Prepaid Funeral Contracts, Perpetual Care Cemeteries, and Money Services Businesses

 

Index - Special Audits Division

Outstanding Industry Memorandums 

 

Memo Number

Issued To

Subject

Date Issued / Revised

1006

All Institutions Regulated by the Texas Department of Banking;
All Examining Personnel and
the Department Ombudsman

Request for Reconsideration of Examination Finding (REF)

05-31-13

1013

Money Services Business License Holders

Sharing Examination Reports With a Bank

02-22-16

1014

All Perpetual Care Cemetery Certificate Holders

Examination Rating System for Perpetual Care Cemeteries

12-01-11

1015

Money Services Businesses

Outsourcing of Compliance Functions

02-22-16

1017

Rescinded.

   

1018

Prepaid Funeral Contract ("PFC") and Perpetual Care Cemetery ("PCC") Licensees

Distribution of Prepaid Funeral Contract and Perpetual Care Cemetery Reports of Examination

11-01-13

1019

Money Services Businesses (MSB) Licensees

Distribution of Money Services Businesses Reports of Examination

11-01-13

1021

Texas Finance Code Chapter 151 License Holders

Consumer Awareness About Fraud-Induced Wire Transfers

01-17-06

1022

All Money Services Businesses License Holders

Examination Rating System for Money Services Businesses

12-12-11

1023

All Money Services Businesses License Holders

Examination Frequency Policy for Money Services Businesess

9-01-18

1024

Money Service Businesses Licensees

Accepting Money Services Businesses (MSBs) Reports of Examination (ROEs) of Other State Agencies

10-19-12

1026

All Prepaid Funeral Benefit Holders

Prepaid Funeral Contract Modifications at the Time of Death

11-03-09

1027

All Perpetual Care Cemetery Certificate Holders

Burial Marker or Monument List Requirement

06-13-11

1028

All Prepaid Funeral Benefit Providers and Sellers

Compliance with Prepaid Funeral Contract Provisions

11-22-11

1031

All Perpetual Care Cemetery Certificate Holders

Examination Frequency for Perpetual Care Cemeteries

09-01-12

1035

Foreign Money Transmitters

Licensing of Foreign-Located Money Transmitters Under Texas Finance Code Chapter 151 (the Money Services Act)

05-01-13

1036

Money Services Business License Holders

Background Check Self-Certification for Money Services Businesses Chapter 151 (the Money Services Act)

11-01-13

1037

All Virtual Currency Companies Operating or Desiring to Operate in Texas

Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act

04-01-19

1038

Money Services Business (MSB) License Holders

Appointment of an Authorized Delegate to Conduct Money Transmission on Behalf of a License Holder

10-13-14

1040

Money Services Business License Holders

Recommended File Documentation for Money Services Business License Holders that Conduct Business through Authorized Delegates, Foreign Agents and Counterparties, and Gateway Agents

10-29-15

1041

Money Services Business License Holders

Examination Policy for Domestic MSBs that Conduct Business from a Non-traditional Office Location

11-24-15

1042

All Institutions Regulated by the Texas Department of Banking

Effect of Criminal Convictions on Licensing

10-17-17

SUPERVISORY MEMORANDUM - 1006

May 31, 2013

TO:

All Institutions Regulated by the Texas Department of Banking
All Examining Personnel and the Department Ombudsman

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Request for Reconsideration of Examination Finding (REF)

Policy

It is the policy of the Department to provide sound supervision of the entities it regulates through fair and unbiased examinations and monitoring.  In the event that a material disagreement arises regarding an examination finding or rating, this policy addresses the proper process to request a Reconsideration of an Examination Finding (REF).

Reconsideration of Examination Finding During an Examination

If a material disagreement between Department examiners and an entity under examination arises regarding an examination finding, the entity should first  attempt to resolve the dispute with the Examiner-In-Charge (EIC) of the examination. Entities are encouraged to discuss any conflicting issues during an examination with the EIC and to work closely with the EIC to ensure that all available information is received and fully explained.

If a satisfactory resolution is not reached, the entity may further pursue its concerns with the EIC's supervisor.  For examinations conducted by the Bank and Trust  Supervision Division, the Regional Director,  Chief Trust Examiner, Chief IT Security Examiner, or the Director of Bank & Trust Supervision may be contacted. For examinations conducted by the Special Audits Division, the Director of Special Audits may be contacted. 

Request for Reconsideration of Report of Examination Finding

If, after the Report of Examination is received and an entity continues to have an unresolved objection with one or more finding(s) or rating(s) in the Report of Examination, the entity may file a written request for review of the matter with the Banking Commissioner. The written request should be submitted to the Texas Department of Banking Ombudsman at 2601 N. Lamar Blvd., Austin, Texas 78705. A request for a REF should be submitted within 30 days after receipt of a Report of Examination and should include a full description of the matter in dispute, along with supporting documentation.

The objection(s) will be investigated by the Ombudsman who is appointed by the Commissioner.  The Ombudsman may request additional information from the entity requesting the REF and obtain documents from the examining division. The Ombudsman performs an independent analysis and makes a recommendation to the Commissioner regarding the objection. The Commissioner will issue a final determination in the form of a written response  to the entity. The supervised entity requesting the REF has no right to a hearing or further appeal after the Commissioner has rendered a decision.

As a general rule, supervisory decisions and actions continue in effect during this process. However, new supervisory decisions or actions based on examination findings associated with a REF may be suspended until the review is completed and the Commissioner makes a final determination.

Withdrawal of Request

A REF may be withdrawn by an entity at any time during the review process by submitting a written request to the Ombudsman.

SUPERVISORY MEMORANDUM - 1013

February 22, 2016

TO:

Money Services Business License Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Sharing Examination Reports With a Bank

BACKGROUND

The Texas Department of Banking (Department) has learned that some banks have expressed reluctance to open or maintain accounts for Money Services Businesses (MSBs). For this reason, some MSBs have expressed a desire to make copies of Reports of Examination (ROEs) issued by the Department available to banks to demonstrate their compliance with state and federal law. The Department is committed to assisting licensed MSBs to ensure that banking services are available, and this Supervisory Memorandum establishes the Department's policy in this matter.

STATEMENT OF POLICY

Much of the information contained in an ROE is confidential under Texas Finance Code §151.606 and therefore prohibited from general release. Moreover, the ROE itself is Department property that cannot be shared without permission from the Department.

This Supervisory Memorandum authorizes a licensed MSB to make ROEs issued by the Department in connection with examination of its MSB activities available to a depository bank if that bank's management requests a copy as part of its due diligence procedures or if the MSB wants to demonstrate its compliance with state and federal statutes. A licensed MSB may also share its ROE with management of a bank it has approached about opening an account for its MSB business.

However, before an MSB may release an ROE to a bank, it must take two actions. First, it must redact personal information about any customer as well as any reference to suspicious activity reports that have been filed. Second, it must enter a written agreement with the bank in which the bank acknowledges that the ROE is confidential information under Texas Finance Code §151.606 and agrees to take appropriate measures to maintain that confidentiality. For examination purposes, the MSB must maintain a list of every bank to which it releases an ROE and a copy of each confidentiality agreement. A bank receiving an MSB's ROE in this manner may not release any portion of the ROE to third parties without express written consent of both the Department and the MSB.

The authorization provided in this Supervisory Memorandum only applies to these circumstances. Accordingly, under different circumstances an MSB must contact the Department for authorization to release an ROE. This authorization also only applies to ROEs issued solely by the Department; it does not apply to any ROE issued in connection with a joint examination performed by multiple state regulatory agencies. In the case of a multi-state joint examination, the MSB must contact the Department and each participating state regulator to obtain appropriate authorization to release the ROE. Be advised that in some cases that will not be possible as several states have statutes that prohibit their regulators from releasing ROEs under any circumstances.

SUPERVISORY MEMORANDUM - 1014

December 1, 2011

TO:

All Perpetual Care Cemetery Certificate Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Examination Rating System for Perpetual Care Cemeteries

Background

The rating system communicated through this Memorandum represents an update and revision to the system last revised in 2006.

Overview

The Department of Banking periodically examines the trust funds and related records of perpetual care cemeteries pursuant to Chapters 711, 712 and 714 of the Texas Health and Safety Code (Health Code), and Section 26 of the Texas Administrative Code.  HB 2495 which became effective September 1, 2011 amended Chapter 712 of the Health Code to require a certificate holder to demonstrate minimum net worth requirements as a condition of renewal.

During examinations, a certificate holder must be able to demonstrate that the certificate holder is operated in a safe and sound condition and that they meet the minimum net worth requirement outlined in Section 712.003 of the Health Code through submission of current financial statements or tax returns. As a result of this statutory change, the financial condition needs to be a component considered when evaluating and determining the overall risk profile of the certificate holder.

As a result of the examination, the certificate holder is assigned a uniform risk rating of 1 to 5 based upon:  the quality of perpetual care fund administration; compliance with applicable statutes and rules; recordkeeping adequacy; maintenance of the cemetery; overall financial condition and adherence to sound fiduciary principles.  A uniform risk rating of 1 indicates the strongest level of compliance and the least degree of supervisory concern.  Certificate holders rated a 5 are accorded the highest degree of supervisory concern due to critical deficiencies in administration/compliance and a high level of risk to fund beneficiaries.

Disclosure Policy

It is the policy of this Department to advise regulated entities of the tentative ratings assigned by this agency at the conclusion of their examinations.  Final ratings are communicated in the Report of Examination.  Ratings for perpetual care cemeteries are not confidential by statute and are released in Open Records requests.

Rating System for Perpetual Care Cemeteries

Rating "1"  (Strong Overall Condition)

The certificate holder is assigned a uniform risk rating of 1. Certificate holders in this group are sound in every respect; any adverse findings or comments are of a minor nature and can be resolved in the normal course of business by management.  Such certificate holders have demonstrated a willingness and ability to comply with applicable laws and regulations, and adhere to sound fiduciary principles. The overall financial condition of the certificate holder is adequate commensurate with the risk imposed by its size, nature and activity. Certificate holders in this group give no cause for supervisory concern.

Rating "2"  (Satisfactory Overall Condition)

The certificate holder is assigned a uniform risk rating of 2. Certificate holders in this group are generally satisfactory but may reflect a few weaknesses.  Trust fund deposits, fiduciary responsibilities and recordkeeping are generally within statutory compliance.  Violations of law and operating weaknesses are considered minor. The overall financial condition of the certificate holder is satisfactory commensurate with the risk imposed by its size, nature and activity.  Management presents no regulatory concerns.  To the extent that deficiencies are correctable in the normal course of business, supervisory concern is not warranted.

Rating "3" (Marginal Overall Condition)

The certificate holder is assigned a uniform risk rating of 3. Certificate holders in this group exhibit operating and compliance weaknesses ranging from moderate to marginally severe.  Violations of applicable law may be in evidence, some of which may be repeat criticisms.  Operating records are inadequately maintained, required recordkeeping is less than satisfactory, and/or deposits to the trust fund have not been made in a timely manner.  Additionally, adherence to sound fiduciary principles in the investment and/or administration of perpetual care trust funds may be lacking and these operating and compliance weaknesses may have resulted in a trust fund deficiency. The overall financial condition of the certificate holder may be less than sufficient commensurate with the risk imposed by its size, nature and activity.  Further, management may lack the ability or willingness to effectively address weaknesses within appropriate timeframes. Certificate holders in this group require more than normal supervision to assure correction of deficiencies and preservation of trust funds.

