CUNA Regulatory Comment Call


November 29, 2005

OFAC RELATED CHANGES TO ACH NETWORK

EXECUTIVE SUMMARY

Please feel free to fax your responses to CUNA at 202-638-7052; or e-mail them to Assistant General Counsel Lilly Thomas at lthomas@cuna.com; or mail them to Lilly c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. Click here for a copy of NACHA’s proposal.

BACKGROUND

The Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanction policies based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. 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.

Currently, Receiving Depository Financial Institutions (RDFIs) are receiving cross-border entries (PPD and CCD Standard Entry Class Codes) for payments that may involve a non-U.S. participant, but are not identified as cross-border entries because these payments entered the U.S. through channels other than through a Gateway Operator. This can make it difficult for RDFIs to meet their OFAC compliance obligations.

Additionally, 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.

Gateway Operators need certain formatting changes to process cross-border payments more efficiently. A primary example is that many other countries do not make a distinction between consumer and corporate payment transactions, making it vitually impossible for the Gateway Operator to properly map incoming ACH transactions to the proper SEC Code.

NACHA has been working with OFAC to determine how cross-border payments should be handled. Four alternatives were considered. Those alternatives are:

  1. To define cross-border transactions more broadly as International ACH;
  2. Transactions and revise the formatting requirements for Cross-Border Payments (CBR Entries);
  3. To make no substantive changes to existing cross-border rule provisions;
  4. To prohibit the use of the ACH Network for International ACH Transactions; and
  5. To make receipt of International ACH Transactions optional.

NACHA is seeking comment on all four alternatives, but only the first alternative is discussed at length in this proposal. The second alternative, to make no substantive changes to the existing provisions, was not supported by the NACHA Rules Work Group. Currently, the ACH Network is exposed to the risk of processing transactions that should be blocked and making it difficult for RDFIs and ODFIs to comply with their OFAC requirements. If no changes are made to the current rules structure, there is a risk that Federal regulations will require additional scrutiny for all ACH transactions rather than just for cross-border transactions under NACHA’s approval.

The third alternative would completely eliminate using the ACH Network for international payments, which would require the scope of the prohibitive payments to be defined and for the Rules to explicitly state that international payments may not be transmitted of the ACH network. This alternative would likely not eliminate the flow of cross-border transactions through the ACH, but would rather make it impossible to identify those transactions.

The alternative to make international ACH transactions optional would have little value associated with large-scale adoption of cross-border payments because of the costs associated with maintaining a registry of RDFI routing numbers that accept these payments.

DISCUSSION

The first alternative in this proposal would expand the definition of International ACH transaction. The new definition would broaden the scope of the types of payments that would be considered international payment orders. The proposed definition would be:

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. A party to the Payment Transaction for purposes of this subsection is:

(1) any person or entity that owns or otherwise controls an account that is debited or credited as a part of a Payment Transaction that includes an Entry that is transmitted through an ACH Operator in the United States;
(2) any financial institution (FI) holding such account or serving as an intermediary in the processing and settlement of the Payment Transaction; or
(3) any person that is the Payor or Payee in the Payment Transaction, whether or not such person is sending or receiving the Payment Transaction by means of an Entry if any part of the Payment Transaction involves an Entry that is transmitted through an ACH Operator in the United States.

This definition includes a Payment Transaction that is not funded, or where payment is not made, by debit or credit to an account maintained by the Payor or the Payee (e.g., funded by Payor over the counter or “Payable Upon Proper ID” to Payee), and a party includes the FI that receives such funds or makes such payment. Any transaction that meets this definition must be originated using the CBR Standard Entry Class Code.

This new definition would include all international payment orders involving the U.S. ACH Network, whether initiated through the Gateway Operator or a financial institution. All payments falling within the scope of this proposed definition would be required to be identified by the cross-border Standard Entry Class code. Other definitions would also be added or modified to clarify the concepts in the new definition of an International ACH Transaction.

