DOJ and Criminal Exposure for Unlicensed Money Transmission
A federal agent arrives at a money transmitter's office with a subpoena. The subpoena requests customer records, transaction records, and banking records for a six-month period. The agent tells the CEO that they are investigating potential unlicensed money transmission under 18 USC 1960.
This is the moment when a compliance violation becomes a criminal investigation.
Most money transmitter operators do not think seriously about criminal exposure. They focus on regulatory compliance—filing SARs, conducting due diligence, implementing AML controls. But the criminal law is a separate legal system with different standards, different procedures, and catastrophic consequences if you are convicted. Criminal charges against a money transmitter typically result in imprisonment of the principals and criminal forfeiture of assets.
18 USC 1960: The Federal Criminal Statute
Section 1960 of Title 18 of the United States Code makes it a federal crime to conduct money transmission without being licensed or authorized to do so. The statute reads as follows:
"Whoever knowingly conducts or attempts to conduct a financial transaction in violation of any regulation, rule, or license requirement of the Secretary of the Treasury, knowing that the financial transaction is designed in whole or in part... to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds of any specified unlawful activity... shall be fined... or imprisoned not more than 10 years, or both."
There is a separate provision that applies specifically to money transmission: "Whoever knowingly and willfully fails to comply with any regulation promulgated by the Secretary under this chapter requiring money transmitters to register, or to maintain, preserve, or report certain records, or to submit certain reports or information... shall be fined... or imprisoned not more than 5 years, or both."
In practice, prosecutors use the first provision more frequently because it carries a longer sentence and because the mental state requirement ("knowingly") is easier to establish than "knowingly and willfully."
What Constitutes "Unlicensed Money Transmission" Criminally
The definition of "unlicensed money transmission" for purposes of the criminal law is essentially the same as the regulatory definition: engaging in the business of receiving money from a person and transferring that money to another location or another person, without being licensed to do so.
But in the criminal context, the question of "licensing" is more complicated. You might be licensed by one state but not licensed by another state. Are you conducting unlicensed money transmission when you operate in a state where you are not licensed? The answer depends on whether you are soliciting customers in that state or are only receiving unsolicited money from customers in that state.
The FinCEN regulatory framework requires a money transmitter to be licensed by each state where the money transmitter is "operating" or "conducting business." But the operational standard is fact-intensive. If you advertise on the internet and ship money from your office in Texas to customers in California, are you conducting business in California? If you receive money through your website from a customer in California and send it to Mexico, are you conducting business in California?
For criminal liability purposes, the answer becomes: if you are knowingly engaging in the business of money transmission in a state without a license, you are violating the law. The knowledge element is critical. If you did not know you needed a license in a state, you may not be criminally liable even if you were violating the regulation.
But the knowledge element is established easily if you were previously notified. If a state regulator contacted you and told you that you needed a license in that state, and you continued to conduct transactions without getting licensed, the knowledge element is satisfied. If you read the state law and made a mistake in interpreting it, that does not eliminate the knowledge element. Courts have held that a reasonable person would have understood that they needed a license.
The Intent Requirement and How Prosecutors Prove It
The criminal statute requires proof that the defendant "knowingly" conducted money transmission without a license. This is not the same as "knowingly and willfully." "Knowingly" means the defendant was aware of the conduct. The defendant does not need to know that the conduct was illegal. The defendant does not need to intend to break the law.
In practice, prosecutors establish the knowledge requirement through circumstantial evidence. They will present evidence that the defendant was engaged in money transmission: that the defendant received money from customers, that the defendant transferred that money to beneficiaries, that the defendant charged fees, that the defendant maintained records of the transactions. This evidence, together with evidence that the defendant was not licensed, is sufficient to establish that the defendant "knowingly" conducted unlicensed money transmission.
Prosecutors often introduce evidence of the defendant's awareness of the licensing requirement. This might be evidence that the defendant received correspondence from a state regulator about licensing, that the defendant consulted with an attorney who advised licensing was required, or that the defendant applied for a license at some point. This evidence tends to prove that the defendant knew a license was required.
