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Author Topic: Consequences of operating as MTL if operation outside of the USA  (Read 1528 times)
tagbond
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October 21, 2013, 04:43:14 AM
 #1

I have a startup that is a combination of ideas from Groupon, Adsense and Paypal - We are based in the Philippines with no office or bank account in the USA, and will be licensed here as an Electronic Money Issuer, with AMl / KYC policies. We will at some point also be registered as an EMI in Europe as well. Trying to do the same thing in USA is a minefield when trying to organise Money Transmitter Licenses (MTL). We are registered with Fincen, but not as MTL in any state.

In our system we will enable ewallet systems for both Fiat and Crypto, which allows users to transfer to other users and purchase goods/services online via our platform (which extends to any website or mobile app via our API)

The question is, if we are based outside the USA, with no banking in the USA, what can a state do? They would have to sue us in the Philippines where we will be licensed, to stop us offering services in that particular state. On a USA federal level, we are already registered and will comply with regulations as specified by Fincen, so it will be the individual state that has to take action. Will they bother? The websites etc are using AWS, but I don't think individual states can issue a takedown notice for websites, or can they?.

This has wider implications for any foreign company offering services to the USA where that company holds and transfers a currency (fiat or crypto), and operating from servers that are based in USA. Not talking about gambling or anything against the law on a federal level, more on a state to state level.

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October 21, 2013, 04:47:04 AM
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"against the law at state level" is also against the law at the federal level.  You aren't compliant with FinCEN if you are in any violation of state law/regs.  Being registered doesn't make you compliant it simply makes it easier for the feds to find you if/when you aren't compliant.  Being compliant makes you compliant.

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October 21, 2013, 06:48:07 AM
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Which means that Mt Gox and most other exchanges are not compliant either, despite being registered with Fincen. The question was, what can an individual state do about it?..

If it will be a serious problem then we just turn off the ability for a user to transfer to each other. However, the rewards aspect of our business is similar to Google Adsense in that they pay out a share of advertising income to a website owner, difference being we hold funds ready to pay out on behalf of the business instantly a deal or tagvert within our system is redeemed. If this still needs an MTL in each state you have customers, then everyone running an affiliate system would also need a license.

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October 21, 2013, 08:23:15 AM
Last edit: October 21, 2013, 08:43:06 AM by prophetx
 #4

Which means that Mt Gox and most other exchanges are not compliant either, despite being registered with Fincen. The question was, what can an individual state do about it?..

If it will be a serious problem then we just turn off the ability for a user to transfer to each other. However, the rewards aspect of our business is similar to Google Adsense in that they pay out a share of advertising income to a website owner, difference being we hold funds ready to pay out on behalf of the business instantly a deal or tagvert within our system is redeemed. If this still needs an MTL in each state you have customers, then everyone running an affiliate system would also need a license.

they may eventually get slapped with big fines (assuming gox stays afloat).  look up the recent penalty fees accessed on Square by the State of Florida for operating without license - 500k down the drain, not including all the money they must have spend on lawyers, auditors to clean up the mess.

http://techcrunch.com/2013/08/16/square-fined-507k-in-florida-for-operating-a-mobile-payment-service-without-a-money-transmitter-license/


by the way i thought the guys at bitinstant are registered in 33+ states... I am surprised they have not come up with an affiliate program...

however i do not think your company would meet the definition of a money transmission business, sounds like you are just paying sales commissions

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October 21, 2013, 10:59:52 AM
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Which means that Mt Gox and most other exchanges are not compliant either, despite being registered with Fincen. The question was, what can an individual state do about it?..

If it will be a serious problem then we just turn off the ability for a user to transfer to each other. However, the rewards aspect of our business is similar to Google Adsense in that they pay out a share of advertising income to a website owner, difference being we hold funds ready to pay out on behalf of the business instantly a deal or tagvert within our system is redeemed. If this still needs an MTL in each state you have customers, then everyone running an affiliate system would also need a license.

they may eventually get slapped with big fines (assuming gox stays afloat).  look up the recent penalty fees accessed on Square by the State of Florida for operating without license - 500k down the drain, not including all the money they must have spend on lawyers, auditors to clean up the mess.

http://techcrunch.com/2013/08/16/square-fined-507k-in-florida-for-operating-a-mobile-payment-service-without-a-money-transmitter-license/


by the way i thought the guys at bitinstant are registered in 33+ states... I am surprised they have not come up with an affiliate program...

however i do not think your company would meet the definition of a money transmission business, sounds like you are just paying sales commissions

There is a problem for your US customers by not having a US entity serving them.  Your US customers will fall under the FBAR filing requirements or risk having their assets with you seized (or equivalent assets in the US)  because they are using a "Foreign Bank" according to the definition of the requirement.
This is a pretty serious trap and could cause bad public relations problems for you unless you get in front of it with some communication to your users.

