As the number of Automated Clearing House (ACH) payments continues to climb — more than 3.8 billion in the fourth quarter of 2008, 5 percent more than the fourth quarter of 2007 — the National Automated Clearing House Association (NACHA) has had to ramp up the rules and regulations that govern these types of transactions in order to align the NACHA operating rules with the Office of Foreign Asset Control (OFAC) compliance obligations.
A NACHA ruling, which took effect on Sept. 18, is quite noteworthy and will affect businesses across myriad industries. The ruling introduces the International ACH Transaction (IAT) Standard Entry Class code, which will impact every financial institution in the United States, as well as any foreign or domestic organization that sends payments into or receives payments from the United States, provided that the payments are processed through the ACH Network.
An IAT is a payment transaction involving a financial agency’s 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; receives funds directly from a person or makes payment directly to a person as part of the payment transaction; or serves as an intermediary in the settlement of the payment transaction.
“In other words, an IAT is an ACH payment transaction that is either originated by, processed through or delivered to a non-U.S. bank,” says Darla K. Mick, the first vice president of treasury management sales at Comerica Bank.
Smart Business learned more from Mick about IAT and how to prepare your business for the changing regulations.
Why has the IAT regulation been implemented?
Post Sept. 11, the OFAC recognized the need to end anonymity and promote traceability in international electronic payments, regardless of how many borders were crossed. Due to the potential terrorist-financing threat posed by small wire transfers, countries are aiming for the ability to trace all wire transfers and minimize thresholds, taking into account the risk of driving transactions underground.
Before IAT, it was difficult for depository financial institutions to identify domestic transactions that may have had international parties involved. They need to know this to comply with U.S. law. Foreign countries have different laws and rules governing electronic payments that may impede a U.S. bank’s ability to reverse or recall erroneous transactions or extend the time frame in which transactions can be returned. This can expose the bank to risks, including the exchange rate risk that domestic ACH payments do not present.
What is the ‘travel rule’?
The Bank Secrecy Act’s ‘travel rule’ requires the originator’s bank to include the name, address and account number of both the originator and the beneficiary. The travel rule detail must accompany transactions.
What might happen if businesses choose to do nothing?
Your payees may experience a disruption in service. Transactions that may have previously appeared to be domestic but are now considered international under the new IAT classification may be returned or delayed. Rules violations related to these transactions can result in significant penalties imposed by OFAC.
If my payroll needs to be sent as IAT, could my employees’ availability be affected?
Yes, for two reasons. First, IAT credit entries delivered to the receiving financial institution by 5 p.m. on the day before the settlement date are not required to be available to the receiver at the opening of business on the settlement date. The transaction posts on the settlement date, but it could settle as late as the close of business.
Second, if the IAT were found to be suspect during the OFAC review, the transaction must be held until the issue is resolved and the item is either cleared or identified as an OFAC violation.
As a corporate originator, what type of due diligence do I need to do with my employees to determine if they are sending their funds out of the country and if we should be coding their payroll as an IAT?
You should have procedures in place to notify employees about IAT and inquire if they are sending their paycheck out of the country. NACHA has created a sample document that you can provide to your employees and vendors so they can inform you whether IAT may be required for their payment. This document is posted on NACHA’s Web site.
What other considerations are there concerning IAT?
It is important that all businesses have a strategy for how they will handle transactions going outside the U.S. To help develop this strategy, NACHA has many tools for corporations on their Web site, as well as a series of Webex sessions to prepare business for IAT. For more information, visit www.NACHA.org.
Darla K. Mick is a first vice president of treasury management sales at Comerica Bank. Reach her at firstname.lastname@example.org or (408) 556-5959.