If the defendant claims they did not know they needed a license, the prosecution will present evidence that a reasonable person in the defendant's position would have known. The prosecution might present expert testimony from someone familiar with money transmitter regulation. The expert can testify that anyone operating a money transmission business would have been aware of the licensing requirement.
State Criminal Statutes for Unlicensed Activity
In addition to the federal criminal statute, many states have criminal statutes prohibiting unlicensed money transmission. These statutes vary in severity. Some states make it a felony to conduct unlicensed money transmission. Others make it a misdemeanor. Some states have statutes that are prosecuted regularly. Others have statutes that are rarely invoked.
Understanding your state's criminal statute is important if you operate in that state. If your state has a criminal statute and it is routinely enforced, you face both federal criminal risk and state criminal risk if you operate without a license.
A notable pattern is that state prosecutors often coordinate with federal prosecutors. If the state has a criminal investigation of a money transmitter, the state may coordinate with the FBI or the U.S. Attorney's Office. In some cases, the state prosecutor will defer to federal prosecution. In other cases, there will be simultaneous state and federal prosecution.
Dual state and federal prosecution creates enormous legal costs and leverage for the government. A defendant may face multiple felony charges in state court and multiple felony charges in federal court. The sentences can run consecutively. The defendant faces pressure to cooperate in exchange for concessions on one set of charges.
Notable Criminal Prosecutions and Case Studies
The prosecution of Liberty Reserve is a notable example. Liberty Reserve was a virtual currency exchange that conducted money transmission without being licensed as a money transmitter. The operators of Liberty Reserve were charged with violating 18 USC 1960 and with conspiracy to launder money. The case resulted in substantial prison sentences for the operators.
The prosecution of Dwolla is an interesting contrast. Dwolla was a payments system that conducted money transmission without being licensed as a money transmitter in all states. Dwolla was investigated by federal and state authorities. Rather than result in criminal charges, the matter resolved through civil enforcement: Dwolla agreed to implement a licensing strategy and agreed to consent to state oversight.
The difference between Liberty Reserve and Dwolla illustrates an important point: criminal prosecution is more likely when the defendant is engaged in conduct designed to evade law enforcement or to conceal the nature of the transactions. Liberty Reserve's use of anonymity, its resistance to regulatory oversight, and its focus on jurisdictions with weak enforcement all contributed to criminal prosecution. Dwolla was engaged in conduct that could have been licensed, and when the company agreed to pursue licensing, criminal prosecution did not occur.
The prosecution of executives at Ripple Labs for operating an unlicensed money transmission service is a more recent example. The case involves whether Ripple was operating as a money transmitter when it sold digital currency. The case is instructive because it demonstrates that the definition of money transmission is expanding as digital currency markets grow, and that defendants who claimed they were engaged in currency sale rather than money transmission face criminal exposure if prosecutors disagree with that characterization.
The Intersection of Money Transmission and Money Laundering Charges
Many criminal prosecutions of money transmitters combine charges of unlicensed money transmission with charges of conspiracy to commit money laundering or substantive money laundering offenses. The unlicensed money transmission charge carries a maximum sentence of five to ten years. The money laundering charges carry up to twenty years imprisonment.
The significance of this dual charging is that prosecutors can establish money laundering on the theory that the defendant facilitated money laundering by conducting unlicensed money transmission. The defendant does not need to have knowledge that the money being transmitted was proceeds of illegal activity. The defendant only needs to have knowledge that the conduct was unlicensed and to have facilitated the transmission anyway.
This creates a paradox: a licensed money transmitter that conducts due diligence, files SARs, and implements AML controls faces lower criminal exposure than an unlicensed money transmitter even if the unlicensed transmitter has the same intent and conducts the same transactions. The unlicensed transmitter can be prosecuted for money laundering based on the fact that they facilitated transmission of illegal proceeds while unlicensed, even if they did not know the proceeds were illegal.
How Criminal Exposure Differs from Civil Enforcement
Civil enforcement by regulators and criminal enforcement by prosecutors operate under different rules.