Rating "4"  (Unsatisfactory Overall Condition)

The certificate holder is assigned a uniform risk rating of 4. Certificate holders in this group exhibit severe operating and compliance weaknesses.  Problems may include:  an immoderate volume of significant violations of law, repeat criticisms, a material deficiency in statutory perpetual care trust fund requirements, significant recordkeeping deficiencies, and/or the failure to invest trust funds in accordance with sound fiduciary principles.  Additionally, identified criticisms are not being addressed or resolved by management. The overall financial condition of the certificate holder may be inadequate commensurate with the risk imposed by its size, nature and activity.  Certificate holders in this group require special supervisory attention to assure prompt corrective action. 

Rating "5"  (Poor Overall Condition)

The certificate holder is assigned a uniform risk rating of 5. Certificate holders in this group exhibit performance or conditions which are critically deficient in numerous major respects, resulting in a nonexistent or materially inadequate volume of trust funds to protect the interests of fund beneficiaries. Problems arise from incompetent or neglectful administration, substantive and repeated violations of applicable laws and regulations, and/or willful departure from sound fiduciary principles.  Such conditions evidence a flagrant disregard for the interests of the trust's beneficiaries, and prompt action is necessary.  The overall financial condition of the certificate holder may be critically deficient commensurate with the risk imposed by its size, nature and activity.  Certificate holders in this group are of the greatest supervisory concern and as such, require ongoing supervisory attention.

SUPERVISORY MEMORANDUM - 1015

February 22, 2016

TO:

Money Services Businesses

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Outsourcing of Compliance Functions

PURPOSE

Licensed Money Services Businesses (MSBs) sometimes experience difficulty hiring and retaining qualified compliance personnel. It is therefore not unusual for MSBs to employ independent contractors to fill various compliance roles. This memorandum establishes the policy of the Texas Department of Banking (Department) regarding such outsourcing of a license holder's compliance functions.

OVERVIEW

Under Texas Finance Code §151.202, an MSB applicant or license holder must demonstrate its competence and general fitness to comply with all applicable state and federal law. If an MSB  organization does not have an employee managing and directing the MSB's compliance with state and federal law then the MSB does not possess the requisite competence and general fitness. Accordingly, the person who directs and manages an MSB's compliance program, such as a chief compliance officer or similar officer, must be an employee of the organization rather than a consultant or independent contractor. An MSB may outsource any part of its compliance program, including having experienced consultants assist in designing its compliance policies and procedures and performance of most compliance functions, so long as a knowledgeable employee has final decision-making authority in this area.

SUPERVISORY MEMORANDUM - 1018

November 1,  2013

TO:

Prepaid Funeral Contract ("PFC") and Perpetual Care Cemetery ("PCC") Licensees

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Distribution of Prepaid Funeral Contract and Perpetual Care Cemetery Reports of Examination

The purpose of this memorandum is to help ensure that examination findings warranting the Board of Directors (Board) attention are communicated to the individuals who are primarily responsible for overseeing corrective action. In the instances where the licensee is a corporate entity, the responsibility and accountability for oversight of the licensee's operations, including compliance with applicable laws and regulations, ultimately rests with the corporate board of the licensees.

In those situations where the licensee is a corporate entity and the Report of Examination (ROE) reflects an assigned risk rating of 1 or 2, the Department will not require the Board to discuss the ROE in the Board's minutes, unless the ROE requires the licensee to implement a corrective action plan. If the ROE instructs the licensee to implement a corrective action plan, the Board must discuss the ROE and make note of the discussion at its next board meeting and provide that information to the Department at the next examination.  Further, in those situations where the licensee is a corporate entity and the ROE involves material criticism and an assigned risk rating of 3 or greater or is a limited scope examination, the Department will request the licensee's primary contact to notify the Board that the Department will require Board members to sign and acknowledge that they have reviewed the ROE and return this acknowledgment with their response to the ROE.  For situations involving substantial criticism and an assigned risk rating of 4 or 5, the Department will require the Board to call a special meeting to discuss the ROE and to provide the Department with a Board approved corrective action plan for noted violations and deficiencies.  Department staff may attend this Board meeting to convey Department findings.

While examiners of PFC and PCC licensees should continue to discuss their findings during exit meetings with the local designated contacts, the ROE should be addressed to Chairman of the Board of Directors, if applicable, and copied to the designated contact person of the licensee.

SUPERVISORY MEMORANDUM - 1019

November 1, 2013 

TO:

Money Services Businesses (MSB) Licensees

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Distribution of Money Services Businesses Reports of Examination

The purpose of this memorandum is to help ensure that examination findings warranting the Board of Directors (Board) attention are communicated to the individuals who are primarily responsible for overseeing corrective action. In the instances where the licensee is a corporate entity, the responsibility and accountability for oversight of the licensee's operations, including compliance with applicable laws and regulations, ultimately rests with the corporate board of the licensees.

In those situations where the licensee is a corporate entity and the Report of Examination (ROE) reflects an assigned risk rating of 1 or 2, the Department will not require the Board to discuss the ROE in the Board's minutes, unless the ROE requires the licensee to implement a corrective action plan. If the ROE instructs the licensee to implement a corrective action plan, the Board must discuss the ROE and make note of the discussion at its next board meeting and provide that information to the Department at the next examination.  Further, in those situations where the licensee is a corporate entity and the ROE involves material criticism and an assigned risk rating of 3 or greater or is a limited scope examination, the Department will request the licensee's primary contact to notify the Board that the Department will require Board members to sign and acknowledge that they have reviewed the ROE and return this acknowledgment with their response to the ROE.  For situations involving substantial criticism and an assigned risk rating of 4 or 5, the Department will require the Board to call a special meeting to discuss the ROE and to provide the Department with a Board approved corrective action plan for noted violations and deficiencies.  Department staff may attend this Board meeting to convey Department findings.

While examiners of MSB licensees should continue to discuss their findings during exit meetings with the local designated contacts, the ROE should be addressed to Chairman of the Board of Directors, if applicable, and copied to the designated contact person of the licensee.

SUPERVISORY MEMORANDUM - 1021

January 17, 2006

TO:

Texas Finance Code Chapter 151 License Holders

FROM:

Randall S. James, Banking Commissioner

SUBJECT:

Consumer Awareness about Fraud-Induced Wire Transfers

Intent of Issuance

This supervisory memorandum describes the issue of fraud-induced wire transfers and informs Chapter 151 license holders of the Department's concerns regarding this activity. It also provides guidance and establishes best practices for license holders with regards to developing customer awareness programs to combat fraud-induced wire transfers.

Overview

The use of wire transmitters by telemarketers and scam artists in and outside the United States to defraud consumers has become increasingly prevalent in the past few years and more and more cases of fraud-induced wire transfer activity is being seen today. These scam artists tend to prey on elderly individuals but also target any person who is willing to provide money for the obtainment of promised lottery winnings, game prizes, advance-fee credit cards, loans, merchandise, or a variety of other assets. Vulnerable customers are tricked into sending substantial sums of money through schemes involving contests, sweepstakes, and advance fee credit card loan scams. Scam artists normally require the consumer to send cash via wire transfer for a promise to deliver the goods to the consumer. But unfortunately, consumers are left empty-handed and soon realize that they have been scammed by unscrupulous telemarketers and other crooks whose sole goal is to steal money.

Implementation of Wire Fraud Consumer Awareness Programs

As a member of the wire transfer industry, it is crucial that your organization become an active participant in helping to protect consumers targeted by telemarketing scams and other criminals who defraud through the use of wire transfers. As the primary regulator of money services businesses in Texas, the Department has a responsibility to ensure that awareness regarding wire fraud is brought to the forefront so that Texas consumers who use money transmitters are provided ample opportunity to guard against scam artists. In addition, license holders are responsible to assess fraud-induced wire transfer risk within their organization and to establish policies to protect against identified risk.  At a minimum, license holders should employ best practices in developing a consumer awareness program tailored for its organization and the customers it serves.

Following is a list of suggested actions and policies that we consider to be key elements of an effective consumer awareness program dealing with fraud-induced wire transfers. These steps are already being taken by some of our license holders. This is not an all-inclusive list and is only provided to you as a guide in developing your own program. Your risk assessment concerning fraud-induced wire transfers should also serve as a roadmap for establishing and implementing your fraud-induced wire transfer consumer awareness program.

Consumer Warning - Provide written information to the consumer about wire fraud on transaction receipts, forms, or other information provided to the consumer. This same information should also be provided to customers that conduct Internet transactions. The information provided to the customer should be in English and it is recommended that the information also be provided in another language if it is determined that the license holder's customers find it easier to communicate in another language such as Spanish or Vietnamese.  The example below shows sample language for the disclosure.

HELP PREVENT CONSUMER FRAUD!

• Are you sending money to claim lottery or prize  winnings, or on a promise of receiving a large amount of money?

• Are you sending money because you were "guaranteed" a credit card or loan?

• Are you  responding to an Internet or phone offer that you aren't sure is honest?

• Are you sending money to someone you don't  know or whose identity you can't verify?

If so, ask the sales clerk to stop your transfer immediately, or call (name of your company at 1-800-xxx-xxxx.)  If your money has not been picked up yet, it will be returned to you.

Consumer Education - Establish some form of consumer education program to assist customers in avoiding fraud-induced wire transfers and to help customers understand the dangers of these wire transfers. These programs could include the issuance of written material to consumers or offering programs that consumers can attend to learn about fraud-induced wire transfers.

Reimbursement to Consumers - Establish a policy which addresses reimbursing wire principal amount and associated fees (for money transferred that has not yet been paid to the beneficiary) for consumers who make a reasonable claim that the transfer was fraudulently induced. The reimbursement would only take place when the money transferred has not been paid out to the beneficiary.

Agent Training and Communication - Supplement and revise current agent training programs to include discussions about fraud-induced wire transfers and ways to recognize if a customer may be a victim of wire fraud. This information can be provided to agents in the form of live presentations, through training videos, or by revising written reference guides and manuals provided to agents. For license holders that have the technical capacity, license holders could issue periodic e-mails (monthly) to all agents highlighting specific trends or developments relating to fraud-induced wires.  For agents or locations that are determined to have a significantly higher level of fraud-induced wire transfers, the license holder should consider person-to-person or telephone training for these offices.

Closure of Locations - Close locations that are complicit in fraud-induced transfers or who knowingly ignore the fraud. In addition, if certain employees at the location are the complicit or knowingly ignoring parties, the license holder should terminate such employees or if they are employees of an agent, the license holder should insist upon termination of such employees as a condition to continued agent status. Termination or suspension of an agent should occur if the agent has not taken reasonable steps to reduce the fraud noted by the license holder.

Blocking of Transfers - Procedures should be implemented to have the ability to temporarily interdict a wire transfer if the license holder receives notice from a law enforcement authority (local, state, or federal) that a fraud-induced wire transfer is occurring or will occur. The license holder should also implement procedures allowing for the resumption of a wire transfer if the consumer-transferor is contacted, and after the license holder provides reasonable anti-fraud information, the consumer-transferor instructs the license holder to complete the transaction. The license holder should also notify the informing party if the transfer is resumed.

