A state regulatory body has issued a cease-and-desist order to Square Inc., claiming that the San Francisco-based company is handling payments in Illinois without a license in place to do so.

The cease-and-desist order from the Illinois Department of Financial and Professional Regulation says the San Francisco-based mobile payments provider and processor is not abiding by the state’s Transmitters of Money Act because it has not obtained the proper license.

"We've been in close contact with the Illinois Division of Financial Institutions for several months and are addressing their concerns," Square said in an emailed statement. The cease-and-desist order required Square to provide the state with records by Feb. 19.

The San Francisco Chronicle reports that Square recently cut through similar red tape in California by obtaining a money transmitter license, after initially arguing that it does not operate as a true money transmitter.

Thomas Noyes, a former executive at Citigroup and Wachovia, is credited with first spotting the Illinois order. He said in posts to Twitter that he sides with Square since the company does not hold funds.

The state's four-page cease-and-desist states that “no person in this state in the business of selling or issuing payments instruments” can do so without first obtaining a license.

Square's main offering is a portable square-shaped card reader merchants can buy off the shelf to begin accepting swiped card payments. Merchants do not need to use the card reader to use Square's services; Starbucks, which invested in Square last year, uses Square for processing and supports Square's software-based digital wallet.

The state order cites Square’s provision of digital applications for transmitting money through iPhone or Android devices, as well as the company’s selling and issuing of digital gift cards as violations of the law.

Alternative payment companies such as PayPal Inc., a unit of eBay Inc., obtained licensing on a state-by-state basis to offer their services. Facebook Inc. revealed last year when it filed to go public that it was seeking such licensing for the payments portion of its business. By early 2012, Facebook had already obtained such licenses in at least 15 states

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