Essentially any US citizen with foreign account holding that they control (and can withdraw from if they travel abroad) has a reporting requirement if it is over US$10K.

Perhaps you are familiar with the US$10K reporting requirement for transporting a cash amount when you get on an international airplane?  This reporting requirement is to catch those that deposit money in foreign accounts, then travel out of the country and withdraw the funds.

The problems is worse because there is no notification for it and the fees are quite high.
(After two years of not reporting 100% of the account value can be seized, after 3 years 150%)
A few stories like this getting published and it is a serious problem for your public relations for your US selling efforts.
MtGox also has this problem, and did nothing about it (nor are they required to do anything).  It is a ticking time bomb for the users.
http://bitcoinmagazine.com/5481/real-compliance-getting-your-way-by-giving-in/

By registering an entity within the US, the account is a US account.  This gives you more reporting requirements, but eases the burden for your customers.

Sorry for this news.

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tagbond
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October 21, 2013, 02:18:24 PM
 #6

@prophetx - well, we have 2 aspects of the company - tagbond is the rewards program, and tagcash is the ewallet system, and they share the same wallet balances and transfers - we have the ability to turn off the user to user transfer system, on a currency basis, a country basis (which is what we will do in India for example, where ewallets for INR are not legal), or by a user address basis. So we may just have to switch that off for the USA for both USD and Crypto, as for MTL purposes, Crypto is also considered as currency now.

However, we are also setting up our own crypto exchange and taking in funds (including USD) to the Philippines so that adds an extra twist. If we set up a company in the USA with a bank account we are in the same position as Mt Gox, and operating without MTL in different states. So really we have no choice but to stay out and operate from here and make clear the rules on FBAR for customers and let them make their own choices. That probably explains why banks in Asia are wary about opening accounts for US Citizens.

I already registered Tagbond with Fincen, and will do the same for Tagcash, so we have a duty to report any transfers over 10k - not sure about total balances tho...perhaps we may just limit balances to 10k in USD and that would solve that problem.

On a sidenote, I am not a US citizen or all this would be impossible, lol...

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October 21, 2013, 05:16:31 PM
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I am a dual citizen atm. So I am etremely careful.

It is my responsibility to file fbar but I keep my foreign balances below that threshold.  I also do not try to hide money.  All you can do is remind your customers.  But, there is a but...

However, the US is making deals with countries to have their banking institutions report on US nationals' accounts, which is why a lot of EU based banks won't touch someone with an US passport due to the extra paperwork and possibe penalties.  Your business might fall under this as well in certain countries.  There is a list of countries floating around on some govt website but I just cant find it at atm.  It is sort of crazy but I think this will really hurt US business 10+ years from now.

http://rt.com/business/deadline-extended-americans-foreign-banks-231/

There are western union affiliates all over the world and I am sure they, the affiliates, dont need to file with each state.  I am surprised no one has figured this model out in bitcoin land yet... bitcoin union ...


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October 21, 2013, 11:10:32 PM
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I already registered Tagbond with Fincen, and will do the same for Tagcash, so we have a duty to report any transfers over 10k - not sure about total balances tho...perhaps we may just limit balances to 10k in USD and that would solve that problem.
If it were my company, I wouldn't limit it, but I would put some nagging messages up for accounts over 10K, and get especially nagging around the filing deadline.  You have no requirement to do anything, but it would be good customer service.

The only caveat is that the penalty is different if it is an innocent mistake than if it is willful so by notifying you arguably increase their penalty if they fail...Yes, law is weird.


On a sidenote, I am not a US citizen or all this would be impossible, lol...

You know what they say... "It comes with the territory"  Wink


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October 22, 2013, 01:26:17 AM
Last edit: October 22, 2013, 04:30:06 AM by DeathAndTaxes
 #9

Which means that Mt Gox and most other exchanges are not compliant either, despite being registered with Fincen. The question was, what can an individual state do about it?..

Probably true (although I don't like blanket statements on complex law).  Still you are missing the point.  It isn't what can an individual state do.  Non compliance with a state makes you non compliant with the federal statute as well.  So you don't get an auto immunity from federal action.  

As for what can the federal government do to foreign entities with absolutely no assets in the US .... as much as they want.

http://en.wikipedia.org/wiki/United_States_v._Scheinberg

For the record I am not saying DOJ will came after you or that they will even know you exist.  However it is dangerous to assume you are compliant when you aren't.  If you intend to operate non-compliant you should at least internally be aware of the risk.
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October 22, 2013, 03:37:50 AM
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If we get to any reasonable size, then we will be competing with Paypal, and at that point we will acquire Licenses in each state as they did, or working with licensed companies to make sure we comply. But as a very new startup, we have to start somewhere...and to allow the company to grow to be able to do all of that, it has to be done outside the USA.

