

Square Slapped With Cease And Desist By Illinois State Department - knappster
http://techcrunch.com/2013/03/01/square-slapped-with-cease-and-desist-by-illinois-state-department-of-financial-regulation/

======
tptacek
As I understand it, the big deal with money transmission licenses is that they
tend to require sizable bonds (they exist in part to mitigate the risk that
you'll build up a client base and one day take all the float and move to
Antigua --- or, for that matter, that you'll go out of business while holding
the bag on millions of dollars of client payables.

The requirements to get a license in Illinois are straightforward: you need to
meet a (low-seeming) net worth requirement, you can't have outstanding
regulatory problems with the state, your management can't be felons. You also
have to post a surety bond equivalent to max(100k, daily average volume).

If Square isn't already required to be a money transmitter in (say) CA or NY,
it'd be surprising if they had to be one in IL, but either way this seems like
a speed bump for Square.

~~~
dsl
Just because another state has not yet taken enforcement action doesn't mean
Square isn't in violation. The TechCrunch article mentions they have been in
talks with the state for a while, which means they could be talking to 40
other states that have the same concerns... we don't know.

If you are big enough to be noticed by the states as a major money mover,
you're probably big enough to get the proper licenses to conduct business. The
last thing we need is deregulation in the financial space.

~~~
tptacek
Of the various regulatory hurdles you have to jump over to be a business that
handles money for other people, money transmitter licenses seem like one of
the most reasonable requirements, so I guess I agree. It must suck a lot to
have to deal with every state on these, but I'm not sure we'd like federal
requirements any more.

~~~
aristus
If the bond requirement becomes daily volume times 50 states, they are boned.

~~~
AnIrishDuck
I wonder if they can post one bond that meets the requirements of all 50
states somehow... that seems reasonable, the issue is which party they would
post the bond with.

~~~
thinkcomp
No. The bonds must be separate as it currently stands, and they are very
expensive, not to mention a horrible way to handle insurance.

~~~
tptacek
Two questions. First, insurance underwriters sell surety bonds, so what makes
them a "horrible" way to handle insurance? If the states mandated actual
insurance, you'd be held hostage to the arbitrary requirements of insurance
companies; the bond requirement allows you to substitute your own capital for
the judgement of insurance underwriters if that's what you want to do, but
also allows you to avail yourself of the insurance industry.

Second, even though separate bonds are required by each state, what prevents
insurance companies from simply selling you a surety bond product that meets
the requirements of multiple states simultaneously?

------
jrs235
Ah, the great corrupt state of Illinois!

I wonder who and how much money got passed under the table to investigate and
pursue this.

Yes, I realize that no money may have been passed and that someone might have
just been doing "their job" (as they see it).

~~~
rayiner
I don't even understand the motivations behind posts like this. Government =
bad and tech company = good, so therefore any time there is an issue between
them, it can only be the result of government corruption squashing innovation?
Is that basically the gist of it? If it had been the state of Illinois versus
say Apple, would you say the same thing?

Square is part of the financial services sector. It's regulated, and always
has been, for good reasons. There is no need to turn the imposition of
reasonable licensing requirements into a anti-government rant.

What boggles my mind is that many of the same people who go off on things like
this also think the government doesn't do enough to regulate oil companies,
banks, etc. Guess what--people who work in those industries think they're the
"good guys" too, and tirade against the government for imposing regulations to
keep them "innovating." "We shouldn't regulate tech companies, it just hinders
innovation, the government doesn't understand the space anyway" is pretty much
precisely parallel to the thinking that got us deregulation in financial
services.

~~~
jrs235
It's more of a jab at Illinois (that state seems to have more than its fair
share of known corruption issues) than government in general. "If it had been
the state of Illinois versus say Apple, would you say the same thing?" Yes.

Some Government regulations are in fact reasonable, even a libertarian such as
myself can concede that.

Someone else pointed out that Square doesn't really hold funds, they transfer
them. (I haven't verified this statement.) Even if this is true... they still
have access to a lot of people's funds and could very easily steal them.

Your other points are also spot on.

UPDATE: I was a little surprised myself that the net karma score for the
parent comment was positive.

