International ACH Transactions (IAT)

Introduction

Effective September 18, 2009, the National Automated Clearing House Association (NACHA) is implementing a change to the rules governing the Automated Clearing House (ACH) Network as they relate to International ACH Transactions (IAT). As of that date, all international payments will be required to be identified with a new Standard Entry Class (SEC) Code in response to a request from the U.S. Department of Treasury's Office of Foreign Assets Control (OFAC).

The following list of items will help you determine how your company will be affected by the IAT ACH rule change.

• Become familiar with the new IAT ACH Rules and Formats.
• Review all existing payments you originate or receive via the ACH Network for possible IAT scenarios.
• Call Farmers & Merchants Bank (F&M Bank) Customer Service Center at (800) 888-1498 and ask to speak to the Electronic Banking Department with any questions or concerns.

What is IAT?

NACHA is implementing the new IAT SEC code for ACH payments to identify international transactions. International transactions are those payments that have been funded internationally or are being sent to another country with part of the transactions being processed via the ACH Network.

When will the new IAT SEC code become effective?

The new IAT code will become effective September 18, 2009. This means that all international ACH items intended to process on that day must use the IAT code and contain all the new field requirements.

Why is NACHA creating IAT?

IAT was developed in response to a request from the Office of Foreign Asset Control (OFAC). In its letters to NACHA, OFAC stated that it believes the ACH Network is vulnerable to abuse due to the speed and efficiency of the network. OFAC understands that there are transactions currently flowing through the network that are funded by international sources. These transactions cannot be identified currently within the network and are formatted as domestic transactions. OFAC has requested that NACHA modify the NACHA Operating Rules to adequately identify international transactions. In addition, banks should review the international transactions for OFAC compliance.

How do I know if IAT applies to my ACH payments?

If you answer yes to any of the following questions, please read the rest of the information contained in this packet and then call F&M Bank's Customer Service Center at (800) 888-1498 and ask to speak to the Electronic Banking Department about the impact of IAT to your company.

• Is your company a subsidiary of a multi-national company?
• Does your company have foreign subsidiaries?
• Does your company buy or sell to organizations or individuals outside the territorial jurisdiction of the United States?
• Does your company send payroll, pension or benefit payments via the ACH network to individuals with permanent resident addresses outside the territorial jurisdiction of the United States?

What major changes are expected with the new IAT SEC code?

The IAT SEC code will be used for both consumer and corporate international ACH credits and debits. In addition to requiring data elements defined by the Bank Secrecy Act's (BSA) "Travel Rule," OFAC screening indicators will be included with each payment to help RDFIs identify suspicious payments. Furthermore, all international inbound transactions will allow the use of a secondary SEC code to further identify the file type for all WEB, TEL, ARC, POP, BOC, and RCK transactions where applicable.

Who will the IAT SEC code impact?

The introduction of the IAT code will impact all U.S. financial institutions, including those that do not currently send or receive international payments as any financial institution is a potential receiver of an IAT transaction.

When should the IAT SEC code be used?

It may be unclear as to when to use and not to use the IAT code. Below are several helpful scenarios to assist in determining when to use the IAT code.

Scenario A - U.S. Domiciled Company/Standard Direct Deposit

• U.S. domiciled company.
• No direct funding for the payroll from outside the territorial jurisdiction of the United States.
• ACH file information created by or for the U.S. Company and sent to its U.S. bank.
• All employees' ACH deposits are being sent to banks within the territorial jurisdiction of the United States.

Result: Non-IAT transactions, format as PPD transactions (domestic transactions)

Scenario B - U.S. Subsidiary of an Offshore Multinational Corporation

• U.S. domiciled company.
• No direct funding for the payroll from parent company. The funding is for general operating activities of the company and not for a specific ACH file. [Funding can be from U.S. company activities or received as part of a regular funding of the company activities by the parent on a daily, weekly, monthly basis for all check, wire transfer, card or ACH activity.] ACH file - may or may not have been originated by parent company.
• All employees' ACH deposits are being sent to banks within the territorial jurisdiction of the United States.