Sharing of Complaint Information - Procedures should be implemented to share a consumer's complaint made to the license holder that a money transfer has been induced by fraud or deception. The license holder should seek the permission of the consumer to share the complaint information with the Department of Banking and United States law enforcement officials, and if requested by the Office of the Attorney General, should also provide the information to the Office of the Attorney General in the state where the consumer at issue resides and if known, where the recipient is located. The following information relating to the transaction should be shared: name, address and telephone number of the transferor; the date and amount of the transfer; the designated recipient; the identification, if any, presented by the recipient of the transfer; the date and actual location of receipt; and the nature of the consumer's complaint.

Conclusion

We encourage you to assess the risk of fraud-induced wire transfer activity at your business. Based on the risk assessment outcome, you should implement measures to prevent and deter fraudulent activities.  In addition, you should provide information to consumers to prevent them from being the victims of a wire transfer fraud scam.

For further information about this memorandum, contact Special Audits Division Director Russell Reese in Austin at (512) 475-1324.

SUPERVISORY MEMORANDUM - 1022

December 12, 2011

TO:

All Money Services Businesses License Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Examination Rating System for Money Services Businesses

Background

The rating system communicated through this Memorandum represents an update and revision to the examination rating system which was implemented on March 31, 2006 .

Overview

The Department of Banking periodically examines money services businesses pursuant to Chapters 151 and 278 of the Texas Finance Code and Chapter 33 of the Texas Administrative Code.  As a result of the examination, the license holder is assigned a rating of 1 to 5 based upon: the degree of compliance with state and federal reporting and recordkeeping statutes; the effectiveness of anti-money laundering policies and practices, adherence to net worth, security, and permissible investment requirements; and overall financial condition.

In an effort to provide money services businesses (MSBs) with a more uniform rating system, the Department is adopting the Uniform Money Transmitters Rating System (MTRS). The MTRS was developed and adopted by the Money Transmitter Regulators Association (MTRA) which the Department is a lead member state. The MTRS ratings are very similar to the composite ratings previously used by the Department and with this adoption, MSBs will now receive the same examination ratings, regardless if the examination is conducted jointly with other MTRA member states or if the examination is conducted solely by the Department. 

A rating of 1 indicates the strongest level of compliance and the least degree of supervisory concern.  License holders rated a 5 are accorded the highest degree of supervisory concern due to critical non-compliance with applicable statutes, materially deficient policies, a weak financial condition, and noted operational deficiencies.

Disclosure Policy

It is the policy of the Department to advise regulated entities of the tentative ratings assigned by the Department at the conclusion of their examinations.  Final ratings are communicated in the Report of Examination.  The ratings of individual licensees are not a matter of public information and are confidential.

Composite Rating System for Money Services Businesses

Rating "1"  (Strong Overall Condition)

Money transmitters rated a composite "1" are sound in every respect and in substantial compliance with laws and regulations. Any findings or weaknesses noted are relatively minor and can be corrected in the normal course of business.  Such money transmitters are financially strong, exhibit strong performance and risk management practices relative to the organization's size, complexity, and risk profile. Recordkeeping and anti-money laundering policies and practices are satisfactory.  These money transmitters are capable of withstanding normal business fluctuations and require minimal supervision.

Rating "2"  (Satisfactory Overall Condition)

Money transmitters rated a composite "2" are fundamentally sound and in substantial compliance with laws and regulations. Only moderate weaknesses are present and can be corrected in the normal course of business with management's capabilities and willingness. Such money transmitters are financially stable, exhibit satisfactory performance and risk management policies and procedures relative to the organization's size, complexity and risk profile. Recordkeeping and adherence to anti-money laundering policies and procedures is generally satisfactory.  These money transmitters are capable of withstanding normal business fluctuations and require limited supervision.

Rating "3"  (Marginal Overall Condition)

Money transmitters rated a composite "3" exhibit a combination of weaknesses that range from less than satisfactory to moderately severe and violations of laws and regulations may be evident and recurring. The money transmitter may not be resistant to adverse business conditions.  Such money transmitter's risk management practices may be less than satisfactory relative to the organization's size, complexity and risk profile.  Recordkeeping and adherence to anti-money laundering policies and procedures may be deficient and less than acceptable.  Management may lack the ability or willingness to effectively address weaknesses within the appropriate timeframes.  Generally, such money transmitters require more than normal supervisory attention to address their weaknesses. Overall strength and financial capacity, however, are still such that their future viability should not be a concern.

Rating "4"  (Unsatisfactory Overall Condition)

Money transmitters rated a composite "4" exhibit serious weaknesses and/or violations of laws and regulations that may be recurring that cause its overall condition to be unsafe and unsound. Serious financial and/or managerial deficiencies may result in conditions that threaten the money transmitter's viability.  These money transmitters are generally not capable of withstanding business fluctuations and risk management practices are generally unacceptable relative to the organization's size, complexity and risk profile.   Substantial weaknesses pertaining to recordkeeping and compliance with anti-money laundering policies and procedures may be noted.  Close supervisory attention is required and immediate corrective action by management is necessary to address outstanding problems and weaknesses.  Failure of the money transmitter to immediately correct deficiencies may result in an enforcement action, a suspension or revocation of the license.

Rating "5"  (Poor Overall Condition)

Money transmitters rated a composite "5" exhibit critical weaknesses and a combination of other identified weaknesses and/or violations of laws and regulations that may be recurring that cause its overall condition to be considered extremely unsafe and unsound.  The volume and severity of problems are beyond management's ability and willingness to control and correct. Materially deficient recordkeeping and anti-money laundering policies and procedures may be noted.  The transmitter has inadequate risk management practices and immediate corrective action and constant supervisory attention is warranted. Suspension and/or revocation of the license are highly probable.

SUPERVISORY MEMORANDUM - 1023

September 1, 2018

TO:

All Money Services Businesses License Holders

FROM:

Charles G. Cooper, Commissioner

SUBJECT:

Examination Frequency Policy for Money Services Businesses

BACKGROUND

The examination frequency policy communicated through this Memorandum represents an update and revision to the examination frequency system which was originally implemented on September 1, 2006 and was last revised on December 7, 2016.

OVERVIEW

Section 151.601(b)(1) of the Texas Finance Code (Finance Code) provides that MSB license holders may be examined annually or as the Department may reasonably require. When the 18-month risk-based examination frequency schedule was originally implemented, the key risk factors considered in determining the criteria and basis for the examination frequency policy included the volume of business conducted by the entity, number of prior examinations, and the entity’s last two examination ratings. On December 7, 2016, this Memorandum was revised to remove the volume of business conducted by an entity as a criteria.

The Department has now determined that requiring a license holder’s prior two examination ratings be a 1 or 2 is not necessary to evaluate examination risk and frequency. This policy is revised to only require that an MSB’s most current examination rating be a 1 or 2. This revision mirrors Supervisory Memorandum – 1003, Examination Frequency for State-chartered Banks.

In general, as depicted by the tables shown as Attachments A and B, currency exchangers and money transmitters who receive less than satisfactory ratings will be examined every 12 months. Currency exchange and money transmitter licensees who receive a "strong" or "satisfactory" rating during their most current examination will receive an examination  every 18 months. The most current rating must be the result of a full scope examination.

License holders rated "unsatisfactory" or "poor" will also receive a limited scope examination within six months. The limited scope examination will be conducted to assess corrective action and compliance with applicable statutes and rules with respect to the prior examination findings. A new rating will not be assigned until the next full scope examination.

ADDITIONAL QUALIFIERS AND INFORMATION APPLICABLE TO ALL LICENSE HOLDERS

A license holder that qualifies for an extended examination frequency may be excluded from the program if additional circumstances arise relating to changes in financial condition, management practices, business models, regulatory compliance, or any other issue which could significantly impact the overall condition of the license holder. Additionally, any license holder that is subject to a formal administrative action issued by our Department and/or has filed a change of control application within the prior 24 month period which our Department determines has resulted in a substantive change in the daily oversight of the day-to-day operations of the business will be excluded from the 18 month cycle until such action is no longer in effect or until the license holder has complied with the requirements of the administrative action; and the Department has performed at least one on-site examination of the entity since the approval of the change of control application. As a matter of practice, all examinations will be conducted on-site and off-site examinations will only be conducted in circumstances when deemed appropriate. As an example, new license holders that have no transaction activity in Texas may be examined off-site to reduce time and travel costs for the license holder and for the Department.

ATTACHMENT A

Examination Frequency Guide for Currency Exchange License Holders

Uniform Rating*

Full Scope
Exam Frequency

Most current examination rating must be a 1 or 2

18 Months

Most current examination rating is 3, 4, or 5

12 Months

Most current examination rating is 4 or 5

6 Months (limited exam) /
12 Months (full scope exam)

New licensee with no previous examination or rating

6 Months

Licensee with only one examination and with a rating of 1, 2, or 3

12 Months

*Ratings only issued at full scope examination.

 

 

ATTACHMENT B

Examination Frequency Guide for Money Transmission License Holders

Uniform Rating*

Full Scope
Exam Frequency

Most current examination rating must be a 1 or 2

18 Months

Most current examination ratings must be a 1 or 2

12 Months

Most current examination rating is 3, 4, or 5

12 Months

Most current examination rating is 4 or 5

6 Months (limited exam) /
12 Months (full scope exam)

New Licensee with no previous examination or rating

6 Months

Licensee with only one examination and with a rating of 1, 2, or 3

12 Months

* Ratings only issued at full scope examination.

 

 

SUPERVISORY MEMORANDUM - 1024

October 19, 2012

TO:

Money Service Businesses Licensees

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Accepting Money Services Businesses (MSBs) Reports of Examination (ROEs) of Other State Agencies

Background

Section 151.601(b)(1) of the Texas Finance Code (Finance Code) provides that MSB license holders may be examined annually or as the Department may reasonably require. Currently, depending on various factors outlined in Supervisory Memorandum Number 1023, when performing Departmental examination of our MSBs, a 12-month or 18-month examination schedule is followed.

However, Section 151.601(b)(4) of the Finance Code provides that the commissioner may accept the examination report of another state agency or an agency of another state or of the federal government, or a report prepared by an independent accounting firm, which on being accepted is considered for all purposes as an official report of the commissioner.

Chapter 151 of the Finance Code explicitly gives the commissioner the authority to accept MSBs ROEs of other states.  The ability to accept another state's ROE avoids unnecessary regulatory duplication,  facilitates the process of supervision and examination with the least regulatory burden to multi-state institutions, promotes an efficient regulatory system, and fosters effective coordination and communication among states.  This memorandum establishes the general criteria and other conditions necessary to accept the ROE of another state.

General Criteria

In order for the Department to accept an MSB ROE from another state's agency, the MSB license holder must meet the following conditions:

1.  Has received an overall rating of a "1" or "2" at the last examination conducted by the Texas Department of Banking (DOB);

2.  Has been licensed by the DOB for not less than three years;

3.  Has no outstanding or pending formal or informal administrative or regulatory actions;

4.  Has not had more than a 25% increase in the number of authorized Texas delegates and/or locations in the preceding calendar year;

5.  Has not had more than a 25% increase in Texas transaction volume within the preceding calendar year;

6.  Has not experienced a Change of Control within the last 12 months; and,

7.  Has demonstrated compliance with the following provisions of the Finance Code as of the most recent required filing of the MSB license with the DOB:

•    §151.307 - Net Worth

•    §151.308 - Security

•    §151.309 - Permissible Investments.

