The California Law That Should Send The President and Fellows of Harvard College (and Every Private University) To Prison
There are strange unintended consequences of broad state laws.

July 20, 2011
Also published on Quora

Topics = { Education + Government + Harvard University + Payments }

It's not exactly controversial: Harvard University is in Cambridge, Massachusetts. From the standpoint of the State of California, however, that doesn't matter. The people who run Harvard belong in jail. Not just Harvard, though. Yale, too. And Stanford, MIT, Caltech, Dartmouth, Cornell, Duke, Notre Dame, Wellesley, Columbia, Pomona, Occidental, USC, and virtually every other private institution of higher learning in the country.

At this point, you might think this is just made up, but there actually does exist a very clear legal mechanism by which the top officials at every one of these schools could land up incarcerated for a rather long time, for committing a very serious crime. What could all of these university presidents and fellows be up to?

Unlicensed money transmission, of course.

If you're a current undergraduate or a recent alum of just about any school, you probably remember receiving a brochure, possibly amongst a deluge of brochures about college life, regarding a program with an alliterative name like "Crimson Cash" (Harvard) or "Bengal Bucks" (Occidental). These programs, designed to take advantage of the fact that students are required to carry an ID card on campus for building entry anyway, typically facilitate some kind of pre-paid debit-based spending program as an alternative to high-APR credit cards, which tend to prey on unsuspecting students with no prior credit history. While some schools limit acceptance to dining halls, virtually all of them have grown their networks to include third-party area merchants. The web site for Claremont Cash, which can be used at all of the Claremont Colleges, makes a point of stating that, "Many merchants in town accept Claremont Cash." It simply makes economic sense for students and merchants alike.

From a regulatory standpoint, even though the network of merchants is typically contained within a single state, these institutions are money transmitters, or as the United States Department of the Treasury refers to them, Money Services Businesses (MSBs). They or their service providers—such as a company called JSA Technologies, Inc. in the case of Harvard and MIT—hold onto funds that do not belong to them, and facilitate the transfer of those funds to third-party merchants when their systems are instructed to do so, such as when a purchase takes place. This kind of activity has taken place for years at most universities.

So what has changed? On July 1, 2011, § 1872(b) of the California Money Transmission Act (MTA) went into effect. One consequence was that with the Department of Financial Institutions unwilling to explain exactly how much money was actually necessary over and above the statutory net worth requirement of $500,000, I had no choice but to shut down my company's operations in California, for lack of the legal ability to do business with consumers and merchants who are California residents. Yet at private universities, most of which are probably totally unaware of the law's existence, life continued as usual—except for the fact that the pre-paid debit systems they operated were now illegal, as long as those systems held funds for at least one California resident.

In my college class, there were roughly 196 students from California. Every student started off with a fresh re-loadable Crimson Cash balance each semester, taken from their tuition fees.

The USA PATRIOT Act was likely not drafted with this scenario in mind, but one never knows where terrorists might be lurking. § 373 of the law modified 18 U.S.C. § 1960 by broadening the meaning of an "unlicensed money transmitting business" to, according to the Commonwealth of Massachusetts, "eliminate the need to prove that the business knowingly operated without a license. In addition, the definition includes anyone who fails to register as a money transmitter with FinCEN." (See

How does 18 U.S.C. § 1960, the law that it modified, start off? "Whoever knowingly conducts, controls, manages, supervises, directs, or owns all or part of an unlicensed money transmitting business, shall be fined in accordance with this title or imprisoned not more than 5 years, or both."

That penalty would apply just to the unlucky service providers, though, not the universities themselves, surely! Sadly, no. There's also § 1827 of the MTA, which states, "A person may not provide money transmissions on behalf of a person not licensed or not exempt from licensure under this chapter. A person that engages in that activity provides money transmissions services to the same extent as if the person was a licensee, and shall be jointly and severally liable with the unlicensed or nonexempt person."

"But this is madness!" you might think. "The university system must be exempt!" In fact, there is a list of exempt entities in § 1805 of the MTA:

  • The federal government
  • The United States Postal Service
  • State and local governments
  • Commercial and industrial banks
  • Contractors doing government work
  • Boards of trade as designated by the Commodity Exchange Act
  • Clearing agencies registered in accordance with securities laws
  • Payment systems doing work for any of the above
  • Securities broker-dealers registered in accordance with securities laws

So, unless your degree was granted by the Postmaster General himself (or you went to a state school), your alma mater's leadership and trustees could be looking at five years and a criminal record.

Technically, the California Commissioner of Financial Institutions, William Haraf, can exempt anyone from the law under § 1806 of the MTA. Yet it's not clear that this power has ever been invoked, or that it ever will be. When I asked Deputy Commissioner Robert Venchiarutti if it might be used to allow startup companies (such as my own) to compete in the marketplace provided that no consumers filed formal complaints, the response was clear: "That's not gonna happen."

The situation is depressing and absurd to the point of being funny. I've written about this law, generated by financial industry lobbyists and rubber-stamped by the Consumers Union, several times before. In addition to sending university presidents to jail, it aims to preserve the monopoly power that companies like Visa and MasterCard enjoy on payment interchange fees. I've brought all of these problems to the attention of several state legislators in California, but without a public outcry, they feel powerless.

Should you wish to express your thoughts about how the California Money Transmission Act affects you (most likely through your inability to use systems such as FaceCash, your own business or now sadly, your alma mater), you can direct polite and concise e-mail about your personal situation to Jeremy Dennis, Office of Assemblyman Rich Gordon, who has been very kind to make himself accessible regarding this issue. To help him, just put "Money Transmission Act" in the subject line. His e-mail address is


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