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 and utilize the FedLine Web to advise the RDFI of incoming cross-border transactions, which contain 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. The FRB Gateway Operator will most likely utilize the same OFAC screening software that credit unions currently use to flag potential incoming cross-border transactions. 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.

The proposal would expand the information transmitted with a cross-border payment. NACHA is proposing that cross-border ACH entries have the same fields of information as required of wire transfers and other transactions by the Bank Secrecy Act (BSA) Travel Rule. The Travel Rule requires that the financial institution of the originator of the wire transfer or other transaction include the following information in all wire transfer records:

Additionally, each correspondent financial institution or third-party service provider involved in the processing of the transaction would have to be identified.

To convey all the information above, seven mandatory Addenda Records would be necessary to accompany a cross-border entry. NACHA is proposing to group together within the Addenda Records all information related to a particular ACH participant, which would result in the shifting of certain data elements from their current positions.

This proposal would add four optional, single-character fields to the cross-border entry detail record to provide a record within the ACH format for the results of voluntary OFAC screening by the Gateway Operator, by the ACH Operator, and by upstream processing financial institutions or third- parties.

Several formatting requirements would be modified to enhance processing efficiencies associated with the transmission of cross-border payments. One proposed modification would be consolidating cross- border standard entry class codes from two formats (one for consumer and one for corporate entries) into one format making no distinction between consumer and corporate transactions. Other modifications include expanding the use of the Transaction Type Code Field, modifying Field Inclusion Requirements from Required to Mandatory, including a customer service phone number in the Company/Batch Header Record and adding a new Return Reason code related to OFAC compliance.

The proposal has an implementation date of March 16, 2007 and would be dependent on the ability of software providers, financial institutions, and Operators to make the necessary software and processing changes.

QUESTIONS REGARDING THE PROPOSAL

  1. Which alternative, if any, do you support? Please explain.
















    ______ (1) Defining cross-border transactions more broadly as International ACH Transactions and revising the formatting requirements for CBR entries to include information necessary for OFAC regulatory compliance

    ______ (2) Making no substantive changes to the existing cross-border rule provisions
    ______ (3) Prohibiting use of the ACH Network for International ACH Transactions
    ______ (4) Making the receipt of International ACH Transactions optional
    ______ (5) Other suggested alternative, please describe:
















  2. Do you agree with the definition of International ACH Transaction, as proposed? Please explain.
















  3. How would the application of the definition of International ACH Transaction impact your ACH operations (including any correspondent banking functions your organization performs)?
















  4. Are there types of settlement included within the definition of an International ACH Transaction that do not represent international payment orders and thus should not be considered International ACH Transactions? Please explain.
















  5. Would the implementation of this proposal encourage broader use of international payments? Please explain.
















  6. Do you support consolidating cross-border entries under one SEC Code (CBR)? Please explain.
















  7. Do you support allowing cross border entries to be returned using a new Return Reason Code for Specially Designated National when the RDFI has determined that the transaction contains a party on OFAC’s SDN List? Please explain.
















  8. Do you believe you would be better able to comply with Federal laws with the proposed additional mandatory addenda records for cross-border payments? Please explain.
















  9. Is there any other information that should be included (please specify)?
















  10. Please list any information that is proposed to be included that you believe should not be included:
















  11. Do you support including the OFAC Screening Indicators that would indicate the results of any screening done by the Gateway Operator, ACH Operator, and financial institutions or processors? Please explain.
















  12. Do you support including a Customer Service Phone Number within the Company/Batch Header Record? Please explain.
















  13. What would be the operational impact to your credit union associated with this proposal? Please explain.
















  14. How long would your credit union need to implement changes related to this proposal?
    Less than 6 months ______
    6 – 12 months ______
    12 - 18 months ______
    More than 18 months ______
    If more than 18 months, how long: ______
    If you disagree with the proposed implementation date, what implementation date do you believe would be appropriate?
















  15. Please provide any other feedback regarding this proposal.
















Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Lilly Thomas • Assistant General Counsel • (202) 508-6733 • lthomas@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com