Venmo allows money transfers between individuals for arbitrary goods/services/gifts. My understanding is that they/their parent company handle payment processing, escrow, and payout themselves. When people inevitably use it for illegal means, what kind of liability does Venmo face? How do they mitigate this? Does it make a difference that they use a wallet scheme and hold funds in escrow rather than make direct transfers?
Venmo mitigates their liability by making users click through https://en.wikipedia.org/wiki/Click_wrap and accept a 13K+ word TOS https://venmo.com/legal/us-user-agreement/ . This happens when you sign up and enter personal information and back account details and click through the TOS acceptance. (See also LSE Answer Are terms of service legal contracts? )
That TOS states that Venmo will not assume any liability from individuals due to illegal use of their service. Venmo protects themselves from you - and everyone else - when you agreed to the TOS.
The TOS also points out that you agree not to break any laws in the use of their service.
You are solely responsible for ensuring that your use of the Venmo Services is in conformance with applicable federal, state and local laws and regulations.
The TOS outlines restricted activities and acceptable use, and that Venmo is not liable for illegal things such as:
- Acceptable Use
You agree you will not use the Venmo Services to violate any law, statute, ordinance, or regulation relating to sales of:
•narcotics, steroids, certain controlled substances or other products that present a risk to consumer safety;
•items that encourage, promote, facilitate or instruct others to engage in illegal activity;
•items that promote hate, violence, racial intolerance, or the financial exploitation of a crime;
•items that are considered obscene;
•items that infringe or violate any copyright, trademark, right of publicity or privacy or any other proprietary right under the laws of any jurisdiction;
•certain sexually oriented materials or services;
•ammunition, firearms, or certain firearm parts or accessories; or
•certain weapons or knives regulated under applicable law;
You may be liable for such illegal things, if you do them, and Venmo discovers it; but Venmo will not be liable. Venmo may not be aware of your activities, but they can say they won't be liable if/when law enforcement takes action against you. When authorities deal with individuals conducting transactions deemed illegal in the TOS, Venmo can say, in a legal sense, "Hey, they agreed to not do anything illegal and that we wouldn't be liable anyway."
Edit 11/11/16 see comments: "Venmo cannot escape criminal liability for their own acts or omissions (in some jurisdictions)."
I'm sure Venmo monitors their systems in some ways to detect fraud and illegal transactions - perhaps with algorithms and keyword searches (see https://venmo.com/legal/us-privacy-policy/ ) - and they would be required to cooperate with law enforcement under the terms of the state and federal laws that regulate the banking industry and services such as Venmo. See https://venmo.com/legal/us-licenses/ And if the authorities discovered Venmo's efforts at fraud and detection of illegal activity were not adequate, they would legally require Venmo to make changes.
The escrow system is a Venmo feature that can make users feel more secure with a transaction, knowing that a refund or a cancellation of the transaction may be easier with an escrow system rather than trying to get a payment service to "claw back" funds from another user. Venmo "may hold your funds for up to 180 days if reasonably needed to protect against the risk of liability."
The escrow service could be used to mitigate illegal activity, but it may fall to the end user who discovers they have been a victim of fraud or illegal activities and can report it while funds are still in escrow.
Now, the escrow system requires more "back and forth" between users, i.e time to process and release funds; this, combined with the fact that Venmo monitors transactions, may give Venmo more time to analyze transactions and detect fraud and illegal transactions before they are completed.
PayPal: Venmo is a PayPal company (clearly stated in the footer of the site) and PayPal has their own click-through TOS which outlines account requirements and illegal activities:
Venmo is a service of PayPal, Inc., a licensed provider of money transfer services (NMLS ID: 910457). All money transmission is provided by PayPal, Inc. pursuant to PayPal, Inc.’s licenses https://venmo.com/legal/us-licenses/ © 2016 PayPal, Inc.