Regulators are backing down from the controversial orders they have been handing out left and right to financial institutions. However, it seems that some state regulatory bodies are now creating controversial laws - requiring payroll companies to purchase expensive Money Transmitter Licenses (MTLs)…
MTLs have been around since the 70’s but up until recently, payroll processors were not required to have them. MTLs were developed to uphold the Bank Secrecy Act to ensure businesses transmitting money adhered to Anti-Money Laundering (AML) and Know Your Customer (KYC) laws.
Historically this applied to businesses transmitting money transfers, money orders and travelers checks, where the full information of the payments were not monitored by primary financial institutions or other regulatory bodies. For example, if an individual goes into a gas station to purchase a money order, there is no due diligence done to understand if the source of the funds is from an illegal activity.
You see, payroll processors primarily use ACH. ACH Rules require due diligence, including KYC and fraud monitoring considerations. All payroll processors are required to conduct an annual ACH audit to verify compliance with the Rules, but the problem is a lot of them ignore this responsibility because they think that they are covered under their processors or banking partners ACH audit. However, that’s simply not the case. And then, if they do conduct an ACH audit, they tend to utilize a self-audit or CPA firm where the person conducting the audit does not have a full understanding of ACH Rules. Not only does this not align with the spirit of the requirement, but it also means the payroll processors never adequately identify where they may need to make changes with their ACH processing.
Since they have failed to ensure a quality annual audit is conducted, it has ultimately caused a large issue to go unaddressed. To address these issues, state regulators are now requiring these businesses to obtain an MTL. The problem with this is that applying for and annually renewing these licenses come with hefty fees. On an annual basis, this could result in a payroll processor needing to pay these fees in all 50 states, which could end up costing them over a quarter of a million dollars, annually. This will make it nearly impossible for the small to medium payroll processors, that tend to have the best customer support, to stay in business….
For clarity, these requirements are driven by state regulations. Federal laws and requirements by FinCEN state that payroll processors are only considered Money Transmitters (MTs) if they are engaging in activities that make them MTs. However, state laws and definitions differ from federal ones. This adds to the situation because payroll processors must now consider definitions state-by-state and federally.
I ultimately believe that requiring payroll processors to have a MTL is a huge overreach by regulators. These are payroll transactions, not random payments. They are required to pay taxes and track these payments. And, it doesn’t matter if they get a MTL or not; they are still required to have an annual ACH audit.
While this is regulatory overreach and causes lots of issues for these payroll processors, don’t speak too quickly. Before you voice your opposition to regulators, make sure you are doing all of the requirements that most likely would have avoided this whole debacle in the first place. You are more likely to win the debate if you are able to prove you are addressing their concerns.
NEACH Payments Group can help! We can conduct your ACH audit and ACH risk assessment and also provide customized services to help ensure you are addressing your AML and KYC obligations in a way that not only protects the industry but also protects your business.