Result: Non-IAT transactions, format as PPD transactions (domestic transactions)

Scenario C - U.S. Subsidiary of an Offshore Multinational Corporation

• U.S. domiciled company.
• No direct funding for the payroll from parent company. The funding is for general operating activities of the company and not for a specific ACH file. [Funding can be from U.S. company activities or received as part of a regular funding of the company activities by the parent on a daily, weekly, monthly basis for all check, wire transfer, card or ACH activity.]
• ACH file - sent via SWIFT message from a European bank.
• All employees' ACH deposits are being sent to banks within the territorial jurisdiction of the United States.

Result: Non-IAT transactions, format as PPD transactions even though the ACH payment instructions were sent via SWIFT message through a foreign financial agency, there were no funds sent into the country

Scenario D - U.S. Subsidiary of an Offshore Multinational Corporation

• U.S. domiciled company.
• Direct funding for the payroll file from the parent company through a foreign financial agency outside the territorial jurisdiction of the United States.
• Payroll information, whether in SWIFT message, ACH file format, or proprietary format tied to the specific funding is sent to the company's U.S. bank.
• All employees' ACH deposits are being sent to banks within the territorial jurisdiction of the United States through the ACH network.

Result: International transactions, format as IAT transactions

Scenario E - Vendor Payments

• Vendor payments would follow the logic associated with Scenarios A, B, & C listed above.

Scenario F - ACH Debits for Payments to Foreign Receivers

• A foreign bank (Originating Bank) allows non-bank customers to originate payments to consumers in their country.
• A person (Originator) in the U.S. logs on to the foreign bank site and originates a payment to a relative (Receiver) in that country, providing the bank with his/her routing and transit number (ABA number) and account number at his/her U.S. bank along with the routing, account number and physical address of the Receiver in the foreign country.
• The foreign Originating Bank sends a SWIFT message to its U.S. correspondent bank with instructions to send an ACH debit to the Originator's account at his/her U.S. bank along with the name and physical address of the Receiver in the foreign country.
• The U.S. bank processes the debit to the U.S. Originator's bank and credits the correspondent account at his/her bank for the foreign Originating Bank.
• The foreign Originating Bank sends a credit payment to the Receiver's account at the bank in his/her country.

Result: The debit to the Originator's account in the U.S. would be an IAT transaction because the funds are moving out of the U.S. to a foreign financial agency

• A U.S. domiciled company makes pension payments to retirees residing outside the territorial jurisdiction of the United States (expatriates) using Direct Deposit.
• For some of the expatriates, the company has instructions to send the funds through the ACH network to a Gateway Operator, with further instructions to send to a financial agency in a foreign country.
• For the balance of the expatriates, when the Direct Deposit is being sent to domestic U.S. financial institutions consider the following questions:
  • Are the funds staying in the U.S. financial institution
    • Should be PPD transaction: or
  • Are there standing instructions to send the pension payment through various means to a foreign financial agency?
    • Should be IAT transaction
  • Are the funds commingled with other funds, like Social Security, and then sent to another country?
    • Should be PPD transaction

• A foreign bank offers a service in the United States to send credit payments to companies or individuals in its country of domicile.
• The credit payments and remittance data are sent to the foreign bank's U.S. correspondent via the ACH network.
• At the end of the daily processing cycle, the U.S. correspondent credits the foreign bank's correspondent account with the funds consolidated during the day and sends an EDI file with the individual entry detail and remittance information.
• The foreign correspondent bank debits the U.S. correspondent bank's account on its books and sends the credit and the remittance information to the receiving company.

Result: The credit transactions going to the U.S. correspondent bank would be IAT transactions. The U.S. correspondent bank should instruct its correspondent to ensure that the transactions are formatted using the IAT SEC code

There are several Web sites you can visit for information regarding the IAT code.

• NACHA Web site: http://www.nacha.org/
• NACHA IAT Web site: http://www.nacha.org/iat_industry_information/
• NACHA Publications Web site: http://pubs.nacha.org/