John Mills

The Internet has made the world a smaller place and communication cheaper and easier.  Now most companies and sole proprietorships have their own websites or places to purchase goods online.  While businesses and consumers enjoy this market expansion and convenience of shopping electronically, the exchange of money to pay for goods creates a new dilemma, because of the Office of Foreign Assets Control (OFAC) regulations.

Financial institutions must verify an entity blocked by OFAC is not a party to a financial transaction.  Since all domestic financial institutions are bound by this law, they must verify if customers are not on the OFAC list for domestic transactions.  However, this is not the case for international payments.  Since international financial institutions are not bound by United States laws, it is now the responsibility of the receiving financial institution to verify every entity involved in the transaction is not on the OFAC list.  The Travel Rule requires a U.S. financial institution to ensure every transaction contains information about each entity involved in the processing of the transaction. 

For wire transfers, relaying this information is relatively easy.  Wire transfers are performed on an individual basis and have fields specifically designed for this information to be relayed. 

However, the Automated Clearing House (ACH) Network has not been afforded the same luxury, but this is about to change.  Beginning September 18, 2009, a new Standard Entry Class (SEC) code is going into effect.  This new SEC code is for International ACH Transaction (IAT).  The code establishes standards for the information contained in the transaction and will affect every financial institution in the United States, even those that do not originate IATs.  You may think your financial institution will not receive IATs but with the present system, there is no way to determine that.

To process IATs correctly, financial institutions should:

• Educate appropriate staff and, where reasonable, customers
• Develop a policy that addresses ACH OFAC compliance for both receipt and origination of IATs
• Check with your ACH software vendor to ensure it has the proper system in place to handle the new transaction
• Implement and test handling procedures for incoming and outgoing IATs (may require vendor’s assistance) 
• Review how exceptions will be handled and determine if they can be processed timely
• Make sure an entry flagged as a potential OFAC hit does not delay the processing of valid entries
• Ensure new software or code smoothly integrates with existing systems
• Review ACH originators to make sure the appropriate SEC code is being used

Remember, it is the responsibility of each financial institution to ensure OFAC compliance.  While a third-party may perform the OFAC screening, the liability is still on the financial institution.  If you would like more information about the new IAT SEC code, you can find the rule that implements the new code in the 2009 ACH Rule Book.  You also may visit National Automated Clearing ’s website at www.nacha.org for more information.

For more information on this issue or related matters, please contact your BKD advisor.