UPDATE 2: "I don't even understand the motivations behind posts like this." To
be a little snarky I guess and to raise eyebrows and questions. At face value,
little value is added by the comment... until someone replied and added to the
discussion.

------
btilly
Is Square even in Illinois?

If not, then can someone explain to me how Illinois has the power to enforce
this statute? I am not a lawyer, but it would seem to me to be a pretty clear
case of interstate commerce, which is under federal jurisdiction.

~~~
dsl
The Commerce Clause grants powers to Congress, it does not limit the powers of
states.

If someone uses Square to accept a payment or receive the benefit of a payment
within the state, they can regulate it. If Square disagrees or believes the
law is unjust, they can cease business in the state, or file a lawsuit against
the state.

~~~
tptacek
I don't think that's true; if you Google "dormant commerce clause", you'll see
why. State laws restricting interstate commerce have to have a legitimate
interest for that particular state and their interference with interstate
commerce has to be outweighed by their benefit.

~~~
dsl
My point still stands that its up to the state to make the determination, not
you or I. Obviously they feel that Square is doing something that they can
regulate.

~~~
DenisM
It's _not_ up to the state. Supreme cour often overrides state laws on the
grounds that they interfere with interstate commerce.

Also, the "not you or I" part was unnecessary.

------
thinkcomp
Money transmission laws are complex. (See
[http://www.thinkcomputer.com/corporate/whitepapers/heldhosta...](http://www.thinkcomputer.com/corporate/whitepapers/heldhostage.pdf)
.) They're designed to be complex. Most of the laws passed in the past twenty
years have been designed by one man, Ezra Levine (<http://www.mofo.com/ezra-c-
levine/>), who is now a lawyer at Morrison & Foerster. His client is The Money
Services Round Table (TMSRT), and its membership comprises some of the largest
money transmitters in the country.

Square has a money transmission license in California but it is not part of
TMSRT. What's surprising about this situation is the following:

1) Square has a lot of lawyers. It has enough money and clout that they are
probably very good lawyers. Yet even all of that money, clout (Jack Dorsey)
and lawyering could not protect Square from this insane regulatory regime.

2) It is not clear to me, having studied this topic for two years basically
full-time, that Square actually is a money transmitter. They might be, but
they might not be. Per federal regulations (I think 31 CFR § 1010 point
something), they aren't; they are a payment processor, but states ignore these
regulations. Even though the definition varies from state to state, it's hard
for me to figure out what Square does with money that is not done on behalf of
a bank, and banks are exempt from every state money transmission statute to
the best of my knowledge. Usually it's just assumed that their agents are also
exempt (hence the federal "payment processor" term--suddenly you're not a
"money transmitter").

3) State regulators talk to one another but these laws are rarely, if ever,
enforced. Virtually every payment startup I know of that isn't Square is
violating them, including several YC startups, and even non-payment startups.
It's not clear to me what happened in Illinois that their department of
banking decided to take the lead on this. I wonder who has a major presence in
Illinois that was upset enough that it happened. (Obviously not Visa--they're
an investor.)

Square might want to consider filing an amicus brief in my company's case
against the California Money Transmission Act
(<http://www.plainsite.org/flashlight/case.html?id=716056>) and/or joining the
coalition of entrepreneurs and investors I have helped to assemble in
opposition to the insanity that is the money transmission regulatory regime in
the United States, especially given AB 786 in the California legislature
([http://www.leginfo.ca.gov/cgi-
bin/postquery?bill_number=ab_7...](http://www.leginfo.ca.gov/cgi-
bin/postquery?bill_number=ab_786&sess=CUR&house=B&author=dickinson)) and the
hearing about it on March 11 (<http://abnk.assembly.ca.gov/hearings>). E-mail
me at aarong@thinkcomputer.com. This issue will not go away unless we make
some noise about it.

~~~
tptacek
What issue do you want to have go away? The need to post bonds if you're going
to offer a product to the public that involves you taking their money, storing
it, and forwarding it to someone else? Or just the specifics of those
requirements?

I remember the kernel of your argument against CA's law being that their bond
requirement wasn't transparent; that the stated requirements were "minimums"
that could be ratcheted up without amending the actual law. That seems like a
valid complaint, but a valid answer to it would simply be to set the stated
requirements much higher; they'd be transparent, but you'd still have been
priced out of the market --- because it's an expensive market to operate in!

I'm not sure what Ezra Levine has to do with any of this. The money
transmitter laws of a lot of states are similar because they're based on model
regulations drawn up by an association of regulators in the early '90s. Did
Levine help author those regs? So what? Do we think Western Union was trying
to shut Square down before most states even had commercial dialup Internet
access?

