard customers’ funds. Licensees must maintain low-risk and highly-liquid assets to fulfill obligations to customers. As a simplistic example, if a customer provides $100 with transmission instructions to a money transmitter, the company must safely maintain $100 until the fulfillment of the customer’s instructions. States allow certain low-risk and liquid assets as “permissible” methods to hold customer funds until fulfillment. Money transmitters demonstrate adequate PI by preparing reports showing the amount obligated to customers, or transmission liability, and the corresponding PI to meet or exceed those obligations.

States enforce PI requirements with good intentions but often enact complicated rules for a wide variety of transmitter business models operating across our complex financial system. To further complicate the issue, different states possess varying, and sometimes conflicting, PI regulations for reporting and maintenance. States may require PI greater than customer obligations at any point in time, at months’ end, or calculated on an average of daily customer obligations over a designated period of time. States may require quarterly or monthly preparation of PI reports, but not submission, while others require preparation and submission. States might require specific PI reporting forms, and others provide suggested templates for guidance. States also vary on allowable, or permissible, investments such as surety bonds penal sums, authorized delegate receivables, or ACH and card receivables. And in all that variety, licensees must also complete the generic PI portion of the NMLS quarterly call reports. This regulatory complexity can make demonstrating PI compliance difficult for transmitters, especially for those licensed in numerous jurisdictions.

Licensees often allow PI compliance to slip through the cracks by failing to recognize the requirements and assign responsibility within the organization. Money transmitters designate compliance officers and departments to oversee responsibility for Bank Secrecy Act (BSA) and Anti-money Laundering (AML) requirements; however, states’ PI doesn’t fall under federal BSA/AML laws. As a result, licensees may fail to assign PI responsibilities to BSA/AML compliance teams. A company’s financial and accounting departments may maintain the information required to monitor PI levels and produce reports, but companies may not assign responsibility for regulatory compliance to accounting staff. This regulatory limbo often results in negligence of PI requirements until states conduct licensing examinations, then licensees often scramble to scrape together PI reports at the last minute and inevitably incur violations.

States prioritize financial protection for the customers of money transmitters. PI regulations provide essential protections for customers’ money, and states will continue oversight of PI maintenance through company reports and the examination process. Licensed money transmitters must take steps to ensure compliance.

• Become familiar with the PI rules in all jurisdictions of licensure, and how they apply to the company’s products and services.
• Designate a responsible staff member or department to monitor PI maintenance and prepare reports.
• Document PI reporting and maintenance in written policies and procedures to ensure consistent, and explainable, reporting for submitting required states’ reports, NMLS call reports, and license examinations.
• Communicate with your state regulators when questions arise (and they will).

Washington’s Uniform Money Services Act, RCW 19.230 and WAC 208-690, prescribes PI maintenance and reporting requirements in the sections listed below.

• RCW 19.230.010(21) defines outstanding money transmission.
• RCW 19.230.170 requires preparation of monthly reports about PI.
• RCW 19.230.200 requires adequate PI greater than customer liability.
• RCW 19.230.210 lists allowable, or permissible, investments types.
• WAC 208-690-085 provides additional rules for PI maintenance and reports.