Conditions of Acceptance of Other States MSB ROE

In order for the Special Audits Division to accept an MSB ROE from another state, the following conditions must be met:

1.  The MSB ROE start date must not be more than 9-months prior to the DOB examination due date;

2.  The examining state must have executed the MTRA Cooperative Interstate Examination Agreement;

3.  The examination by the other state must have been conducted on-site and considered "full-scope" to include an evaluation of the MSB license holder's anti-money laundering policies and procedures and overall financial condition;

4.  The ROE must not reveal significant regulatory concerns pertaining to management practices, financial conditions, business models, or other areas that could adversely impact the overall condition of the MSB license holder;

5.  The results of the ROE must demonstrate that the MSB license holder would have received a comparable rating of a "1" or "2" as defined by the DOB Supervisory Memorandum 1022 - Examination Rating System for MSBs; and.

6.  The most immediately prior ROE must have been completed by the DOB.

Procedures for Acceptance

The MSB examining staff currently meets twice during a fiscal year for examination scheduling purposes. The ability and eligibility of accepting ROEs from other state agencies will be evaluated at these meetings.  The decision process will include the following steps:

•    Determine which MSB license holders qualify based on the general criteria and other conditions listed above;

•    Review the list of examinations performed by the MTRA member states;

•    Request a copy of the ROE from the MTRA member state;

•    Review the ROE from the MTRA member state for acceptability and compliance with the general criteria and other conditions listed above; and,

•    Provide a written recommendation and supporting documentation for acceptance of the MTRA member state ROE to the Director of the Special Audits Divsion.

Department Oversight

The Department reserves the right to conduct any examination it deems necessary and appropriate even if the above general criteria and other conditions have been met.  Additionally if an MSB ROE is accepted from another state, the Department may still find it necessary to perform Texas delegate visitations or other limited off-site reviews and to report any findings from such visitations or reviews to the licensee.

If it is determined through a thorough risk based analysis that acceptance of another state's ROE of a licensee that does not meet one or more of the general criteria and other conditions listed above, is appropriate and in the best interest of the Department, consumers and the licensee, the Director of the Special Audits Division may request the Commissioner to waive certain general criteria and other conditions.  The Director must provide the Commissioner the detailed circumstances that warrant deviation from the general criteria and other conditions listed above.  The Commissioner will review and make a decision on the request.

Conclusion

The Department believes that having the ability to accept other state's MSB ROE's will provide for enhanced utilization of examination resources, reduced expenses, and reduce  the regulatory burden to the MSB license holder. We believe we can achieve these goals while still fulfilling our oversight responsibility and not jeopardizing consumer protection or hampering the needs of  law enforcement.

SUPERVISORY MEMORANDUM - 1026

November 3, 2009

TO:

All Prepaid Funeral Benefit Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Prepaid Funeral Contract Modifications at the Time of Death

Background and Purpose

This memorandum sets out the methodology to calculate whether the prepaid funeral contract (PFC) is being modified by more or less than 10% and outlines the disclosures required if the funeral provider chooses not to provide a refund for unused credits for modifications of less than 10%.

In accordance with Section 154.1551(b) of the Texas Finance Code a decedent's representative may modify a paid-in-full PFC up to 10% without the consent of the funeral provider, if the purchaser has not executed the contract provision prohibiting modifications to the PFC.  The funeral provider is required to provide a credit for unused or downgraded items, but is not required to provide a refund for modifications less than 10% of the PFC.

Changes to paid-in-full PFCs in excess of 10%, when the purchaser has not executed the contract provision prohibiting modifications, require the funeral provider's concurrence and agreement in writing.  In this situation, the funeral provider is required to allow a credit for guaranteed items not used or downgraded and refund any unused credit.

Calculation of a 10% Change

To determine if the decedent's representative is seeking to amend the PFC by more than 10%, add the total preneed price for all guaranteed items being deleted and/or downgraded.  Upgrades and additional items selected are not used in this calculation. 

If the total deletions and downgrades are in excess of 10% of the guaranteed section of the PFC, the funeral provider may either agree to the changes or limit the decedent's representative to changes not exceeding 10% of the guaranteed section of the PFC.

EXAMPLE

PREPAID FUNERAL CONTRACT

  

AT-NEED FUNERAL CONTRACT
(TODAY'S PRICES)

 

PROFESSIONAL SERVICES

$3,000.00

 

PROFESSIONAL SERVICES

$4,000.00

20 GA. STEEL CASKET

$2,000.00

 

20 GA. STEEL CASKET

$2,500.00

CONCRETE VAULT*

$1,000.00

 

CONCRETE LINER*

   $800.00

CLOTHING

   $200.00

 

OBITUARY

   $500.00

LIMOUSINE

   $500.00

 

LIMOUSINE

   $500.00

TOTAL OF GUARANTEED ITEMS
ON PREPAID CONTRACT**

$6,700.00

 

TOTAL OF ALL CHARGES

$8,300.00

   

Less:

 
   

Inflation Discount

($1,500.00)

   

Additional Credit Due At-Need on OBC Downgrade***

($200.00)

   

Prepaid Funeral Contract

($6,700.00)

     
   

CREDIT NOT USED

($100.00)

*          Today's Price for Vault = $1,200.00

**        10% of Contract Price = $670.00

***      Only $200.00 of the $400 credit is required here on the at-need contract for the outer burial container (OBC);
      the remaining $200.00 is already included in the $6,700.00 PFC credit.

In this example, the decedent's representative chose not to use the clothing for $200.00 and downgraded the concrete vault to a concrete liner.  The downgrade of the OBC using prices at the time of the death results in a credit of $400.00 ($1,200.00 - $800.00).  The deletions/downgrades total $600.00 which is less than 10% of the original guaranteed section of the PFC; therefore, the funeral provider must allow the changes.  The funeral director is required to give a credit of $600.00 toward other purchases that are selected at the time of need.

The charge for the obituary at the time of need would be offset by the PFC credit leaving an unused credit of $100.00 ($600.00 credit - $500.00 for obituary charge). Statutorily, the funeral provider is not required to refund this amount but the funeral provider must demonstrate that the decedent's representative is aware of the unused credit.

Required Disclosures

Properly completed at-need contracts enable the permit holder to demonstrate to the decedent's family and to the Department that all PFC prices were honored at the time of need, that credit was given for any unused preneed items, and that the family was correctly billed. The funeral provider must accurately complete the balance due section of the at-need contract and have it signed by the family.

For contract modifications that do not exceed 10% of the PFC, the decedent's representative must be given notice when modifications result in unused credits.  The disclosure for the unused credit should be clearly and separately identified and the balance due section of the at-need contract. Additionally, the disclosure must include the amount and a notation such as "Unused Preneed Credit". If the proper disclosures are made, no refunds are required.

SUPERVISORY MEMORANDUM - 1027

June 13, 2011

TO:

All Perpetual Care Cemetery Certificate Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Burial Marker or Monument List Requirement

Effective May 5, 2011, Title 7, Section 26.4(f) of the Texas Administrative Code (Administrative Code) was amended and now requires certificate holders to maintain a list or log of each burial marker and/or monument sold since the last examination. Although no specific list/log fields are detailed in the amendment, the list/log must include all information necessary to verify and substantiate the dates specified in subsections (b), (c), (d), and (e) of Section 26.4 of the Administrative Code. The purpose of this memorandum is to provide a sample list/log for your use when developing or reviewing your memorial list/log.

The Department believes the attached marker/monument list/log contains the minimum information necessary to verify compliance with applicable marker/monument regulations. Please note that the attached list is in the recommended format, but you may edit it as you see fit as long as the fields necessary to demonstrate compliance with applicable regulations are included. Each bullet letter below corresponds to a column on the attached sample memorial list.

Recommended Memorial List Data

A.  Purchaser's Name:  The memorial purchaser's name.

B.  Contract Number: The burial memorial contract number.

C.  Memorial Type: The type of burial memorial sold (marker, monument, bench, etc.).

D.  Date Purchaser Sufficiently Paid: The date the purchaser paid the amount you require to order the memorial.

E.  Date Purchaser Approved Design:  The date the purchaser approves the final memorial design.

F.  Date Ordered:  The date you submitted the order to the vendor for fabrication of the memorial. If the vendor requires payment in advance, then you must reflect the latter of the date you paid the vendor or the date you submitted the order.

G.  Date Received: The date the burial memorial is delivered to the cemetery. 

H.  Date Set: The date the burial memorial is set.

I.  Comments: Relevant comments related to the burial monument may be included such as fabrication issues, setting delays due to inclement weather, etc.

Attachment


ATTACHMENT     

Memorial Ordering and Setting

Cemetery Name: ______________________

COA#______________________________


Purchaser's Name
(A)

Contract Nunber
(B)

Memorial Type
(C
)

Property Location

Date Purchaser Sufficiently Paid
(D)

Date Purchaser Approved Final Design
(E)

Date Ordered
(F)

Date Received
(G)

Date Memorial Set
(H)

Comments
(I)

          
          
          
          
          

SUPERVISORY MEMORANDUM - 1028

November 22, 2011

TO:

All Prepaid Funeral Benefit Providers and Sellers

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Compliance with Prepaid Funeral Contract Provisions

Background and Purpose

During recent examinations of prepaid funeral contract (PFC) permit holders, the Department has noticed that several PFCs have not been completed in accordance with Section 154.1511 of the Texas Finance Code. Specifically, our review has noted that goods and services for which management intends to guarantee the price at the time of need are being reflected on the non-guaranteed section of the PFC.

As you recall, HB 3762 which became effective September 1, 2009, allowed for the sale of cash advance items that are non-guaranteed in price. As a result of this statutory change, PFC forms were revised to clearly segregate the guaranteed items from the non-guaranteed items. This memorandum is intended to provide additional guidance for our permit holders who elect to include non-guaranteed cash advance items on a PFC.

Reflecting Guaranteed Items on the Non-Guaranteed Section of the PFC

The Department's approved model contract form requires guaranteed goods and services to be listed on page 1 of the contract and non-guaranteed cash advance goods and services to be on page 2 of the contract. Strict adherence with the segregation of guaranteed and non-guaranteed cash advance items on a PFC is essential, since the corresponding consumer disclosures are included on the respective pages.
All goods and services the permit holder has agreed to deliver at no additional cost to the purchaser must be reflected on page 1 of the contract. All non-guaranteed cash advance items the permit holder has not agreed to deliver at no additional cost to the purchaser and are estimates only and are not frozen in cost, must be reflected on page 2 of the PFC.

Conclusion

The listing of guaranteed items on the non-guaranteed section of the PFC is not allowable and must be discontinued. Therefore, beginning January 1, 2012, all new PFCs sold must list all items for which the permit holder intends to guarantee the price on page 1 of the contract form.

Furthermore, to ensure consumers fully understand the contracted agreement of both parties, if a permit holder has any outstanding PFCs that include guaranteed goods and services on the non-guaranteed section, it is suggested that a letter be sent to the respective purchaser clarifying the permit holder's obligation to guarantee the price at the time of need. The letter should also advise consumers that since the items will be honored at the time of need, the proportionate amount of interest for these guaranteed items will not be credited to the consumer at the time of need. Copies of the notification letters should also be placed in the purchasers' files.

