A money transmitter bond is a special type of surety bond that is required for any business that wishes to start working within the money transmitter industry. A money transmitter is an entity that provides money transfers or payment services throughout the United States. Clear examples of this type of companies are Western Union or Paypal. As with many other industries, a money transmitter is a licensed business. It requires a special license in order to operate. These licenses are mostly issued by state government agencies. In order to obtain a license for money transmitting, the owner of the company should complete a series of prerequisites that qualify the business as adhered to the law. One of these steps is the purchase of a money transmitter bond. The main objective of a money transmitter bond is to assure that the money transmitter business will provide its services in full accordance to the laws and to the specific regulations of the industry. It is a way to protect the customer from any possible fraudulent or unlawful behavior.
As with every other surety bond, the money transmitter bond is a legally enforceable contract between three parties. The first party is known as the Principal. The principal is the individual or entity that will require a money transmitter bond in order to operate a money transmitter business. When purchasing a surety bond of this kind, the principal is agreeing to act adhered to the laws and regulations of the industry. It is a financial guarantee where it is stated that the client will not be a victim of unlawful or ethically dubious services.
The second party is known as the Obligee. Most of the time, state governmental entities play the role of the obligee. The obligee is the party that solicits or requires the bond before issuing a license or permit. Since the government agency that issues the specialized license change from state to state, the exact conditions and expectations of money transmitter bond will be different in one state than another. With the money transmitter bond, the obligee is also protected against any financial loss due to unlawful behavior from the principal.
The third and final party is the Surety. This is the party that sells, underwrites and issues the bond. Sureties need to be financially strong businesses and thus are mostly represented by insurance companies. As the issuer of the bond, the surety has certain specific obligations towards the principal and the obligee. The surety will be the party to act when there is a claim against the bond. When the principal acts in unlawful or ethically dubious manner, the obligee has the right to make a claim against the bond. The surety has the obligation to investigate the situation and determine if the claim is valid. In the event of a valid claim, the surety will pay the obligee for any harm or damage incurred due to the unlawful behavior of the principal. The surety will then charge the principal for a reimbursement of that payment plus any legal fees that came out of the surety’s investigation of the case.
As one might have figured out, a money transmitter bond does not act as insurance for the principal, but for the obligee and the customer. Insurance and money transmitter bond, however, is not the same thing and they should not be confused. Insurance is a contract between two parties (insurance company and insured entity), where no reimbursement is included. Money transmitter bonds are contracts between three parties where reimbursement is necessary in the given case the bond is violated.
The inclusion of money transmitter bonds as a prerequisite to obtain a professional business license is a great and efficient way to regularize the industry. It is the state government entity that follows these regulations and makes sure that every business is acting in full accordance to the laws involving the business and its services. Money transmitter bonds and surety bonds in general are a great way to protect customers from any financial loss due to unhealthy behavior from a business.