It's a shame one has to go through these hoops - There needs to be Federal licensing procedure in the same way that Europe does it. Set up as an Electronic Money Issuer (which needs approx $500k in paid in capital) and then passport that license to every country in the EU, which costs nothing and is automatically granted if no objection after 30 days. It's a similar setup in quite a few countries now, including China where there are over 250 digital wallet systems. It really stifles innovation in USA.

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October 22, 2013, 05:19:06 PM
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As for what can the federal government do to foreign entities with absolutely no assets in the US .... as much as they want.
Really? Shocked It looks insane that U.S. authorities can seize any property around the world! What, for example, Uncle Sam can now accuse Russia for violation some regulation and declare Russia's oil reserves as U.S. property? Grin
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October 22, 2013, 06:10:31 PM
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As for what can the federal government do to foreign entities with absolutely no assets in the US .... as much as they want.
Really? Shocked It looks insane that U.S. authorities can seize any property around the world! What, for example, Uncle Sam can now accuse Russia for violation some regulation and declare Russia's oil reserves as U.S. property? Grin

Please at least try to read.  The OP isn't a sovereign nation, he doesn't have a seat on the UN security counsel, and he doesn't have enough nuclear weapons to wipe out the human race.  So comparing him to Russian oil reserves is kinda silly right?  

As a I linked to the Poker Black Friday entry it is involved non-US companies with non-US employees, operating on non-US servers with funds in non-US banks.  The DOJ working with 87 different host nations simultaneously froze nearly half a billion US dollars in more than 200 hundred bank accounts.  Not a single cent was in a US bank.  

No the US directly isn't going to go to war with a sovereign nation over assets (well sometimes they do that too) but:
a) the OP isn't a sovereign nation
b) the "long arm of the law" in the US is very long as they have agreements with more than half the nations on earth.
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October 22, 2013, 08:39:54 PM
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The OP isn't a sovereign nation, he doesn't have a seat on the UN security counsel, and he doesn't have enough nuclear weapons to wipe out the human race.  So comparing him to Russian oil reserves is kinda silly right?
Russian govt protects national businesses and its owners, also don't forget what US-Russia relationships are now. I cannot even find at least 1 case where Russia forfeited some company's assets on its own territory with request of US court.

BTW, BTC-E is Russian exchange and magically it haven't any legal troubles. If you are concerned about legal issues may be just follow it's example Wink
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October 23, 2013, 12:54:39 AM
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The OP isn't a sovereign nation, he doesn't have a seat on the UN security counsel, and he doesn't have enough nuclear weapons to wipe out the human race.  So comparing him to Russian oil reserves is kinda silly right?
Russian govt protects national businesses and its owners, also don't forget what US-Russia relationships are now. I cannot even find at least 1 case where Russia forfeited some company's assets on its own territory with request of US court.

BTW, BTC-E is Russian exchange and magically it haven't any legal troubles. If you are concerned about legal issues may be just follow it's example Wink

He is right, doubt Russia would agree to FATCA or any other wacky imperialist laws Congress passes ... the long arm of US law does not reach there.

Actually I had a friend stuck in a gulag prison on some made up industrial espionage charges and it took Collin Powell asking Putin in person for them to let him go... no joke... by the time they got him he was reduced to skin and bones

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October 25, 2013, 11:36:02 AM
 #15

If you are looking to achieve compliance and have an ongoing operation.  It may be reasonable to consider having more than one company.  When you get to the size that you want to address the US market with some seriousness, consider having a different company in US (and other countries where you want to serve users, or buying a US shell company (company with no employees) that already has some of the registrations you seek (I've seen MSB shell companys with many state registrations included, that sell for a couple hundred thousand USD).
With a local company, your US customers have no FBAR issue (because it is non-foreign), and the US sub/joint-venture can deal with the local compliance issues, FATCA, run its own P&L and pay licensing/franchise/software fees to the parent in Philippines to keep it as funded or as hallowed out as it makes sense.
This can be repeated in any country in which what you are proposing to do is a regulated industry.
This model can also provide incremental revenue from selling partnerships with local operations, while retaining some shares in each newco.  Some countries will require this model (US and China certainly), but it will almost always be easier to manage regulatory issues when you have a local company.

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October 25, 2013, 06:03:24 PM
 #16

This is exactly what we plan on doing....although I didn't know there were shell companies with MTL...

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