How bank regulatory issues can impact healthcare PE deals

As healthcare platforms embed financial services functionality into their offerings, private equity investors should treat money transmission, anti-money laundering (AML), sanctions, and consumer protection exposure as core diligence items rather than ancillary considerations.

Identifying gaps early can be the difference between a manageable compliance fix and a problem that alters deal economics. With appropriate structuring, investors can identify exposure early, manage it effectively, and protect their investment.

Layer 1 in deal diligence: Money transmission licensing

The threshold question in any healthcare transaction involving payment functionality is whether the target is licensed as a money transmitter and, if not, whether it needs to be. Money transmission generally occurs when a business receives funds from one person for transmission to another, and in healthcare, that occurs more often than many investors expect.

The following activities can implicate money transmission laws. Depending on the funds flow and available exemptions, each may require state money transmission licenses, federal money services business (MSB) registration with the Financial Crimes Enforcement Network (FinCEN), or both*:

• Collection and disbursement of third-party funds in connection with patient payment plans and financing
• Stored-value accounts and patient wallets
• Revenue cycle management that aggregates payments
• Third-party payment processing for provider networks
• Collection and disbursement of payments to research participants, including stipends, reimbursements, and prepaid cards

*These are illustrative examples. None of these activities is automatically regulated; the analysis turns on the specific facts and funds flow.

During diligence:

When a target is unlicensed: Assess whether licensing is required and, if so, what mitigation steps are available. Where appropriate, contract provisions can be restructured, funds flows rerouted, and bank account ownership and control modified to satisfy an available exemption or otherwise address licensing requirements. Restructuring how money moves, however, could disrupt a healthcare platform’s reimbursement operations, payor arrangements, billing workflows, or the flow of revenue between the platform and providers. Any money transmission fix should therefore be evaluated against the broader healthcare regulatory and reimbursement model before implementation.

Size the potential exposure: Determine how much revenue, transaction volume, customer activity, and future growth depend on potentially regulated payment functionality. A licensing gap that affects a small ancillary service may present a very different investment risk than one embedded in the platform’s core revenue model.

When a target is licensed: Analyze the adequacy of the compliance program and confirm that target operates in accordance with applicable tangible net worth, permissible investment, and surety bond requirements (and will continue to meet such requirements on a pro forma basis, giving effect to the transaction). Also consider the implications of acquisition financing, particularly to ensure that any applicable security interest excludes permissible investments and whether any guaranty should be limited or subordinated to preserve compliance with money transmission requirements, including as potentially applied by regulators in their safety and soundness review of the transaction. This latter issue can become a point of negotiation with lenders. To increase regulatory approval prospects and timing efficiencies in certain highly leveraged transactions, it is often a provision worth insisting on.

Layer 2 in deal diligence: Anti-money laundering and sanctions compliance

Any entity that qualifies as a money transmitter or other MSB under FinCEN’s regulations is subject to the Bank Secrecy Act (BSA). That status brings a set of federal obligations, including FinCEN registration, a written AML program, suspicious activity reporting, and certain recordkeeping and reporting requirements. Federal MSB status is a separate question from state licensing status: a target may be exempt from state licensing yet still be an MSB under federal law, or vice versa.

Many healthcare platforms rely on FinCEN’s “integral exception,” which excludes from money transmitter status funds handling that is integral to a business’s own goods or services. The exception is narrower than it is often assumed to be. Platforms that collect payments on behalf of unaffiliated providers, hold balances in patient wallets, or move funds as a standalone service may fall outside it, so a target’s reliance on the exception is an issue worth flagging.

Sanctions obligations apply independently of MSB status. The Office of Foreign Assets Control (OFAC) administers US economic sanctions, which generally prohibit US persons from dealing with sanctioned individuals and entities (including entities majority-owned by them) and with sanctioned jurisdictions. Some programs also reach US persons who “facilitate” prohibited activity by foreign affiliates or vendors. Because OFAC liability is strict and the limitations period for many sanctions violations is now 10 years, historical issues at a target can carry meaningful exposure for an acquirer.

Healthcare transactions also warrant heightened scrutiny. FinCEN has identified healthcare fraud as a significant illicit finance risk, and enforcement authorities frequently pursue parallel healthcare fraud, False Claims Act, and money laundering theories where fraud proceeds are involved. Additionally, OFAC has stressed the importance of risk-based sanctions compliance programs, and its enforcement actions have highlighted compliance deficiencies arising from inadequate sanctions due diligence and integration following acquisitions.

During diligence:

Issues to be aware of: Whether the target has a clear basis for its federal MSB status, including any reliance on the integral exception; whether it has a functioning BSA/AML program; whether its OFAC screening extends to customers, payees, vendors, and ownership; and how it has handled past screening alerts or blocked transactions.

Cross-border dimensions: Non-US operations, offshore vendors, international clinical trial sites, and foreign payees can introduce sanctions risk tied to specific locations and counterparties. US-person involvement in foreign activity may raise facilitation questions, and EU and UK sanctions regimes do not always align with US requirements. OFAC authorizations for certain medical and humanitarian activity exist, but they come with conditions. These are issues best surfaced during diligence rather than after closing.

Deal implications: AML and sanctions findings can affect representations and warranties, indemnities, escrows, closing conditions, and post-closing obligations. Questions about voluntary self-disclosure to OFAC may also arise. Representations and warranties insurance often excludes known compliance issues and, in some cases, sanctions matters altogether.