The Department will continue to monitor the sale of non-guarantee items at future examinations and if non-compliance is determined, will require the permit holder to contact the purchaser and revise the PFC. 

SUPERVISORY MEMORANDUM - 1031

September 1, 2012

TO:

All Perpetual Care Cemetery Certificate Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Examination Frequency for Perpetual Care Cemeteries

Overview

Chapter 712.044 of the Texas Health & Safety Code provides that the Commissioner may examine certificate holders on a periodic basis, as the Commissioner reasonably considers necessary or appropriate to protect the interest of plot owners and efficiently administer and enforce this chapter.

Historically, we have adhered to a 12-month examination schedule for all certificate holders rated "strong", "satisfactory," or "marginal." For certificate holders rated "unsatisfactory" or "poor," a limited scope examination is conducted within approximately three months of the full-scope examination to assess corrective action and compliance with applicable statutes with respect to the prior examination findings.

After careful thought and consideration of several factors and issues relating to our examination process and the certificate holders we regulate, we are implementing an 18-month risk-based examination frequency schedule. In our view, this policy does not jeopardize consumer protection, is sufficient to provide effective oversight, and provides for a more efficient use of the Department's examination staff. Further, the 18-month cycle assists in reducing the regulatory burden for qualifying, well managed certificate holders.

The two key risk factors considered in determining the criteria and basis for the examination frequency policy outlined in this memorandum include the size of the PCC trust fund, and the entity's prior examination rating.

In general, as depicted by the table shown below, PCCs with a trust fund of $1 million or more as reported in their most recent examination and who receive satisfactory ratings will be examined every 12 months. PCCs with less than $1 million and who receive satisfactory ratings as reported in their most recent examination will receive an examination every 18 months.

Additional Qualifiers and Information Applicable to All Certificate Holders

A certificate holder that qualifies for an extended examination frequency may be excluded from the program if additional circumstances arise relating to changes in financial condition, management practices, ownership, business models, regulatory compliance, or any other issue which could significantly impact the overall condition of the certificate holder. Additionally, any certificate holder that is subject to a formal administrative action will be excluded from the 18-month cycle until such action is no longer in effect or until the certificate holder has complied with the requirements of the action.

Examination Frequency Guide for Certificate Holders

PCC Trust Fund

Uniform Rating

Full Scope
Exam Frequency

$1 Million or More

Most current examination rating is 1, 2 or 3

12 Months

Less Than $1Million

Most current examination rating is a 1 or 2

18 Months

Less Than $1Million

Most current examination rating is a 3

12 Months

Any Size Trust Fund

Most current examination rating is 4 or 5

3-6 Months (limited exam) / 12 Months

Any Size Trust Fund

Certificate Holders that have not received at least two on-site examinations with ratings

12 Months


Conclusion

The Commissioner reserves the right to conduct any examination it deems necessary and appropriate even if the above general criteria and other conditions have been met and the performance of the examination is necessary for the efficient enforcement of applicable law.


SUPERVISORY MEMORANDUM - 1035

May 1, 2013

TO:

Foreign Money Transmitters

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Licensing of Foreign-Located Money Transmitters Under Texas Finance Code Chapter 151 (the Money Services Act)

Background

It has become relatively easy and inexpensive to operate a website that accepts payments, and to therefore reach consumers across the world. As a result, an increasing number of money transmitters operate exclusively through the Web, allowing Texas consumers to use their services irrespective of where the company is located. This issue has been discussed among multiple states through MTRA and CSBS with no policy consensus emerging. While the states differ in their approaches to foreign-located money services businesses (MSBs), the Financial Crimes Enforcement Network of the U.S. Treasury Department (FinCEN) has made it clear that Bank Secrecy Act (BSA) rules apply to all persons offering MSB services in the U.S. from foreign locations. Specifically, FinCEN issued a final rule in 2011 and a follow-up guidance in 2012, which establish that foreign-located MSBs must register with FinCEN, implement anti-money laundering (AML) programs, and appoint an agent in the US for service of legal process. The Department's policy regarding such foreign-located money transmitters has developed over time as changes in underlying jurisdictional and international licensing issues have evolved. This Supervisory Memorandum clarifies and formalizes the Department's policy in this matter.

Prescriptive Jurisdiction

Prescriptive jurisdiction is the authority of a state or country to apply its law to people, activity, or things. Texas must have prescriptive jurisdiction in order to apply the money transmission licensing provisions of the Money Services Act. A state generally has prescriptive jurisdiction over entities located within the state. But when an entity is located out of state, a substantial amount of case law has established the circumstances under which a state may exert prescriptive jurisdiction. A full review of the law is beyond the scope of this memorandum, but it can be generally stated that Texas may exert prescriptive jurisdiction over a money transmitter that operates an interactive website through which a Texas consumer might communicate with the company, sign up for accounts, and send money through the website.1  International law generally allows a state or nation to extend its prescriptive jurisdiction over foreign entities based either on the nationality of potential victims, or on acts which produce detrimental effects within its borders.2   Therefore it is the Department's position that any money transmitter who allows Texas consumers to initiate transactions through its website is subject to the licensing requirements of the Money Services Act, regardless of where the transmitter is physically located.

Licensing of Foreign Entities

When a foreign MSB has no physical presence, employees, or agents within the U.S., but transmits money for persons located in Texas through a website, it must obtain a money transmission license under the Money Services Act or cease conducting business for persons located in Texas. Because certain requirements to obtain and maintain a license established by the Money Services Act and Title 7 of the Texas Administrative Code (7 TAC), Chapter 33, are based on standards specific to the U.S., and also because of the increased difficulty obtaining documentation from foreign sources, a foreign MSB that applies for a license must take certain additional steps to ensure that the Department can evaluate and oversee the MSB on terms substantially equivalent to a U.S.-based entity. Specifically, in addition to the standard requirements, the following conditions are required of foreign MSBs in order to obtain and maintain a money transmission license.

1.     English documentation. Finance Code § 151.602 requires that all records must be kept in English and financial information denominated in U.S. dollars. All documentation required for the license application, examinations, and other filings must be provided in English, with financial figures denominated in U.S. dollars. If a foreign license holder routinely keeps the records required by § 151.602 in a language other than English, English translations must be made available.

2.     Documentation regarding regulation at home. If the foreign-located MSB is currently regulated in its home country, it must provide documentation of good standing with the regulator there. The documentation should include how long the entity has been licensed or regulated by the regulator. If regulated in other countries as well, documentation of good standing in those jurisdictions must also be provided.

3.     Registration with FinCEN. The entity must register as a money transmitter with the Financial Crimes Enforcement Network of the U.S. Department of Treasury.3 

4.     Accounting standards for financial records. Finance Code § 151.304(b)(2) requires an applicant to submit audited financial statements in order to determine that the applicant meets minimum net worth requirements. Under Finance Code § 151.307, an applicant's net worth must be calculated in accordance with generally accepted accounting principles (GAAP). Finance Code § 151.602 further requires that a license holder maintain a ledger in accordance with GAAP. A foreign entity must calculate its net worth either in accordance with the GAAP established and maintained by the U.S. Financial Accounting Standard Board, or in accordance with the International Financial Reporting Standards (IFRS) maintained by the International Accounting Standards Board. The audited financial statements, the ledger, and all other related financial records required by statute or rule must likewise be denominated in U.S. currency and be prepared in accordance with either U.S. GAAP or IFRS.

5.     Accountant. Audited financial statements must be prepared by either a U.S.-based certified public accountant (CPA), or by an accountant who has been positively evaluated by the International Qualifications Appraisal Board and has passed the Uniform CPA Exam.

6.     Background checks. Finance Code § 151.203 and 7 TAC § 33.13 authorize the Commissioner to require background checks for a license application. Search firm reports must be conducted on all controlling individuals, executive officers, directors, general partners, trustees, or managers by an acceptable, independent search firm. These search firm reports must conform to the requirements described in Appendix A of the application forms provided by the Department.

7.     Security bond. Finance Code § 151.308 requires an applicant to provide, and a license holder to maintain, security in the form of a surety bond, an irrevocable letter of credit, or a deposit that conforms to § 151.308. A foreign license applicant must obtain the required security from an entity with a physical location in the U.S., and that is authorized to do business in Texas.

8.     Examination. A foreign license holder must provide a location in Texas where examinations can be conducted. In the event of multistate examinations, the Department may agree to a U.S. site that is located outside Texas. The license holder must make all documents required for examination available at this location for the duration of the examination, and must make arrangements for at least one English-speaking employee to be present to assist with the examination.

SUPERVISORY MEMORANDUM - 1036

November 1, 2013

TO:

Money Services Business License Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Background Check Self-Certification for Money Services Businesses Chapter 151 (the Money Services Act)

Purpose

This supervisory memorandum outlines the policy of the Texas Department of Banking (Department) with regard to background checks that are performed in relation to Money Services Businesses (MSBs) in accordance with the Department's statutory duties. This memorandum addresses when and how an MSB license holder may file a certification in lieu of having the Department review a person's background. This memorandum also addresses the responsibilities of the license holder with respect to self-certification.

Background

Pursuant to Texas Finance Code §§ 151.104, 151.202, and 151.203, the Department routinely reviews the backgrounds of persons who apply for an MSB license, acquire control of an MSB, or become a principal of an MSB. Background checks are conducted to determine whether the person has the financial responsibility and condition, the financial and business experience, and the general competence and character required by Finance Code §151.202 to lead the affairs of an MSB. Toward this end, the Department requires such individuals to submit fingerprints and biographical information and sign a release form that authorizes the Department to obtain copies of the records and information necessary to evaluate the individual's background. In cases where the individual is a foreign citizen who has not resided within the U.S. for the past ten years, in lieu of conducting the background check itself the Department accepts third-party search firm reports that meet specified requirements.

Definitions

For purposes of this memorandum, the following terms have the meanings stated here.

•    "Background Check" means the sum of actions taken to gather and evaluate information regarding:  an individual's education, employment, credit and criminal history, and reputation; or a company's ownership, credit, regulatory background, and reputation.

•    "Principal" has the meaning ascribed by Finance Code §151.002(b)(18).

•    "Officer" means an executive officer or director, or any manager who has direct control, or significant management policy and decision-making authority, over a license holder's ongoing, daily money services operations in Texas.

Statement of Policy

For all new MSB license applications, the Department must review the backgrounds of all principals. In cases of foreign citizens residing outside the U.S., the Department may accept and review reports prepared by acceptable third-party search firms. Once licensed, pursuant to Finance Code §151.604(a), MSBs must notify the Department no later than 15 days after the addition of a new principal. During the first three years that an MSB holds a license, a background check on every new principal must be reviewed and approved by the Department.

After three years of continuous licensure, instead of providing the background check documents for a new officer to the Department for review and approval, an MSB may file a certification form that attests to the fact that the MSB has performed the necessary background check review itself. However, when a personnel change results in a change of control as defined by Finance Code §151.002(b)(6) and §151.605, the MSB may not self-certify in this manner. In order to sign the certification, the license holder must have investigated the financial responsibility and condition, the financial and business experience, and the general competence and character of the proposed officer. The proposed officer must also affirm that he or she meets certain statutory conditions. As such, the certification form must be completed and signed by both an executive officer with the authority to bind the license holder, and the proposed officer. If the Banking Commissioner deems it necessary, the Department may require a license holder to submit to the normal background check procedure regardless of how long the license holder has been licensed.

