CUNA Comment Letter

Gulf Opportunity Pilot Loan Program

December 19, 2005

NACHA – The Electronic Payments Association
Maribel Bondoc
Manager of Network Rules
13665 Dulles Technology Drive, Suite 300
Herndon, VA 20171

Re: Rules Work Group #22 – OFAC and Operator Related Changes to the ACH Network

Dear Ms. Bondoc,

The Credit Union National Association (CUNA) is pleased to respond to NACHA’s proposed changes to its Operating Rules related to OFAC and Operator related changes for international payments transmitted through the ACH Network. This letter was prepared under the auspices of CUNA’s Payment Systems Subcommittee, which is chaired by Ralph Jones, Executive Vice President of the Georgia Credit Union Affiliates, Georgia. By way of background, CUNA is the largest credit union trade association, representing approximately 90% of our nation’s nearly 8,900 state and federal credit unions, which serve nearly 87 million members.

Summary of CUNA’s Position

Discussion

CUNA and its members strongly support combating terrorism and support efforts to help financial institutions comply with OFAC’s regulations. In its discussions with NACHA, OFAC has indicated that there is greater exposure to Specially Designated Nationals and Blocked Parties (SDN) subject to U.S. policies on sanctions for payment transactions and expects a higher level of scrutiny of ACH payments involving non-U.S. parties.

NACHA is proposing to amend its rules to expand the formatting requirements of cross-border ACH transactions and broaden the definition of a cross-border transaction to include all international payments. We generally support these changes so that our financial system is safeguarded from terrorists and financial institutions can further continue to comply with OFAC requirements.

NACHA is proposing a new definition of “International ACH Transaction” to include a debit or credit entry that is part of a payment transaction in which one or more parties to the payment transaction is not subject to U.S. legal jurisdiction. While we support expanding the definition of international ACH transaction to include all cross-border ACH transactions, whether initiated through the Gateway Operator or a financial institution, we believe the proposed definition may unintentionally sweep domestic transactions under these requirements. By tailoring the definition around the parties, rather than the transaction type, NACHA may be including transactions that are conducted by foreign nationals living in the United States conducting a domestic transaction. Such a transaction may not otherwise be a cross-border transaction other than the Originator or Receiver may not be subject to U.S. legal jurisdiction.

Appendix A to the Request for Comment, which provides examples of transactions included in the proposed definition, focuses on whether parties are funding the transaction rather than whether they are subject to U.S. legal jurisdiction. We encourage NACHA to revise the definition of “International ACH Transaction” so that extensive examples are not necessary. If NACHA believes that such an Appendix would be beneficial to Network participants, we encourage NACHA to include the examples in its Operating Guidelines.

Currently, cross-border entries are designated with either a consumer or corporate Standard Entry Class code (SEC). NACHA is proposing to consolidate cross-border entries under one SEC (CBR). A single SEC will make the Operating Rules more consistent with the rules governing ACH in other countries, which currently do not differentiate between consumer and corporate transactions. Therefore we support consolidating the SECs into one cross-border entry code.

Additionally, we support creating a new return reason code for cross-border entries. A new code specific to cross border entries will allow Receiving Depository Financial Institutions (RDFIs) to return a cross-border entry if it has concerns about the transaction relating to OFAC compliance. We further support using a broad Return Reason Code, which will permit the RDFI to return the transaction for “reasons of OFAC compliance” and not to specifically imply that the RDFI knows it has an OFAC match. This would enable the RDFI to use this code when it is required to reject a transaction to comply with OFAC regulations. However, if OFAC regulations require the RDFI to block the transaction, we encourage NACHA to clarify that the RDFI is not required to return the transaction.

Information that is currently being transmitted with a cross-border payment is insufficient to identify all parties involved in the transaction for OFAC monitoring purposes. This can make it difficult to determine whether the ODFIs and RDFIs are processing transactions that should be blocked. We support NACHA’s proposal to include the “Travel Rule” fields in the addenda records. The Travel Rule requires that the financial institution of the originator include the name and address of the Originator, amount of payment, date of the payment, and any payment instructions as well as the name, physical address and account number of the Receiver (“Beneficiary”), the receiver bank, correspondent Financial Institution(s) name, ID number and Branch Country Code; and reason for the payment. Including this information will give financial institutions the necessary information on which to make informed decisions about whether potential OFAC hits are true matches.

However, we do not support allowing up to 9,999 addenda records for cross-border transactions. Storing and scanning such a large quantity of data would be difficult for many financial institutions and encourage NACHA to limit the number of additional addenda records to 100 or fewer.

The Federal Reserve Bank’s Retail Product Office (FRB), on behalf of the Federal Reserve Gateway Operator, announced its intention to screen incoming cross-border ACH transactions for OFAC compliance. The FRB would like to be able to advise the RDFI of potential issues with incoming cross-border transactions containing data appearing on the OFAC SDN List. Electronic Payments Network (EPN), the private sector ACH Operator, has also announced that it will make available an OFAC screening function to its customer financial institutions. We believe that a field for communication to RDFIs may be beneficial for some credit unions, but oppose Operators using this field to communicate potential OFAC violations. The FRB Gateway Operator will most likely utilize the same OFAC screening software that is available to credit unions today to flag potential incoming cross-border transactions, which frequently identifies potential matches that, upon investigation, are not true matches with the OFAC list. Because the credit union is ultimately responsible for blocking flagged accounts, this may create additional burdens on credit unions to re-verify transactions flagged by the FRB Gateway Operator. Further, the differences in various scanning software may create additional and unnecessary burdens for credit unions. There are many different OFAC compliance software-scanning solutions on the market today and each has its own match criteria that can be set at the institution’s discretion. If the Operator uses software that is set differently than the credit union’s software, the same transaction may yield different results, requiring the credit union to determine whether to post the transaction.

Because of the significant number of changes proposed, we believe that credit unions would need at least twelve to eighteen months to implement the necessary changes. Therefore, we believe that September 2007 is a more appropriate implementation date.

Conclusion

CUNA appreciates the opportunity to comment on the proposed changes. We fully support combating terrorism and efforts to help financial institutions comply with OFAC’s regulations. As addressed above, there are aspects of the proposal we feel problematic and urge NACHA to amend as we suggest. In the meantime, if you have any questions about our letter, please contact me at (202) 638-5777.

Sincerely,

Lilly Thomas