Civil enforcement requires that the regulator establish a violation by a preponderance of the evidence—meaning the evidence is more likely than not to establish a violation. Criminal enforcement requires that the prosecutor establish a violation beyond a reasonable doubt—meaning the evidence must be so compelling that no reasonable juror could doubt the defendant's guilt.
But criminal enforcement is not harder than civil enforcement in all respects. In criminal enforcement, the defendant's intent is relevant and the defendant's knowledge is relevant. But the defendant has the right to remain silent and the right to refuse to testify. In civil enforcement, the defendant can be compelled to testify and can be compelled to produce documents.
More significantly, criminal enforcement brings to bear investigative powers that are not available in civil enforcement. Federal prosecutors can subpoena bank records without notice to the defendant. Federal prosecutors can conduct wiretap investigations. Federal prosecutors can use cooperating witnesses. These investigative tools are available only in criminal cases.
An important procedural difference is that in a criminal case, the defendant can file a motion to suppress evidence if law enforcement obtained the evidence illegally. In a civil enforcement case, the regulatory agency's rules of evidence are more permissive, and constitutional protections against illegal searches are weaker.
Protecting Yourself and Your Business from Criminal Risk
The most direct way to protect yourself from criminal exposure is to become licensed. If you are licensed in every state where you conduct business, you are not in violation of the unlicensed money transmission statute.
But licensing is not always feasible. New York's license, for example, is expensive and requires extensive capital. Some states have licensing processes that take years. Some money transmitter businesses operate across many states, and licensing in all of them is operationally complex and expensive.
If you operate across multiple states, make a deliberate decision about which states you will license in. That decision should be based on: which states have the highest regulatory risk, which states have the most enforcement activity, where are your customers located, which states' laws are clearest about the licensing requirement.
Once you have made that decision, document it. Write a memorandum explaining why you decided to license in some states and not others. Make clear that you made a deliberate decision based on legal analysis, not that you were unaware of the licensing requirement.
If you have decided not to license in a particular state, establish a mechanism to prevent customers in that state from using your service. You might geofence your mobile application so that customers in unlicensed states cannot create accounts. You might include in your terms of service that the service is not available in certain states and that customers in those states are prohibited from using the service. You might implement IP filtering to detect when transactions originate from unlicensed states.
These controls will not eliminate your risk, but they demonstrate that you are aware of the licensing requirement and are taking steps to comply.
Alternatively, if you are willing to accept the risk that you might be conducting unlicensed money transmission in certain states, you should take steps to limit your exposure. This means: ensure that you are not conducting money transmission for customers you know are in unlicensed states; ensure that you are not targeting customers in unlicensed states through advertising; ensure that you have a mechanism to detect when a customer appears to be in an unlicensed state and to prevent the customer from conducting transactions.
You should also educate your customers that your service is licensed in certain states and not in others. Include this information in your terms of service. When a customer establishes an account, ask the customer to certify the state in which the customer resides. These steps create a record that you were aware of the licensing requirement and were taking steps to comply.
What to Do If You Receive a Federal Subpoena
If a federal agent appears with a subpoena, do not panic and do not destroy documents. You are not authorized to destroy documents in response to a subpoena, and doing so is a separate federal crime: obstruction of justice.
When you receive a subpoena, consult with a criminal defense attorney immediately. Do not respond to the subpoena without legal counsel. Do not answer questions from the federal agents without your attorney present.
The subpoena will request specific documents and will specify a date by which the documents must be produced. You have the right to seek additional time if the deadline is unreasonable. You also have the right to challenge the subpoena if it requests documents that are privileged (that is, communications between you and your attorney, or information obtained by your attorney in preparing your defense).
When you produce documents in response to a subpoena, produce exactly what the subpoena requests. Do not produce more than requested. Do not redact documents unless you are asserting a legal privilege. The reason is that overproduction of documents creates the impression that you are cooperating, which can be used against you.
