12.05.2011

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Updates

Now that the late night and early morning holiday shopping frenzy has passed, we bring you the final update in the Perkins Coie 2011 Holiday Wrapping Paper series.  The Financial Crimes Enforcement Network of the Department of the Treasury ("FinCEN") recently provided interpretive guidance on the final rule amending the Bank Secrecy Act's regulations establishing comprehensive regulatory requirements for prepaid access ("Final Rule") by answering frequently asked questions ("FAQs").  To discuss issues that retail clients face in complying with the Final Rule, Perkins Coie will be hosting an Interactive Entertainment Roundtable on Thursday, December 8, 2011 from 8:00am to 9:30am.  This update is a high level summary of those subject to compliance with the Final Rule and what such compliance requirements entail.  The summary is guided by the interpretation provided in the FAQs. 

On July 26, 2011, FinCEN issued  the Final Rule. The Final Rule applies regulations regarding money service businesses ("MSBs") to “providers” and “sellers” of "prepaid access."  The Final Rule became effective on September 27, 2011.  In response to industry comments, FinCEN extended the time for compliance with most of the requirements imposed on sellers, as well as the registration requirement imposed on providers, to March 31, 2012.  FinCEN additionally explained that it will not initiate any compliance matter or enforcement action prior to March 31, 2012 for violations of the Final Rule, nor will FinCEN assess any civil money penalties for violations of the Final Rule that occur prior to March 31, 2012. 

Retail merchants should actively evaluate their gift card, gift certificate, stored value card, and store credit policies in light of the Final Rule.  The Final Rule generally regulates prepaid programs, which are arrangements under which a person provides certain types of prepaid access.  The definition of prepaid program excludes certain types of prepaid access, which are further described in this update.  Merchants must determine both whether they are selling prepaid access that is not exempted from the definition of a prepaid program and, even if the prepaid access is exempted, whether they are meeting the requirements to avoid being regulated as a seller of prepaid access.  If the prepaid access a retail merchant issues is exempt from the definition of a prepaid program, and the retail merchant has implemented policies and procedures necessary to avoid high volume sales of prepaid access, then the retail merchant will not be required to comply with the onerous obligations of the Final Rule.  If the prepaid access issued is a prepaid program, or the retail merchant is selling high volumes of prepaid access to customers, then the retail merchant must comply with the Final Rule.

The Final Rule, as clarified by the FAQs, applies to prepaid products and participants in the prepaid industry, including retail issuers of prepaid access, in the following ways:

  • The Final Rule regulates all prepaid access, including future access to products or services, such as software, songs, telephone minutes, and games.  It is important for retail merchants, when evaluating its prepaid products, to understand that application of the Final Rule is likely not limited to devices that are denominated in dollar value, but rather prepaid access likely includes devices that can be redeemed for a specific good or service.
  • Closed loop prepaid access (including in-store credit for merchandise returns), which most retail merchants utilize, for the first time is regulated as a prepaid program if more than $2,000 can be associated with the prepaid access device or vehicle on a given day.  This limitation includes reloads.  For example, if a prepaid access device can never hold more than $2,000 at a time, but during a given day the device begins with a load of $1,800, the holder spends $500, and the holder reloads $500 to the device, $2,300 would have been associated with the device in one day.  Such prepaid access would fall within the definition of a prepaid program, and subject the retail merchant to the regulatory requirements of the Final Rule.  Retail merchants should develop procedures to limit the amount of value that can be associated with a prepaid access device in a given day in order to avoid having a prepaid program and being subject to the requirements of the Final Rule.
  • Low-value ($1,000 or less) open loop prepaid access, for the first time, is regulated as a prepaid program if it can be (1) used internationally, (2) transferred between or among other persons within the prepaid program, or (3) reloaded by a non-depository (non-bank) source.  Re-loads made through retail store transactions (e.g., cash, check or credit card), wire transfers originating at a MSB, or checks payable to a payee other than the provider of prepaid access all constitute reloads by a non-depository source.
  • Persons who sell prepaid access that is not exempt from the definition of a prepaid program are regulated as a seller of prepaid access if the prepaid access can be used before the customer's identity is verified.  Retail merchants should look carefully at any programs under which they resell third party gift cards.  If the third party gift cards that a retailer resells are not exempt from the definition of a prepaid program the merchant's resale would subject them to the regulatory regime of the Final Rule.
  • Persons who sell $10,000 or more of prepaid access per person per day and do not have policies and procedures in place that are reasonably adapted to prevent such sales are regulated as a seller of prepaid access.  This regulation of high volume sales of any prepaid access (including prepaid access that is otherwise exempt from the definition of a prepaid program) is intended to address sales to the end user/customer of the prepaid access, not to apply to businesses in the distribution channels that move prepaid access products to market.  Business to business bulk sales of prepaid access do not need to be limited to $10,000 per business per day provided the business recipient of the prepaid access is not the end-user.  All retail merchants who sell prepaid access, including those that sell their own gift cards and those that resell a third party's gift cards, should implement policies and procedures to prevent the sale of $10,000 or more of prepaid access to a single customer in a day.  FinCEN advised retailers to consider typical customers, locations, and volume of prepaid access sales in developing policies and procedures reasonably adapted to prevent sales of $10,000 or more of prepaid access per person per day.

The Final Rule, as clarified by the FAQs, imposes the following obligations on persons who constitute providers or sellers of prepaid access:

  • Providers and sellers of prepaid access are required to comply with recordkeeping requirements related to customer identifying information and transactions, implement an effective anti-money laundering program, and report suspicious activity.
  • Additionally, providers of prepaid access are required to register with FinCEN as MSBs.

Questions about the Final Rule or Prepaid Access

For more information regarding the Final Rule or prepaid access compliance, please contact J. Dax Hansen (via e-mail; 206.359.6324) or Naomi A. Sheffield (via e-mail; 206.359.8078).

© 2011 Perkins Coie


 

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