international ach transactions: the basics of iatinternational ach transactions: the basics of iat

1. International ACH Transactions: The Basics of IAT

3. Introduction to International Payments

4. What are International Payments? Credit and debit payment instructions Exchanged across national borders Transfer value between an Originator (sender) and a Receiver (beneficiary)

5. Payment Options

6. Electronic Payment Systems Domestic - United States ACH Fedwire/CHIPS Cards Money Transmitters Western Union, PayPal

7. Electronic Payment Systems International Cards Proprietary SWIFT Message Bank-to-bank messaging network and not a payment system Money Transmitters Western Union, PayPal

8. Bridging Domestic Payments Systems

9. 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

10. 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

11. Correspondent Banking Over 500 years old Developed by banks in Genoa to facilitate trade Banks for banks International and domestic

13. Foreign Exchange Conversion of one currency to a different currency Continuous Linked Settlement (CLS) Created for the purpose of settling foreign exchange transactions Reduces settlement risk Same-day settlement

14. 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

15. Current Cross-Border ACH Payments Process

16. 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

17. 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

18. Cross-Border Transaction Flow

19. IAT Overview

20. 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

21. 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

22. 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

23. Purpose Respond to OFAC�s request to align ACH Rules with OFAC compliance obligations Make it easier for RDFIs to comply with OFAC obligations

24. SEC Code Change Eliminates CBR and PBR Introduces new SEC Code of IAT

25. Definition of IAT An ACH entry that is part of a payment transaction involving a financial agency�s office that is not located in the territorial jurisdiction of the United States Office of 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 fund directly from a Person or makes payments directly to a Person as part of the transaction Serves as an intermediary in the settlement of the payment transaction

26. Domestic or IAT? A U.S. company with 400 U.S.-resident employees is a subsidiary of an offshore multinational corporation with its headquarters in Europe. The U.S. company sends payroll payment instructions for all 400 U.S. employees in a single file to its New York bank where it holds an account. Upon receipt of the payroll information, the New York bank executes the following payment transactions: Originates an ACH file of 400 credit entries to pay the 400 U.S. employees on Settlement Date, and Creates an offsetting book-entry debit to the U.S. company�s account at their bank totaling the sum value of the ACH credit entries.

27. Result Domestic All 400 ACH credits and the single, offsetting book-entry debit are domestic transactions (credits = PPD entries/debit = on-us DDA entry) New York bank and RDFIs holding the accounts of the U.S. employees are the only financial agencies involved in the payment transactions and all are within the territorial jurisdiction of the U.S.

28. Domestic or IAT? A U.S. company with 400 U.S.-resident employees is a subsidiary of an offshore multinational corporation (the parent company) with its headquarters in Europe. The parent company has centralized the global treasury, human resources, and data processing functions of its subsidiaries at its headquarters in Europe. The U.S. company sends the parent company any changes to employee status, salaries, hours, etc. After updating its central HR records, the parent company sends payment instructions for all 400 U.S. employees in a single file to its New York bank on behalf of the U.S. company, which holds an account with the New York bank. Upon receipt of the payroll information, the New York bank executes the following payment transactions: Originates an ACH file of 400 credit entries to pay the 400 U.S. employees on Settlement Date, and Creates an offsetting book-entry debit to the U.S. company�s account at their bank totaling the sum value of the ACH credit entries.

29. Result Domestic All 400 ACH credits and the single, offsetting book-entry debit are domestic transactions (credits = PPD entries/debit = on-us DDA entry) New York bank and RDFIs holding the accounts of the U.S. employees are the only financial agencies involved in the payment transactions and all are within the territorial jurisdiction of the U.S.

30. Domestic or IAT? A U.S. company with 400 U.S.-resident employees is a subsidiary of an offshore multinational corporation (the parent company) with its headquarters in Europe. The parent company has centralized the global treasury, human resources, and data processing functions of its subsidiaries at its headquarters in Europe. It has also centralized many of its HR-related banking functions with an international bank headquartered in Europe. The U.S. company sends the parent company any changes to employee status, salaries, hours, etc. After updating its central HR records, the parent company sends payroll payment instructions for all 400 U.S. employees in a single file to its international bank in Europe on behalf of the U.S. company. Upon receipt of the payroll information, the European bank instructs the bank in New York via a SWIFT message to execute the following payment transactions: Originate an ACH file of 400 credit entries to pay the 400 U.S. employees on Settlement Date, and Create a debit to the U.S. company�s account at the New York bank totaling the sum value of the ACH credit entries.

31. Result Domestic All 400 ACH credits and the single, offsetting debit are domestic transactions (credits = PPD entries/debit = on-us DDA entry) The SWIFT message instructed the New York bank to debit the U.S. company�s account and not the parent company�s correspondent account at the bank in New York New York bank and RDFIs holding the accounts of the U.S. employees are the only financial agencies involved in the payment transactions and all are within the territorial jurisdiction of the U.S.

32. Domestic or IAT? A U.S. company with 400 U.S.-resident employees is a subsidiary of an offshore multinational corporation (the parent company) with its headquarters in Europe. The parent company has centralized the global treasury, human resources, and data processing functions of its subsidiaries at its headquarters in Europe. It has also centralized many of its HR-related banking functions with an international bank headquartered in Europe. The U.S. company sends the parent company any changes to employee status, salaries, hours, etc. After updating its central HR records, the parent company sends payroll payment instructions for all 400 U.S. employees in a single file to its international bank in Europe on behalf of the U.S. company. These instructions include a request to debit the parent company�s account with the European bank to fund the payroll file on behalf of its U.S. subsidiary. Upon receipt of the payroll information, the European bank executes the following : Debits the account of the parent company at the European bank, and then sends a SWIFT message to the New York bank with instructions to: Credit its correspondent account at the New York bank on behalf of its U.S. subsidiary, Originate an ACH file of 400 credit entries to pay the 400 U.S. employees on Settlement Date, and Create a debit to the U.S. company�s payroll settlement account at the New York bank totaling the sum value of the ACH credit entries.

33. Result IAT All 400 ACH credits would be IAT The European bank is involved in the payment transaction by debiting the parent company�s account in Europe and serving as an intermediary in the settlement of the payment transaction

34. Gateway Operator New Obligations for Gateway Operators and ODFIs Redefines Gateway Operator as the entry point to or exit point from the U.S. Removes current requirement for formal declaration Allows any ODFI or ACH Operator to be a Gateway Operator Adds new Gateway Operator obligations ACH Operators may process outbound debit/credit entries and limit inbound IAT entries to credits only ODFIs may process outbound and inbound debit and credit entries

35. �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 Receiver�s FI Foreign Correspondent Bank(s) name, Bank ID and Bank Branch Country Code Reason for the payment

36. 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

37. OFAC Compliance All financial institutions are responsible for OFAC compliance Financial institutions cannot contract away their liability for OFAC compliance

38. 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

39. 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

40. 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

41. 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

42. 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

43. Resources MPX 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/answer.shtml#24

44. Summary Implementation date of March 20, 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