Do not organize the documents you produce in a way that makes them easier to read or understand. Produce them in the order they were kept in your ordinary business records. The reason is that a well-organized production can suggest that you were preparing for litigation or enforcement.
Do not attempt to communicate with the agent after receiving the subpoena. All communication should go through your attorney. If the agent contacts you directly, your attorney will advise you not to talk to the agent without counsel present.
The Compliance Defense: Can a Good Program Save You?
An important question is whether a good compliance program is a defense to criminal charges. The answer is: not directly, but it is highly relevant to sentencing and to the decision of whether to prosecute.
A defendant cannot use a compliance program as a defense to criminal liability. If the defendant knowingly conducted unlicensed money transmission, the fact that the defendant also filed SARs and conducted due diligence does not eliminate the criminal liability.
But a strong compliance program is relevant to the decision of whether to prosecute. Federal prosecutors exercise discretion about whether to bring charges. If a defendant was engaged in conduct that technically violates the law but was operating in good faith, was attempting to comply with regulations, and had implemented significant controls, a prosecutor may exercise discretion not to prosecute.
A strong compliance program is also relevant to sentencing. If a defendant is convicted, the defendant's compliance efforts will be relevant to the sentence the judge imposes. A defendant who was engaged in money transmission, was unaware that licensing was required, and conducted significant compliance activities will receive a lighter sentence than a defendant who knowingly operated without a license and took no steps to comply.
The takeaway is that if you are operating in gray areas of the law, you should document your compliance efforts carefully. If you consulted with attorneys about licensing requirements, document that consultation. If you implement transaction monitoring, document that you are running the system and reviewing alerts. If you conduct training, document it. If you file SARs, keep records. These documents will not prevent prosecution, but they will be relevant to the decision whether to prosecute and to the sentence imposed if you are convicted.
Criminal Prosecution as a Deterrent
The federal government uses criminal prosecution of money transmitter operators as a deterrent to unlicensed money transmission. The message the government is trying to send is: if you conduct money transmission without being licensed, you face federal criminal prosecution and potential imprisonment.
This deterrent works by creating visibility. When a high-profile money transmitter operator is prosecuted, other money transmitter operators take notice and become more cautious about compliance.
From the perspective of a business operating in the space, this means that you should take the licensing requirement seriously. If you have any doubt about whether you need a license, you should err on the side of licensing or not engaging in the activity.
If you have made a deliberate decision not to license in a particular state, document that decision and make sure the decision is defensible. A decision not to license should be based on a legal analysis that concludes you are not engaged in money transmission, not on a decision that you are willing to accept the risk of criminal prosecution.
Creating an Audit Trail for Your Licensing Decisions
One of the most effective ways to reduce criminal exposure is to document the licensing decisions you have made. Create a memorandum addressing each state where you potentially could operate. For each state, analyze: does the state require licensing for your business model, have you obtained a license, if not, why not, what steps have you taken to ensure you are not conducting business in states where you are not licensed.
This memorandum should be prepared in consultation with your attorney, and it should be protected by attorney-client privilege. The memorandum should be specific to your business and should reflect actual analysis, not generic boilerplate.
Keep this memorandum updated as your business evolves. If you add a new service line, analyze whether that service line triggers licensing requirements in additional states. If your customer base shifts, analyze whether you now have customers in states where you are not licensed.
The value of this memorandum is that it demonstrates that you have considered the licensing question, have consulted with legal counsel, and have made deliberate decisions. If you are prosecuted, this memorandum will be discovered by the prosecutor. But it will also be available to your defense attorney, and it may be persuasive to a jury that you were attempting to comply with the law.
Practitioner's Bottom Line
Criminal liability for unlicensed money transmission is based on the fact of engaging in money transmission without a license, not on intent to break the law. Minimize criminal exposure by either licensing in jurisdictions where you operate or by documenting a legal analysis supporting why you are not engaged in money transmission. If you receive a federal subpoena, immediately consult with a criminal defense attorney and produce only what is requested. A strong compliance program does not prevent prosecution but is highly relevant to prosecutorial discretion and to sentencing.