How to Self-Certify

When any license holder intends to change or add an officer, the license holder must notify the Department no more than 15 days after the proposed new officer joins the organization. If the license holder has been licensed at least three years, it may state in the notice its intention to certify that the proposed officer meets the qualifications required by Finance Code Chapter 151. It must then submit an executed copy of the self-certification form provided by the Department on its website no later than 30 days after notifying the Department of the personnel change. If there are no regulatory concerns that would preclude self-certification, the Department will notify the license holder that the certification has been accepted and that no background check must be submitted for the Department to review and approve.

SUPERVISORY MEMORANDUM - 1037

April 1, 2019 (rev.)

TO:

All Virtual Currency Companies Operating or Desiring to Operate in Texas

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Regulatory Treatment of Virtual Currencies Under the Texas Money Services Act 1

PURPOSE

Virtual currencies have proliferated in recent years and, particularly with the advent of cryptocurrencies like Bitcoin, have raised novel questions in relation to money transmission and currency exchange. This supervisory memorandum outlines the policy of the Texas Department of Banking (Department) with regard to virtual currencies. This policy expresses the Department's interpretation of the Texas Money Services Act,2 and the application of its interpretation to various activities involving virtual currencies. While the popularity of Bitcoin has sparked new discourse on the nature of money and transferability of value, this memorandum seeks only to establish the regulatory treatment of virtual currencies under existing statutory definitions.

TYPES OF VIRTUAL CURRENCY

In broad terms, a virtual currency is an electronic medium of exchange typically used to purchase goods and services from certain merchants or to exchange for other currencies, either virtual or sovereign.3 As of the date of this memorandum the Department is not aware of any virtual currency that has legal tender status in any jurisdiction, nor of any virtual currency issued by a governmental central bank. As such, virtual currencies exist outside established financial institution systems. There are many different virtual currency schemes, and it is not easy to classify all of them, but for purposes of this memorandum, they can generally be divided into two basic types:  centralized and decentralized.

Centralized Virtual Currency

Centralized virtual currencies are created and issued by a specified source. They rely on an entity with some form of authority or control over the currency. Typically, the authority behind a centralized virtual currency is also the creator. Centralized virtual currencies can be further divided into subclassifications that in some cases, become too complex to apply a universal policy. Some can be purchased with sovereign currency but cannot be exchanged back to sovereign currency; some can be converted back to sovereign currency; some are used only for purchase of goods and services from a closed universe of merchants, while others may have a theoretically open universe of merchants.

One particular subclass of centralized virtual currencies is stablecoin. Stablecoins are a form of centralized virtual currencies that is backed by the issuer with sovereign currency, precious metals, or cryptocurrency and therefore hold intrinsic value. By pegging these coins to an underlying asset, the intent is to create a less volatile virtual currency that retains a stable value. The most popular form of stablecoins is backed by a sovereign currency of which the issuer keeps a reserve in an amount equal to or greater than the amount of issued stablecoin. As it pertains to money transmission regulation, an important aspect of these sovereign-backed stablecoins is the “redemption right” allowing the stablecoin holder to redeem the coin for sovereign currency from the issuer. This redemption right may be explicitly granted to a stablecoin holder through a user agreement with the issuer or it may be an inherent right granted to the coin holder by the issuer guaranteeing it will buy back coins to keep the value stable. The most popular sovereign-backed stablecoin at the time of this writing is Tether, a coin backed 1-to-1 by U.S. Dollars so one Tether coin is the equivalent value of one USD at all times.

Decentralized Virtual Currency

Decentralized virtual currencies are not created or issued by a particular person or entity, have no administrator, and have no central repository. Thus far, decentralized currencies are all cryptocurrencies. A cryptocurrency is based on a cryptographic protocol that manages the creation of new units of the currency through a peer-to-peer network. The creation of cryptocurrency happens through a process called mining that basically involves running an application on a computer that performs proof-of-work calculations. When the computer performs a sufficient amount of these calculations, the cryptocurrency's underlying protocol essentially generates a new unit of the currency that can be delivered to the miner's wallet. Because users' wallets act as the connection points of the cryptocurrency's peer-to-peer network, transfers of cryptocurrency are made directly from wallet to wallet, without any intermediary, whereas digital transfers of sovereign currencies must be made through one or more intermediaries such as a financial institution or money transmitter.

One important characteristic of cryptocurrency is its lack of intrinsic value. A unit of cryptocurrency does not represent a claim on a commodity and is not convertible by law. And unlike fiat currencies, there is no governmental authority or central bank establishing its value through law or regulation. Its value is only what a buyer is willing to pay for it. Most cryptocurrencies are traded on third party exchange sites, where the exchange rates with sovereign currencies are determined by averaging the transactions that occur. Some experts consider cryptocurrency to be a new asset class that is neither currency nor commodity, but possessing characteristics of both, as well as characteristics of neither.

ANALYSIS

Currency Exchange

Exchanging virtual currency for sovereign currency is not currency exchange under the Texas Finance Code. Finance Code §151.501(b)(1) defines currency for purposes of currency exchange as "the coin and paper money of the United States or any country that is designated as legal tender and circulates and is customarily used and accepted as a medium of exchange in the country of issuance." Because neither centralized virtual currencies nor cryptocurrencies are coin and paper money issued by the government of a country, they cannot be considered currencies under the statute. Therefore, absent a legislative change to the statute, no currency exchange license is required in Texas to conduct any type of transaction exchanging virtual with sovereign currencies.

Money Transmission

In many instances, factors distinguishing the various centralized virtual currencies are complicated and nuanced, and to make money transmission licensing determinations the Department must individually analyze centralized virtual currency schemes. Accordingly, this memorandum does not offer generalized guidance on the treatment of centralized virtual currencies, other than sovereign-backed stablecoins, by the Money Services Act's money transmission provisions.

Money transmission licensing determinations regarding transactions with cryptocurrency and sovereign-backed stablecoins turn on the single question of whether either should be considered "money or monetary value" under the Money Services Act. Under Finance Code §151.301, money transmission is "the receipt of money or monetary value  by any means in exchange for a promise to make the money or monetary value available at a later time or different location." Although there is a great amount of discussion over whether cryptocurrencies should be considered money, for purposes of money transmission regulation in Texas the term is defined by statute. Finance Code §151.301(b)(3) provides that "'money' or 'monetary value' means currency or a claim that can be converted into currency through a financial institution, electronic payments network, or other formal or informal payment system." As already stated, a cryptocurrency is not currency as that word is defined in the Money Services Act. A unit of cryptocurrency is also not a claim.4 It does not entitle its owner to anything and creates no duties or obligations in a person who gives, sells, or transfers it. There is no entity that must honor the value of a cryptocurrency or exchange any given unit of a cryptocurrency for sovereign currency. For comparison, under federal law U.S. coin and paper currency must be honored for payment of all debts, public charges, taxes, and dues, and the U.S. Treasury Department must redeem it for "lawful money."5 But the owner  of a unit of a cryptocurrency has no right or guaranteed ability to convert that unit to sovereign currency. The only way to convert a unit of cryptocurrency to sovereign currency is to find a willing buyer. Therefore, cryptocurrencies as currently implemented cannot be considered money or monetary value under the Money Services Act.

On the other hand, stablecoins that are pegged to sovereign currency may be considered a claim that can be converted into currency and thus fall within the definition of money or monetary value under Finance Code §151.301(b)(3). In those instances where the stablecoin is backed by a sovereign currency reserve and a redemption right exists to the holder of the stablecoin, the holder has a claim to the sovereign backing the coin because the issuer has taken on the obligation to provide sovereign currency in exchange for the stablecoin at a later time (upon the holder’s request).

STATEMENT OF POLICY

Because cryptocurrency is not money under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location is not money transmission. Consequently, absent the involvement of sovereign currency in a transaction, no money transmission can occur. However, when a cryptocurrency transaction does include sovereign currency, it may be money transmission depending on how the sovereign currency is handled. A licensing analysis will be based on the handling of the sovereign currency.

To provide further guidance, the regulatory treatment of some common types of transactions involving cryptocurrency can be determined as follows.

In contrast, because a sovereign-backed stablecoin may be considered money or monetary value under the Money Services Act, receiving it in exchange for a promise to make it available at a later time or different location may be money transmission. A licensing analysis will turn on whether the stablecoin provides the holder with a redemption right for sovereign currency thus creating a claim that can be converted into money or monetary value. This is true regardless whether the redemption right is expressly granted or implied by the issuer.

A virtual currency business that conducts money transmission must comply with all applicable licensing provisions of Finance Code Chapter 151 and of Title 7, Texas Administrative Code, Chapter 33. In addition, several considerations should be highlighted. First, because a money transmitter conducting virtual currency transactions conducts business through the Internet, the minimum net worth requirement under Finance Code §151.307 is $500,000.6 Be advised that the Commissioner may increase the required net worth up to a maximum of $1,000,000 based on the factors set out in §151.307(b). Second, a license holder may not include virtual currency assets in calculations for its permissible investments under Finance Code §151.309. Lastly, pursuant to Finance Code §151.203(a)(3) the Commissioner requires that license applicants who handle virtual currencies in the course of their money transmission activities must submit a current third-party security assessment  of their relevant computer systems. Because the new technological paradigm created by cryptocurrencies has brought with it new risks for the consumer, it is incumbent on a license applicant to demonstrate that all virtual currency is secure while controlled by the applicant. Since security of a company’s virtual currency operation is dependent upon the integrated components of its operations, the scope of the required independent third-party assessment, audit, test or combination of a license applicant must include:

SUPERVISORY MEMORANDUM - 1038

October 13, 2014

TO:

Money Services Business (MSB) License Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Appointment of an Authorized Delegate to Conduct Money Transmission on Behalf of a License Holder

Background and Purpose

Section 151.402(a) of the Texas Finance Code (Finance Code) provides that a money transmission license holder may conduct business through an authorized delegate (AD). 1 Finance Code Section 151.402(b) sets out requirements that the license holder must satisfy before it conducts business through an AD and Section 151.402(c) lays out ten specific requirements for the written contract between the license holder and the AD, including setting forth the nature and scope of the relationship between the license holder and the AD. Overall, the license holder is responsible for the acts of the AD that are conducted pursuant to the authority granted by the license holder and that relate to the license holder's money transmission business.

This authorized delegate provision was intended to be a statutory codification of the common law of agency. The purpose of an AD is to allow license holders to conduct business in locations where they have no presence and access customers they otherwise could not.

With the rise of money transmission conducted via the internet, the Texas Department of Banking (Department) became aware of some unlicensed money transmitters attempting to use the AD provision in an effort to circumvent the required licensing process. These unlicensed money transmitters become appointed as an AD by entering into a contract with an MSB that is currently licensed as a money transmitter in Texas. However, a review of the parties' relationship reveals the unlicensed entity is actually conducting its own business and not the business of the license holder and is therefore not a legitimate AD.

This supervisory memorandum sets out the Department's interpretation of what it means for a money transmission license holder to conduct business through an AD under Finance Code Section 151.402. This memorandum also establishes key criteria the Department will use when determining if a license holder is conducting business through an AD.

