A pivotal day for the automated clearing house (ACH) network was 18 September 2009 when NACHA, the electronic payments association that governs ACH standards in the US, amended its operating rules after 10 years to introduce a new standard entry class (SEC) code. Today all international payments made through the ACH network need to be identified via a SEC code known as an International ACH Transaction (IAT). This change affects all stakeholders in the payments ecosystem, from corporate payment initiators, financial institutions, third-party financial software vendors, to payment service providers.
Under the new NACHA rules, IAT entries became subject to the US Department of Treasury Office of Foreign Assets Control (OFAC) screening. NACHA changed the rules in response to OFAC and anti-money laundering (AML) concerns associated with previous codes that could not be checked against the OFAC Specifically Designated Nationals (SDN) list. The objective of the IAT rule change is to ensure that US organisations are not doing business with blocked entities or banned countries.
The new rule requires that IAT payments include specific data elements defined by the Bank Secrecy Act’s (BSA) Travel Rule. The new file format comprises of a detailed record and at least seven addenda records needed for compliance with the BSA Travel Rule, including information about the originator, the receiver, the beneficiary, and all domestic and foreign banks involved in the transaction. The IAT format mirrors the data requirements for wire transactions, and is designed to be mapped to transaction formats used globally, such as SWIFT and ISO 20022.
Impact on Businesses
The rules governing international electronic payments (e-payments) should not be taken lightly. The penalties for ignoring those obligations are both criminal and civil, and include both jail time and fines ranging from US$10,000 to US$10,000,000 per occurrence by OFAC and up to US$500,000 per month for NACHA rule violations. Along with the substantial fines, the reputational risks for non-compliance from adverse publicity can be even more damaging.
The determining factor when assessing whether a transaction is considered an IAT or a domestic transaction is the location of the financial agency or financial institution involved in the processing and settlement of the transaction. The following are some general guidelines for organisations on how to identify potential IAT scenarios:
- Payroll, pensions or benefits: companies that pay payroll, pension, or benefit payments via the ACH network to current or former employees who have moved out of the country require further investigation to determine whether those funds remain in the US, or become cross-border transactions.
- Accounts payable (A/P): some disbursements that were previously treated as domestic payments are now considered international payments. The key to determining whether to format a transaction as an IAT is to identify the final beneficiary. Even if the recipient is located in the US, a vendor that is a subsidiary of a foreign owned multinational company may have an international beneficiary.
- Accounts receivable (A/R): companies that sell to organisations or individuals outside of the US receiving payments via the ACH network require ACH transactions to be formatted as IATs.
Corporate Priorities in Transitioning to IATs
According to NACHA, the new IAT code for international ACH transactions surged 520% to 9.53 million from 1.54 million transactions in Q311 from the same period in 2010. The tremendous increase in IAT volumes suggests that some may be recognising the need for and benefits of IAT.
Last September, NACHA approved additional modifications and refinements to IAT entries as mandatory standard changes that span through 15 March 2013. Coupled with the rise in the number of cross-border ACH transactions, the question that needs to be asked is: where are corporate ACH initiators in the implementation process today?
Logica surveyed North American companies across a broad spectrum of industries. The online survey was supplemented with responses collected from senior executives at the Association for Financial Professional (AFP) Annual Conference, an event for finance and treasury corporate practitioners in North America. The survey of more than 100 respondents revealed that more than two years after the passage of IAT, most corporate businesses are still not prepared to send or receive IAT – only 36% are live, 14% are in the implementation stage, 39% have a business case in development and 11% are in the review or selection process of technology providers.
The low rate of implementation is not surprising and can be attributed to a variety of issues and challenges including:
- Increased cost: the cost of additional compliance emerged in the wake of the financial crisis when organisations were focused on cost cuts.
- Additional burden and complexity: the extensive technological and process changes to accommodate the additional addenda data and format needed to be passed on to banks are deterrents for companies looking to use IAT. Many continue to use laborious manual processing in such cases.
- Industry confusion: slow adoption of banking partners in modifying their systems and procedures for IAT transactions is hindering corporations looking to their financial institutions for guidance.
Benefits of IAT
Yet, IAT also offers opportunities for organisations. These are:
- Enhanced transparency and security: the changes enable ACH transactions to receive the same level of screening as international wire transactions. IAT rules thus bring more visibility into the process. In addition, the parties or entities involved in the transaction are carried in the IAT payments, facilitating compliance with US regulations.
- Increased efficiency: the new file format eases the automated OFAC screening, along with additional payments remittance information, can facilitate the transition from paper cheques to e-payments.
- Improved payments mix for cost savings: IATs provide more cost-effective payments channels for cross-border payments for corporates. With increased global trading partners, IAT is an alternative to paper cheque payments, and even certain more costly wire transfers for non-urgent, low dollar transactions to and from foreign countries.
- Optimised analytics: the additional data and travel rule requirements for IAT payments is value-add for corporate businesses looking to employ business intelligence for dynamic and faster decision-making.
The Way Forward: A Checklist for Corporates
As the dynamics of the market, business environment and changes in regulatory requirements increase in complexity, IAT offers a compelling reason for corporate business to make the shift. However, these changes are not easy, and require three key elements:
For effective and efficient IAT transition, organisations need to take a number of significant steps:
- Review existing OFAC compliance policy and enhance policy and procedures to include compliance steps for the IAT coding and screening process.
- Assess transaction monitoring systems to ensure they are equipped to send and receive IATs. The mandatory information fields are available and transmitted with IATs that, if not properly filled out, will prevent the payment from being processed.
- Review existing vendor, employee, and pension payments for possible IAT applications.
- Communicate with appropriate vendors and employees.
- Communicate with banks.
- Conduct testing with banks and vendor(s) to ensure that all IATs are properly screened for OFAC compliance.
- Train employees on OFAC and NACHA IAT requirements.
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