International ACH Transactions

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International ACH Transactions
Global Payments Forum Meeting September 12, 2007

• Priscilla C. Holland AAP, CCM
• Senior Director, Network Development

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Agenda Topics

• History
• Rule Changes
• Format Changes
• OFAC Requirements
• IAT Scenarios
• Impacts to financial institutions Corporate
  Originator
• Implementation Date

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Changes to International ACH Payments

• Primary Purposes
• Respond to OFACs request to align the Rules with
  OFAC compliance obligations, and
• Make it easier for RDFIs to comply with those
  obligations

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Regulatory Requirements

• Post-September 11 sudden recognition of need to
  end anonymity and promote traceability in
  international electronic payments regardless of
  how many borders were crossed.
• OECD standard setting body, the Financial Action
  Task Force (FATF) in Paris tasked with
  developing special recommendations to address
  particular threats.
• Driven by US, but with strong endorsement of EU
  member states, and other members

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Objective of SR VII

• Objective of FATF Special Recommendation VII (SR
  VII)
• To prevent terrorists and other criminals from
  having unfettered access to wire transfers for
  moving their funds and for detecting such misuse
  when it occurs.

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Goals of SR VII

• To ensure that basic information on the
  originator of wire transfers is immediately
  available
• to law enforcement for detecting, investigating,
  and prosecuting terrorists or other criminals and
  tracing the assets of terrorists or other
  criminals,
• to financial intelligence units for analyzing
  suspicious or unusual activity and disseminating
  it as necessary, and
• to beneficiary financial institutions to
  facilitate the identification and reporting of
  suspicious transactions.

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General Requirement

• Traceability of all but smallest transactions
• Due to the potential terrorist financing threat
  posed by small wire transfers, countries should
  aim for the ability to trace all wire transfers
  and should minimize thresholds taking into
  account the risk of driving transactions
  underground.
• All FATF member countries (including US, EU, G-7,
  Mexico, Russia, Gulf Cooperation Council) must
  implement by December 31, 2006.

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OFAC Request Background

• 1997 Agreement with OFAC handling for domestic
  payments
• 2003 FedACH International announces incoming ACH
  transactions from Europe
• OFAC provides the industry with guidelines on
  handling cross-border ACH transactions.
• OFAC give the industry the opportunity to
  self-regulate

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OFAC Request

• Letter dated November 9, 2004
• Speed and efficiency makes ACH vulnerable to
  abuse with respect to international cross-border
  movement of funds.
• Additional information needed to permit an
  adequate degree of scrutiny of transactions for
  OFAC compliance.
• US RDFI and beneficiaries will continue to have
  an obligation to ensure that all aspects of
  inbound, cross-border transactions are in
  compliance with OFAC regulations and to take
  appropriate steps to investigate, suspend,
  reject, block and report on transactions as
  necessary.

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OFAC Request

• Letter dated November 9, 2004
• Outbound cross-border transactions
• US ODFIs and their originators will continue to
  be responsible for ensuring that all parties to
  the transactions, as well as the underlying
  purpose of the transactions, are not in violation
  of OFAC regulations, and they will need to take
  appropriate steps to investigate, suspend,
  reject, block, and report on transactions.

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SEC Code Changes

• Will eliminate the CBR and PBR SEC codes.
• Overlap of CBR/PBR for return items only for a
  limited period following the implementation of
  the IAT
• New SEC code for international ACH transactions
  will be the IAT in Article Two

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Definition of International ACH Transaction

• International ACH Transaction an ACH entry that
  is part of a payment transaction involving a
  financial agencys office that is not located in
  the territorial jurisdiction of the United
  States.
• An office of a financial agency is involved in
  the payment transaction if it -
• holds an account that is credited or debited as
  part of the payment transaction, or
• receives funds directly from a Person or makes
  payment directly to a Person as part of the
  payment transaction, or
• serve as an intermediary in the processing and
  settlement of the payment transaction.
• Financial agency means an entity that is
  authorized by applicable law to accept deposits
  or is in the business of issuing money orders or
  transferring funds.