"Conducting Business Through" Analysis

A money transmission license holder may conduct business through an AD appointed by the license holder. 2 By its plain terms, the statute allows a money transmission license holder to appoint an AD only for the purpose of the license holder conducting its business through the AD. This is inherent in the term delegate, which can generally be defined as a person appointed to represent another. The statute does not allow for license holders to appoint ADs for any other reason. As such, ADs may only offer money transmission services or products that are the services or products of the license holder.

A person may not be appointed as an AD by a license holder in order to conduct its own money services business. If the purported AD is conducting its own business, then it logically cannot be representing the license holder. In such a scenario, the purported AD is more accurately described as merely a contracted business partner (CBP), as each party is operating its own distinct and separate business. One sign that an AD is really a CBP is the likelihood that no relationship would exist between the license holder and the CBP if the license holder did not have a money transmission license or there were no licensing requirements.

Key Criteria

To provide further guidance, the Department has developed a list of key criteria that it considers when determining if a money transmission license holder is conducting its business through an AD. Factors the Department considers include, but are not limited to:

•  How the license holder "controls" the conduct of business through the AD.

•  Is the scope of the relationship between the license holder and the AD vague or limited under the terms of the appointment agreement?

•  Generally speaking, the more vague or limited the terms of the agreement, the more likely the license holder and AD are really only CBPs and the AD appointment is illegitimate.

•  Does the license holder have little or no control over the customer's funds?

•  For example, the customer's funds may be kept in the AD's bank accounts and only funneled through the license holder's accounts temporarily or may never enter the license holder's accounts at all. These would be signs of insufficient control and that the AD is actually a CBP.

•  Whether the license holder and the AD appear to be operating their own distinct and separate businesses.

•  Does the AD offer its own product or service instead of the license holder's product or service?

•  The Department expects the AD to offer the license holder's product or service.

•  Is there co-branding between the license holder and the AD?

•  If the license holder's name or logo does not appear on the product or service that the AD is providing, customers will not be aware that they are conducting business with the license holder through the AD.

•  Does the AD process transactions through the license holder's platform or does it have its own separate system?

•  Transactions on behalf of the license holder should be conducted through the license holder's platform or system. If the AD uses its own platform or system that is separate and distinct from the license holder, it is an indicator the AD is actually a CBP.

•  How the fees flow between the license holder and the AD.

•  Does the AD pay fees to the license holder?

•  The Department expects the license holder to compensate the AD on a per transaction or commission basis. When the roles are reversed and the AD pays fees to the license holder, this is an indicator that the AD is actually a CBP.

•  Does the license holder primarily derive its revenue from the transactions performed by the AD or from the fees paid by the AD?

•  The Department expects the license holder to primarily derive its revenue from the transactions performed by the AD on its behalf.

•  Whether the customers have a contractual and/or business relationship with the license holder or the AD.

•  The customers should have a relationship with the license holder, and be made aware of the license holder's role in their transactions. In addition, liability for the customer funds rests with the license holder. If only the AD is obligated to the consumer to perform services or the license holder does not have a contractual relationship with the customer, those would be indicators that the AD is actually a CBP.

Conclusion

The above list of key criteria is intended to guide MSBs as to how the Department will evaluate the relationship between the parties. They are not intended to be a list of determinative requirements. Accordingly, the Department will evaluate the totality of facts and circumstances, including the key criteria listed above, to determine if a license holder is conducting business through an AD as authorized by Finance Code Section 151.402(a) or if the license holder and purported AD are in actuality only CBPs that are each operating their own separate and distinct businesses. In the latter case, the Department will find the CBP to be engaging in the business of money transmission in Texas without a license. The money transmission license holder will also be required to terminate the appointment of the CBP as an AD as authorized by Finance Code Sections 151.104(a)(3) and 151.402(c)(8). If the license holder continues to engage in illegitimate AD activities it may be subject to further action by the Department, including license revocation or suspension under Finance Code Section 151.703(b).

SUPERVISORY MEMORANDUM - 1040

October 29, 2015

TO:

Money Services Business License Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Recommended File Documentation for Money Services Business License Holders that Conduct Business through Authorized Delegates, Foreign Agents and Counterparties, and Gateway Agents

DEFINITIONS

For purposes of this guidance, the following definitions apply:

• Authorized Delegate (AD) has the same meaning as found in Section 151.002(b)(2) of the Texas Finance Code.

• Foreign agents or counterparties - include foreign-based entities used by a money services business (MSB) to pay out beneficiary funds.

• Gateway agents are domestically located or domiciled MSBs or processors that are used by a MSB to gain access to foreign paying agents and payout locations.

Hereinafter, the terms foreign agents, counterparties, and gateway agents will be referred to simply as agents.

BACKGROUND

Texas Department of Banking (Department) examinations routinely include a detailed review of money services business AD and agent files. Files are reviewed primarily to assess compliance with the requirements of Section 151.402 of the Texas Finance Code (Conduct of Business through Authorized Delegates); and, Title 31 Code of Federal Regulations (CFR) 1022.210 (Anti-Money Laundering (AML) Program). Foreign agent files are also reviewed to assess adherence to the anti-money laundering guidelines set forth in Financial Crimes Enforcement Network (FinCEN) Interpretive Release 2004-1 for foreign agents and counterparties.

Agent and AD relationships have long been known by regulators and industry to pose substantial compliance risks for MSBs. Consequently, agent and AD file review comprises a significant component of the examination process for assessing compliance with AML Program requirements and Texas law. To date there has been limited guidance available to MSBs with respect to regulators' expectations for the content and organization of files selected for review. Neither Chapter 151 of the Texas Finance Code, nor Title 31 CFR Chapter X specifically addresses these expectations; however, Texas law requires license holders to establish policies, procedures, and controls requiring reasonable risk-based background investigations to ensure that ADs are complying with: (1) all applicable federal and state laws; (2) AD agreement requirements, including terms and conditions; and, (3) consumer disclosure notice requirements.

In addition, federal law requires MSBs to establish effective AML procedures and controls, which includes agent and AD monitoring policies and procedures. At a minimum, these procedures should cover contracts; consumer disclosures; on and off-site reviews; risk assessment; credit reviews; background investigations; escalation and termination policies for ADs and agents; transaction monitoring; and, BSA training. As such, file documentation presented for review should support the license holder's adherence to its agent and AD policies and procedures regarding conducting initial (on-boarding) due diligence and periodic (on-going) monitoring.

PURPOSE

The purpose of this memorandum is to provide license holders with industry best practices regarding the documentation of AD and agent compliance monitoring efforts. In addition, it is the intent of this memorandum to offer general guidance for AD and agent file content and structure in order to facilitate more efficient and effective regulatory review, to improve MSB compliance, and to reduce the demands on limited license holder resources.

DOCUMENTING COMPLIANCE

The most frequently noted examination issues observed by Texas examiners include the untimely delivery of AD and agent files for review, deficiencies in the documentation provided to support compliance with agent and AD oversight (due diligence), and difficulty locating specific documents within the files. More often than not, these deficiencies are the result of the absence of established file documentation procedures or protocols, and are further augmented when the files are not centrally managed. Texas examiners have noted that MSBs face difficulties in demonstrating compliance when relevant file documents are maintained in different departments or in locations different from where the examination is conducted. Examples of de-centralized file management include credit review documents that are maintained within the credit department; AD and agent applications that are maintained within regional offices; and, contracts that are maintained within the general counsel's office. In order for a MSB to adequately demonstrate compliance, it is recommended that all corresponding documentation be centrally maintained.

Agent and AD File Content

The Department understands that the documentation of on-boarding and on-going due diligence will vary among license holders. Nevertheless, the Department has identified the following types of document content that tends to support effective agent and AD due diligence:

On-boarding due diligence documents

• On-boarding approval checklist, if applicable

• Agent and AD BSA policies and procedures

• Evidence of agent due diligence over subagents (e.g. subagent lists, reviews conducted by the agent, etc.)1

• Approval by foreign regulators to conduct money transmission, including documentation demonstrating compliance with applicable foreign country regulations

• Application for Agency Appointment

• Signed Agency/AD Contract (Trust Agreement) and addendums

• Background on owners and principals (e.g. OFAC/WorldCheck/LexusNexus), including verification of identity (e.g. photo IDs, social security numbers, etc.)

• Credit review and approval documents (e.g. financials, credit reports, Dun & Bradstreet, income tax returns, etc.)

• Funds settlement documents (ACH and Pre-Authorized Draft Authorization Agreement)

• Secretary of State/local legal filings and corporate ownership information legal filings

• Initial BSA review and risk rating

• Evidence of initial AML/BSA training

• Evidence of receipt of AML/BSA policies and procedures and other information required to be  provided to ADs by license holder, see Sections 151.402(b)(1);151.402(c)(9); and 151.402(c)(10) of the Texas Finance Code

On-going due diligence documents

• Copies of periodic on-site and off-site program reviews, including findings and license holder follow-up actions (remediation, escalation, termination), updated risk assessments and supporting documents

• Confirmation procedures for payouts by foreign agents and counterparties

• Current lists of foreign agents' subagents

• Documentation to support on-going foreign agent monitoring and due diligence over its subagents

• Evidence to support periodic (on-going) BSA training

• Evidence to support the license holder's review of updated BSA/AML Program policies and procedures

• Evidence to support agent compliance with independent AML review requirements

• Updated credit review

• If applicable, reports of foreign regulators for agents (violations, fines, penalties)

• Updated owner/principal due diligence (including change of ownership and other structural changes, OFAC). License holders subscribing to negative news services should include or reference negative items detected by the service and management actions taken.

File Organization

As with file content, the organization of agent and AD files will vary among MSBs depending on internal file and document maintenance policies. Similar to file content, the Department has identified the following aspects of file organization and delivery that tend to result in efficient examiner review and reduced demands on license holder staff and management resources:

- Whether the files are provided electronically (preferred format) or in paper form, the documents contained within the files must distinguish between those related to on-boarding due diligence and on-going supervision. That is, on-boarding documents should be clearly identifiable and separate from file documents related to on-going supervision.

- Within the on-boarding and on-going classifications, related documents should be filed together and clearly labeled. For example, the on-boarding folder would have a sub-folder labeled Contracts containing all contract related documents. Similarly, the on-going supervision folder may have a subfolder labeled Program Reviews that contains documents related to periodic AD monitoring.

- File documents should be arranged in chronological order.

It is ultimately incumbent upon management to ensure that the documents contained in files presented for review provide sufficient evidence that the compliance risks identified in the risk assessment have been satisfactorily mitigated.  Further, management should follow its own company's record retention policy when determining how long to maintain a specific AD or agent document record.

SUPERVISORY MEMORANDUM - 1041

November 24, 2015

TO:

Money Services Business License Holders

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Examination Policy for Domestic MSBs that Conduct Business from a Non-traditional Office Location

BACKGROUND AND PURPOSE

An increasing number of money services businesses (MSBs) operate exclusively through a website or mobile application, allowing consumers to use their services irrespective of where the company is located. Because these MSBs do not conduct their business with their customers in a traditional face-to-face manner, some are choosing not to operate out of conventional brick-and-mortar locations nor to maintain a traditional corporate headquarters. Instead, some are choosing to conduct business from a residence or they are choosing to operate their businesses entirely remotely.