A broad net in deal diligence: Patient financing and consumer protection

Healthcare payment models create risks beyond traditional money transmission. Patient financing, billing, and collections can also have healthcare-specific requirements, including financial assistance obligations, patient privacy and, depending on the arrangement, fraud-and-abuse considerations.

During diligence:

Examine: How the target communicates with patients about financial obligations, whether collections practices comply with applicable state laws, and whether marketing claims about financing or payment plans could expose the business to unfair or deceptive practices claims. Where the platform extends or arranges patient credit, you should assess applicable licensing requirements, interest and fee limitations, and credit disclosure obligations.

For platforms supporting hospitals and health systems: Understand how financing interacts with financial assistance and charity care requirements, including whether patients are screened for available assistance before being directed to financing products.

Follow the patient and the money: Map who bills the patient, receives and holds the funds, extends financing, conducts collections, accesses patient information, and ultimately bears financial risk. That can uncover overlapping bank regulatory, consumer protection, and healthcare regulatory obligations that may not be apparent when each function is reviewed separately.

The challenge for investors: Bank regulatory gaps and enforcement can seriously impact deals

Change-of-control triggers in money transmission licenses frequently require advance regulatory approval, which can extend deal timelines if they are not identified early. Map those requirements before signing and account for regulatory notices, consents, and approvals in the transaction timeline and deal documents. Lender diligence has become more sophisticated and increasingly flags money transmission requirements and licensing gaps as a reason to reprice, hold back proceeds, or condition closing.

The enforcement landscape adds another dimension. Federal law, including the federal prohibition on unlicensed money transmitting businesses, and state enforcement mechanisms create exposure for unlicensed activity. FinCEN may also impose penalties for BSA violations. Bank partners may reassess account relationships when licensing questions arise, and state regulators can issue cease-and-desist orders that disrupt operations in specific markets.

Critical banking and payment relationships are therefore a further diligence point. Investors should understand whether a change of control, licensing issue, or compliance finding could trigger consent requirements, enhanced due diligence, restrictions, or termination rights under the agreements with partners on which the business relies.

The cumulative effect can be a deal that looks clean on the healthcare side but carries hidden bank regulatory exposure that changes the underwriting, erodes value, or delays closing.

The solve: Smart structuring strategies and regulatory positioning

Money transmission regulatory risk is manageable when addressed proactively.

Deal structuring can minimize licensing obligations through strategies such as the agent-of-payee exemption and bank partnership arrangements, both of which can reduce or eliminate the need for state money transmission licenses in appropriate circumstances. These arrangements require jurisdiction-specific analysis; a bank relationship alone does not establish that the platform is exempt. Post-closing integration plans can incorporate remediation steps and design compliance programs to align acquired platforms with regulatory expectations.

Diligence findings should also inform the transaction itself. Depending on the issue, investors may need to address regulatory approvals, pre-closing remediation, representations and warranties, closing conditions, or other appropriate risk-allocation mechanisms in the deal documents.

For targets with pre-existing licensing gaps, the key is engaging issues early enough to shape outcomes rather than reacting to them under deal pressure. For example, where appropriate, voluntary disclosure and remediation planning can position the business favorably with regulators before any enforcement action materializes. Prospective restructuring alone does not resolve exposure for past activity. Regulatory relationship management with state examiners and federal agencies, along with no-action letters and exemption strategies, can further reduce the licensing burden where available.

Recap: What investors can do

As healthcare platforms continue to integrate financial services functionality, private equity investors should consider the following steps:

• Assess payment functionality early in diligence. Before pricing is finalized, identify every activity that could constitute money transmission: third-party payments related to patient financing, stored-value products, revenue cycle aggregation, clinical trial payments, and third-party processing. Determine whether the target is licensed or needs to be. Evaluate against the laws of the jurisdictions where senders or receivers are located (including US and non-US jurisdictions).
• Map AML and sanctions exposure. Be aware of the basis for the target’s federal MSB status, including any reliance on the integral exception; the state of its BSA/AML program and OFAC screening; and sanctions risk arising from cross-border activity, foreign locations, and vendors under US, EU, and UK regimes, where applicable.
• Conduct consumer protection risk mapping. Review patient-facing communications, billing and collections practices, and marketing claims against both federal UDAP/UDAAP standards and applicable state laws.
• Build regulatory positioning into the deal structure. Explore agent-of-payee and bank partnership structures to minimize licensing obligations. If potential remediation may include licensing, negotiate financing terms with money transmission requirements (including a security interest carve-out for permissible investments and any necessary guaranty limitations or subordination) in mind and run the target’s pro forma financial statements, giving effect to the deal to ensure the target can meet applicable financial metrics.
• Plan for pre- and post-closing remediation. Identify issues requiring pre-closing action. Develop integration plans that address remaining licensing gaps through voluntary disclosure where appropriate, compliance program design, and regulatory relationship management, rather than deferring these issues until they become enforcement risks.

Bank regulatory, AML, and sanctions considerations in healthcare private equity do not necessarily require walking away from a deal, but they warrant early and careful attention. Investors should determine whether an issue is a straightforward fix or one that changes the economics of the investment and adjust their approach accordingly.