International ACH Transactions: The Basics of IAT

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International ACH Transactions The Basics of IAT
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Regulatory

• U.S. Domestic ACH
• ACH Rules
• Regulation E (Electronic Funds Transfer Act)
• UCC 4A
• Regulation D
• Office of Foreign Assets Control (OFAC)
• Internationally
• No global rules body

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Settlement

• Domestically
• Federal Reserve
• Internationally
• No central bank to perform that function
• Each country has their own central bank and the
  European Union has the European Central Bank
• Correspondent banking

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International Payments Risks

• U.S. OFAC obligations
• Fluctuation in foreign exchange rates
• Domestic payment rules differ
• Return item times and procedures vary from
  country to country

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Current Cross-Border ACH Payments Process
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Current Cross-Border ACH Functionality

• No global ACH currently available
• NACHA began work on facilitating international
  ACH payments in 1993
• First Cross-Border Payment Operating Rules
  approved in 1997
• CBR and PBR introduced in 2000

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Gateway Operator

• Originating Gateway Operator (OGO)
• Exit point from the national payments system of
  the originating country
• Receiving Gateway Operator (RGO)
• Entry point to the national payments system of
  the receiving country

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Cross-Border Transaction Flow
Originator
ODFI
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IAT Overview
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OFAC Background Obligations

• Agreement with OFAC for handling domestic
  payments in 1997
• Know Your Customer
• ODFI Know Your Originators
• RDFI Know Your Account Holding Customers

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OFAC Request November 2004

• ACH Network is vulnerable to abuse with respect
  to international cross-border movement of funds
• U.S. RDFIs
• Ensure that all aspects of inbound, cross-border
  transactions are in compliance with OFAC
  regulations
• U.S. ODFIs Originators
• Obligated to ensure that all parties to
  transactions as well as the underlying purpose of
  the transactions are not in violation of OFAC
  regulations

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New Regulatory Requirements for ACH

• International ACH Transactions
• Effective March 20, 2009
• Requires ODFIs and Gateway Operators to identify
  all international ACH payments as such
• Use of new SEC code of IAT
• Include specific data elements defined with BSA
  Travel Rule
• Ensures all parties have information necessary to
  comply with U.S. law, including OFAC compliance
  programs

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Purpose

• Respond to OFACs request to align ACH Rules with
  OFAC compliance obligations
• Make it easier for RDFIs to comply with OFAC
  obligations

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SEC Code Change

• Eliminates CBR and PBR
• Introduces new SEC Code of IAT

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Travel Rule Information

• BSA Travel Rule data elements in 7 mandatory
  Addenda Records
• Name and physical address of Originator
• Name and physical address of Receiver
• Account number of Receiver
• Identity of Receivers FI
• Foreign Correspondent Bank(s) name, Bank ID and
  Bank Branch Country Code
• Reason for the payment

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Formatting Requirements

• Optional remittance data in 2 Addenda Records
• Remittance data does not have to be in specific
  format
• Mandatory identification of Foreign Correspondent
  Banks
• Max of 3 to 5 Addenda Records

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OFAC Compliance

• All financial institutions are responsible for
  OFAC compliance
• Financial institutions cannot contract away their
  liability for OFAC compliance

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OFAC Compliance for IAT

• Must have a written OFAC compliance policy
• Review inbound entries
• All parties to the transaction, remittance data,
  and correspondent banks
• Review outbound entries
• All parties to the transaction, remittance data,
  and correspondent banks

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OFAC Screening Indicators

• Entry Detail Record
• Two single-character fields used to convey
  results of OFAC screening
• Optional for use by Gateway Operator and
  Third-Party Service Provider
• Identifies potential presence of blocked party

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Key Issues for ODFIs

• Review all Originators and agreements
• Identify Originators initiating international
  payments
• Make necessary revisions to agreements to comply
  with IAT rules
• Educate ACH Originators on IAT requirements
• Develop and implement OFAC compliance policy
• Returns
• Returned using the timeframes of the receiving
  country
• Review fee structure

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Key Issues for RDFIs

• Be able to identify IAT entries and appropriately
  screen for OFAC compliance
• OFAC Screening Indicators - optional for use by
  Gateway Operator
• Ensure OFAC screening of all information in the 7
  mandatory addenda records Travel Rule info
• Returns
• Use domestic ACH timeframes
• Include 7 mandatory addenda information
• Review fee structure

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Impacts to Originators

• Understand IAT definition
• Review existing vendor, employee and pension
  payments for possible IAT scenarios
• Ensure systems are capable of creating IAT and
  have required information available in company
  database to populate mandatory fields

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Resources

• NACHA
• www.nacha.org/IAT_Industry_Information/
• 2009 Rules Changes Supplement 4 to 2008 ACH
  Rules
• Section IV, Special Topics in 2008 Operating
  Guidelines
• FRB Financial Services IAT Resource Center
• www.frbservices.org
• OFAC
• www.ustreas.gov/offices/enforcement/ofac/faq/answe
  r.shtml24

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Summary

• Implementation checklist
• Implementation date of Sept 19, 2009
• Develop and implement OFAC compliance policy or
  revise existing policy
• Acquire OFAC screening software tools or a
  Third-Party Service Provider
• Train all staff