While the Texas Department of Banking (Department) accepts non-traditional business locations for licensing purposes, the Department is unable to conduct examinations at such locations. This supervisory memorandum outlines the policy of the Department with regard to domestic MSBs that conduct their business from non-traditional office locations. This memorandum addresses where the Department will conduct examinations, in accordance with the Department's statutory duties, when a domestic MSB does not have a conventional office.

STATEMENT POLICY

Pursuant to Texas Finance Code §151.601, MSB license holders shall provide, and the Department shall have full and complete access to, all records the Department may reasonably require to conduct a complete examination, and the records must be provided at the location and in the format specified by the Department. For most MSBs, the corporate office is specified by the Department as the location where examinations will be conducted. However, for those domestic MSBs operating out of a location other than a corporate office - such as a private residence - or that operate entirely on a virtual or remote basis, another mutually acceptable location must be specified for examinations.

In selecting an alternate and mutually acceptable location for an examination, the MSB must select a commercial location, such as an office building, hotel or other location where a private space - like a conference room - can be reserved. A home office or a public retail location, such as a coffee shop, will not be an acceptable location. The location may be in the home state of the MSB or in the home state of the examiners, keeping in mind that the MSB shall pay all costs reasonably incurred in connection with its examinations. See Texas Finance Code §151.601(d) and 7 Texas Administrative Code §33.27(h).

The examination location must be private, so that examiners and MSB employees can discuss information without risk of exposing information made confidential under state and federal law. It is also important that the space is private so that there are minimal distractions while the examination is taking place. If the MSB operates out of a shared office space, an examination may be conducted at that location if the MSB has access to a conference room or other private space within the shared space; however, the examination cannot be conducted in the shared area itself. In addition, the MSB must provide a space that is large enough to accommodate all participating examiners.

Beyond the size and site of the examination location, the MSB must also provide for at least one employee to be physically present to assist with the examination. The employee must be knowledgeable about the MSB's business operations and computer systems. The employee need not sit in the room with the examiners for the entire period of the examination, but must remain close by and be available to answer questions or retrieve records as requested. Arrangements must also be made for the MSB's computer systems to be available during the examination, such that the MSB employee and examiners have real-time access to the MSB's programs and platforms in the same manner as if they were in the MSB's office itself. Such access will necessitate a space with a VPN connection or internet access and where the MSB can set up its own computer that interfaces with its own systems. It is also recommended but not required that a copier and a printer are available at the location so that records can be provided to examiners on paper as needed. Finally, the MSB must be able to facilitate meetings with officers, managers and/or employees, either at the location of the examination or via telephone or video conference meetings.

CONCLUSION

The Department must conduct examinations of its MSB license holders in locations that are safe and secure. While home and virtual offices are acceptable for conducting business, they are not acceptable for conducting examinations. In those instances where a traditional office location is not available, the Department and MSBs must find alternate and mutually acceptable locations for examinations. The Department believes the policy set out above will ensure that examinations are conducted in a safe and complete manner, to the benefit of both the MSB and the Department.

SUPERVISORY MEMORANDUM - 1042

October 17, 2017

TO:

All Institutions Regulated by the Texas Department of Banking

FROM:

Charles G. Cooper, Banking Commissioner

SUBJECT:

Effect of Criminal Convictions on Licensing

OVERVIEW

Texas Occupations Code §53.021(a) grants the Texas Department of Banking the authority to suspend or revoke a license, disqualify a person from receiving a license, or deny to a person the opportunity to take a licensing examination on the grounds that the person has been convicted of: (1) an offense that directly relates to the duties and responsibilities of the licensed occupation; (2) an offense that does not directly relate to the duties and responsibilities of the licensed occupation and that was committed less than five years before the date the person applies for the license; (3) an offense listed in 42A.054, Code of Criminal Procedure1; or (4) a sexually violent offense, as defined in Article 62.001, Code of Criminal Procedure.

Pursuant to Texas Occupations Code §53.025, the Department is issuing the following guidelines regarding section 53.021(a)(1), stating the reasons a particular crime is considered to directly relate to the duties and responsibilities of a particular license and any other criterion that affects the licensing decisions of the Department. The Department currently charters or issues licenses or permits to the following entities: state-chartered banks and foreign bank agencies, trust companies, money services businesses, sellers of prepaid funeral benefits, and perpetual care cemeteries. As to money services business licensing, disqualifying convictions are set out in Texas Finance Code §151.202(e); the below guidelines are intended to supplement what is set out in statute. As to permits to sell or accept money for prepaid funeral benefits, crimes directly related to the fitness for those permits are set out in 7 Texas Administrative Code §25.31(c).

POLICY

Pursuant to Texas Occupations Code §53.021(a)(1), the Department may suspend or revoke a license, disqualify a person from receiving a license, or deny a person the opportunity to take a licensing examination on the grounds that the person has been convicted of an offense that directly relates to the duties and responsibilities of the licensed occupation. These guidelines are intended to reflect the Department’s overarching duty to regulate the fiduciary and financial responsibilities of its licensees and apply to felony convictions of officers, directors, owners, and the entity itself. 

State-Chartered Bank and Foreign Bank Agency

Operating a state-chartered bank or foreign bank agency involves or may involve activities such as receiving money from consumers, remitting money to third parties, maintaining accounts, making representations to consumers regarding the terms of loans, repossessing property without a breach of the peace, maintaining goods that have been repossessed, collecting amounts due in a legal manner, and foreclosing on real property in compliance with state and federal law. Consequently, the following crimes are directly related to the duties and responsibilities of a licensee and may be grounds for denial, suspension, or revocation:

A.    any offense involving dishonesty or theft;
B.    any offense that involves misrepresentation, deceptive practices, or making a false or misleading statement (including fraud or forgery);
C.    any offense that involves breach of trust or other fiduciary duty;
D.    any offense that involves drug trafficking, terrorist funding, money laundering or a related financial crime;
E.    any violation of the Bank Secrecy Act or USA PATRIOT Act;
F.    any criminal violation of a statute governing debt collection;
G.    failure to file a government report, filing a false government report, or tampering with a government record;
H.    any greater offense that includes an offense described in subparagraphs (A) - (G) of this paragraph as a lesser included offense;
I.    any offense that involves intent, attempt, aiding, solicitation, or conspiracy to commit an offense described in subparagraphs (A) - (H) of this paragraph.

Trust Company

Operating a trust company involves or may involve activities such as acting as trustee and performing fiduciary duties per written agreement or by court order, receiving money and other property for investment in real or personal property, acting as executor, administrator, or trustee of the estate of a deceased person, acting as a custodian, guardian, conservator, or trustee for a minor or incapacitated person, receiving for safekeeping personal property, acting as custodian, assignee, transfer agent, escrow agent, registrar, or receiver, acting as investment advisor, agent, or attorney in fact, or engaging in a financial activity or an activity incidental or complementary to a financial activity. Consequently, the following crimes are directly related to the duties and responsibilities of a licensee and may be grounds for denial, suspension, or revocation:

A.    any offense involving dishonesty or theft;
B.    any offense that involves misrepresentation, deceptive practices, or making a false or misleading statement (including fraud or forgery);
C.    any offense that involves breach of trust or other fiduciary duty;
D.    any offense that involves drug trafficking, terrorist funding, money laundering or a related financial crime;
E.    any violation of the Bank Secrecy Act or USA PATRIOT Act;
F.    failure to file a government report, filing a false government report, or tampering with a government record;
G.    any greater offense that includes an offense described in subparagraphs (A) - (F) of this paragraph as a lesser included offense;
H.    any offense that involves intent, attempt, aiding, solicitation, or conspiracy to commit an offense described in subparagraphs (A) - (G) of this paragraph.

Money Services Business

Operating a money services business involves or may involve activities such as receiving money, bullion, or specie from consumers, remitting money, bullion, or specie to third parties, maintaining accounts, exchanging currency, transporting currency, and making representations to consumers regarding the intent to make available deposited money, bullion, or specie. Consequently, in addition to the disqualifying convictions set out in Texas Finance Code §151.202(e), the following crimes are directly related to the duties and responsibilities of a licensee and may be grounds for denial, suspension, or revocation:

A.    any offense involving dishonesty or theft;
B.    any offense that involves misrepresentation, deceptive practices, or making a false or misleading statement (including fraud or forgery);
C.    any offense that involves breach of trust or other fiduciary duty;
D.    failure to file a government report, filing a false government report, or tampering with a government record;
E.    any greater offense that includes an offense described in subparagraphs (A) - (D) of this paragraph as a lesser included offense;
F.    any offense that involves intent, attempt, aiding, solicitation, or conspiracy to commit an offense described in subparagraphs (A) - (E) of this paragraph.

Seller of Prepaid Funeral Benefits

See 7 Texas Administrative Code §25.31(c).

Perpetual Care Cemetery

Operating a perpetual care cemetery involves or may involve activities such as making representations to prospective purchasers of burial rights, collection and investment of perpetual care trust funds, continuing the general maintenance and care of the cemetery property, and maintaining adequate records as required by 7 Texas Administrative Code §26.2. Consequently, the following crimes are directly related to the duties and responsibilities of a licensee and may be grounds for denial, suspension, or revocation:

A.    any offense involving dishonesty or theft;
B.    any offense that involves the desecration of a cemetery, abuse of a corpse, or related crime;
C.    any offense that involves misrepresentation, deceptive practices, or making a false or misleading statement (including fraud or forgery);
D.    any offense that involves breach of trust or other fiduciary duty;
E.    failure to file a government report, filing a false government report, or tampering with a government record;
F.    any greater offense that includes an offense described in subparagraphs (A) - (E) of this paragraph as a lesser included offense;
G.   any offense that involves intent, attempt, aiding, solicitation, or conspiracy to commit an offense described in subparagraphs (A) - (F) of this paragraph.

Additional Factors 

In determining whether a criminal offense directly relates to the duties and responsibilities of holding any of the above charters, licenses, or permits, the Department will consider the following factors, as specified in Texas Occupations Code § 53.022:

•    the nature and seriousness of the crime;
•    the relationship of the crime to the purposes for requiring a license to engage in the occupation;
•    the extent to which a license might offer an opportunity to engage in further criminal activity of the same type as that in which the person previously had been involved; and
•    the relationship of the crime to the ability, capacity, or fitness required to perform the duties and discharge the responsibilities of a licensee.

In determining whether a conviction for a crime renders an applicant or a licensee unfit to be a licensee, the Department will consider the following factors, as specified in Texas Occupations Code §53.023:

•    the extent and nature of the person's past criminal activity;
•    the age of the person when the crime was committed;
•    the amount of time that has elapsed since the person's last criminal activity;
•    the conduct and work activity of the person before and after the criminal activity;
•    evidence of the person's rehabilitation or rehabilitative effort while incarcerated or after release, or following the criminal activity if no time was served; and
•    evidence of the person's current circumstances relating to fitness to hold a license, which may include letters of recommendation from one or more of the following:

o    prosecution, law enforcement, and correctional officers who prosecuted, arrested, or had custodial responsibility for the person;
o    the sheriff or chief of police in the community where the person resides; and
o    other persons in contact with the convicted person.

The purpose of these guidelines is to give notice to the types of crimes that may result in adverse action. Moreover, these guidelines are not intended to be an exhaustive list nor do they prohibit the Department from considering crimes not listed herein. After due consideration of the factors listed above, the Department may find that a conviction not described herein renders a person unfit to hold a license.