~~~
thinkcomp
Thomas,

First, it's nice to know that you're interested in my views the subject.
Before (<https://news.ycombinator.com/item?id=3595814>), you did not seem to
be.

You have summarized my position incorrectly. Generally, there are two major
distinct requirements that the MTA sets forth: tangible net worth and surety
bonds. These requirements are independent and cumulative (not mutually
exclusive). There are further two types of surety bonds required that in
aggregate (and the law explicitly requires aggregation for most startup-type
activity) must be valued at $750K minimum. At 3% per year that costs a startup
at least $22,500 per year just to operate in one state.

Contrary to your summary, that number is clear. The number that is not clear
is the tangible net worth requirement. The current statute sets it at a
minimum of $500K, again, independent of the surety bonds. The statute then
gives the Commissioner (or his/her subordinates) the power to raise that
number to _any level on a case-by-case basis_ , without even informing the
applicant. So the bar can change, and you can be told that it HAS changed, but
you do not necessarily need to be told what it is. I was told $1M, $2M, $20M,
and $80M in one meeting, later to be told $1.5M--maybe. This is a
constitutional due process issue if there ever was one. It's also an issue of
giving a single bureaucrat unfettered discretionary power--another
constitutional problem.

You can apply anyway (for the $5,000 non-refundable application fee), but if
you are rejected, _you must inform other states that you have been rejected
from applying for a license_ , and there is a highly increased risk that they
will in turn reject you in their own state. This cascading effect poses
serious constitutional problems.

If you break any part of any state money transmission law without meaning to,
and even if you have been advised by a lawyer that you are in the clear, you
are in violation of 18 U.S.C. § 1960(a), which means you and your investors
could go to jail, because that's what 1960 actually says
(<http://www.plainsite.org/laws/index.html?id=14426>). And it has been used
against people, mostly Muslims
([http://www.plainsite.org/laws/index.html?id=14426&table=...](http://www.plainsite.org/laws/index.html?id=14426&table=cases)).

Furthermore, as I see you pointed out, the aggregate burden of complying with
47 state laws far outweighs any nominal (and I would argue illusory) consumer
protection benefit--another constitutional problem under the Pike test.

So what would I like to see go away? All of this. In its place I'd like a
single federal regulator like Canada's FINTRAC that charges no fees, registers
companies in the space, and performs real-time checks on operational funds
used to keep these companies running. Current bank regulators barely use
computers for actual regulation, which is why MF Global and Peregrine were
able to fail even though they were capitalized in the eight and nine figures
(see <http://www.aarongreenspan.com/writing/essay.html?id=77>).

Your argument that the "answer to it" is to make requirements even higher does
not scale or in my opinion even make any sense. Those examples at least prove
it wrong. By your logic there should only be three mega-companies with
trillions of dollars that can comply with these amazingly high requirements.
We have that now. It's not working very well. Most people call it "too big to
fail" and see it as a problem.

A better solution is FDIC-type insurance for money transmitters. Companies pay
premiums based on risk to insure each other, instead of buying limited surety
bonds to insure only themselves.

Lastly, Ezra Levine has to do with it because he wrote the MTA. He also wrote
Hawaii's law. He also wrote about twenty other laws.
<http://www.moneylaunderingconference.com/2012/speakers.asp> ("He is the
author of money transmitter licensing laws in many states and has been
instrumental in the passage of model money transmitter safety and soundness
laws in numerous states.") From the GCMT 2006 conference web site which is no
longer on-line: "Since 1986, Mr. Levine has represented a wide variety of
check issuers, funds transmitters, stored value issuers, bill payment entities
and internet funds transmitters with regard to all aspect of the approximately
45 state statutes dealing with licensing of payment instrument issuers, funds
transmitters and the like." And, "He has had an active role in the enactment
of the money transmitter laws in Oregon, Minnesota, Washington, Iowa, West
Virginia, Illinois, Wyoming, North Carolina, Florida, Idaho, North Dakota, New
Jersey, Tennessee, Maine, Vermont, Arizona, the District of Columbia and
Indiana."