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Identification of IAT Parties

• Defines new parties as part of IAT entry
• Correspondent Bank
• Foreign Gateway Operator (FGO)
• Re-defines Gateway Operator as the entry point to
  or exit point from the U.S.
• Can be any ODFI or ACH Operator
• Removes current requirement for formal
  declaration of Gateway Operator status
• Adds new obligations for Gateway Operators

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Travel Rule Information

• Name and physical address of the originator
• Name and physical address of the beneficiary
• Originating bank name, identification number,
  branch country code
• Intermediary bank name, identification number,
  branch country code
• Receiving bank name, identification number,
  branch country code
• Reason for payment

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Gateway Operators - Article Eleven (Obligations
of Gateway Operators)

• Warranties for IAT entries
• Rules for agreements with FGOs, ODFIs,
  authorization to transmit credit entries, OFAC
  compliance
• ACH Operators acting as Gateway Operators may
  process outbound debit and credit entries but
  must limit Inbound IAT Entries to credits only
  (reversing debits permitted)
• FIs acting as a Gateway Operator may process
  inbound and outbound debits and credit entries.

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Article Two Prerequisites to Origination

• Subsection 2.2.1.13 International ACH
  Transactions, compliance with US law
• Section 2.11 International ACH Transactions
• Originator/ODFI Agreements
• ODFI Warranties for IAT Entries (Inbound and
  Outbound)
• Compliance with Foreign Payments System Rules
• Liability for Breach of Warranty
• Exceptions for Outbound IAT Entries

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Article One - General

• Exemption From Rules Obligations
• A specific provision will be added that excuses a
  participating DFI from its obligations under the
  Rules to credit or debit an account or to
  transfer funds when such action would be in
  conflict with U.S. law.
• Example, excuse an RDFI from its obligation to
  recredit a Receiver for an unauthorized debit
  entry under the Rules when such action is
  prohibited by OFAC.

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Formatting Requirements

• OFAC Screening Indicators
• 2 single-character fields
• Optional usage by Gateway Operator or
  Correspondent Bank/Third-Party to convey results
  of voluntary OFAC screening
• Identifies potential presence of blocked party in
  record to RDFI
• 0 indicates no blocked party found 1
  indicates possible presence of blocked party

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Formatting Requirements

• Detail record
• 7 mandatory addenda records containing the
  additional information that OFAC has requested
• 2 additional addenda records for remittance data
• Optional fixed field addenda record for
  correspondent bank information

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Formatting Requirements

• Optional remittance information
• 2 optional addenda
• 80 characters of remittance data per record
• Enables inclusion of SWIFT 4x35 remittance data
• Mandatory identification of Correspondent Banks
• Addenda record required for each correspondent
• Maximum of 3 or 5 (depending on the number of
  remittance information addenda used)

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Formatting Requirements Returns

• In a Return transaction the 7 mandatory addenda
  records from the forward item must be passed back
  with the returned item.
• Remittance data and any correspondent bank
  information will not accompany the Return.
• There will be no Dishonored Returns or Contested
  Dishonored Returns

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Formatting Requirements - NOC

• Notification of Change entries will not require
  the original 7 mandatory addenda records to be
  returned with the NOC
• Company Batch Header Record Field 3 IAT
  Indicator must contain IATCOR
• Refused NOC transactions are not supported

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OFAC Compliance

• All financial institutions are responsible for
  OFAC compliance
• If a financial institution contracts with a
  third-party provider to do the actual OFAC
  reviews of the transactions- OFAC is clear that a
  financial institution cannot contract away their
  liability for OFAC compliance

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OFAC Compliance for IAT

• Have a written OFAC compliance policy
• Inbound transactions review of all parties to
  the transaction, remittance data and
  correspondent banks
• Outbound transactions review of all parties to
  the transactions and remittance data

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IAT Scenarios Document

• Developed by NACHA staff and representatives from
  several large global transaction banks
• OFAC has reviewed and agreed to the
  interpretations of the scenarios
• Key In all scenarios the location of the
  financial agencies involved in the transaction is
  the key determining factor

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IAT or Domestic Transaction???

• Scenarios Document

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International Impacts

• All payments coming into the U.S. that will be
  entered into the U.S. ACH will be required to
  include all additional data.
• Data privacy and security issues?
• Impact to low value payment processing?
• Expands beyond the U.S.

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Implementation Date

• March 20, 2009!!