So yes, we do think that Western Union has been trying to prevent the creation
of new innovative services since before most states even had commercial dialup
Internet access.

Aaron

~~~
tptacek
Talking about money transmitter laws makes sense on stories about money
transmitter laws, but doesn't make sense on other threads.

You've basically restated what I said but in much greater detail. Thanks.

I'm choosing my words less carefully than you are. When I said the states
could "answer" your objection, I meant that the points you raised about
transparency could be blunted by becoming very transparent but also more
onerous.

~~~
thinkcomp
I'm sorry, but that "other thread" was entitled "Major Bitcoin exchange shuts
down, blaming regulation and loss of funds." You have harassed me relentlessly
on this topic and others, as recently as a few days ago when you falsely
accused me of having a sneaky ulterior motive for putting information in the
public domain at <https://news.ycombinator.com/item?id=5282532>), and I am
tired of it.

I wrote a comment about financial regulation on a thread about financial
regulation and you launched a personal attack against me for it, as you often
do.

Just now, I did not restate what you said. I explained in great detail why the
state of affairs is NOT as you say.

Perhaps in the future you could choose your words more carefully.

~~~
tptacek
I'm not sure what the other thread you're pointing to has to do with money
transmission laws. There, you were enlisting volunteer support for an effort
that happened to be remunerative to yourself. You didn't mention that in your
comment; I wished you had. (Note also that by the end of the thread the
goalposts had also moved from Plainsite to Asymptote.) You then replied to the
effect that I'd accused you of operating the entire effort as some kind of
scam, which I of course hadn't done.

That exchange, like this one, is characteristic of the way you communicate on
HN. You could just respond to questions or even refute them aggressively.
Instead, you take things personally and create smokescreens.

It's an unfortunate habit because in this particular discussion you are
probably in greater command of the facts than I am, and yet you spend
credibility on pointless innuendo that is easily knocked down.

(I obviously have my own expansive portfolio of unfortunate HN habits, but
unlike you I'm not appealing to HN for help in any particular cause, so I
think it matters less for me.)

~~~
thinkcomp
Obviously at this point we're talking about the fact that you are harassing
me, not money transmission laws.

PlainSite's database of public information (which is freely available to non-
lawyers) is a public good. Operation Asymptote is an attempt, from which I
have no way of profiting exclusively or directly, to increase the value of
that public good. The only way that I might profit from Operation Asymptote is
indirectly. So your argument that the "effort that happened to be remunerative
to [my]self" is plainly false and deliberately misleading and possibly
damaging to my reputation.

Your insightful comments about computer security on this forum are a public
good. You might profit from them if someone finds them one day and agrees with
or wants to know more about something you say--but so might anyone else.

The difference here is that you are (wrongly and publicly) accusing me of
improper conduct for failing to note that I might profit from more public
information being available, and I am not accusing you of anything because
helping to improve the commons is _supposed_ to help everyone profit, and I am
glad to learn about computer security from you, and to also see you make a
living from it.

So this is my last warning. Stop harassing me.

~~~
tptacek
o.O

------
epitrochoidal
From the C&D: "Consumers obtain said devices, free of charge, either through
U.S. postal mail or by picking them up at multiple retail locations throughout
the State of Illinois." Seems like the real issue may be the "free of charge"
part. No charge, no sales tax revenue for the State of Illinois. Maybe I'm too
cynical, but I can see this as a bureaucratic rationale.

~~~
rmah
Pretty much every state has similar licenses to the Illinois license. Square
will have to apply for them in all of those states eventually. They're just
being cheap and playing chicken with regulators so they can delay as long as
possible to avoid the financial impact of compliance.

