This ACH Operations Bulletin advises Originating Depository Financial Institutions (ODFIs) and other ACH participants of an amendment to the Nacha Operating Rules regarding the warranty an ODFI makes for an Outbound IAT Entry. This Bulletin is being issued due to the immediacy of the effective date of the Rules amendment.
Currently, the Rules provide that the ODFI of an Outbound IAT Entry warrants to the RDFI, ACH Operator and Gateway that the IAT Entry complies with the laws and payment systems rules of the receiving country. In practice, the breadth of this warranty has been identified by financial institutions as a barrier to the Origination of IAT Entries. The Rules amendment narrows the scope of this warranty to focus solely on the authorization of the Entry, when authorization is required by the laws or payment system rules of the receiving country. This change is intended to encourage additional origination of Outbound IATs by focusing the warranty on the more limited subject matter most critical to the permissibility of the Entry.
ODFI WARRANTY FOR OUTBOUND IAT ENTRIES
Previously under the Rules, the ODFI’s warranty for Outbound IAT Entries was broad and required the ODFI to warrant that the Entry complies with all laws and payment system rules of the foreign (receiving) country. In practice, however, this warranty has been a barrier for many ODFIs to originate Outbound IATs. Given the industry’s investment in enabling IAT Entries, and given other impending regulatory requirements regarding international remittances, Nacha and the industry are interested in lowering barriers to the use of IAT.
Under the revised Rules, ODFIs transmitting Outbound IAT Entries now warrant only that they are in compliance with foreign laws or payment system rules regarding authorization of the Entry, if authorization is required. ODFIs presumably will pass this warranty to their Originators in order to confirm that Originators have obtained any authorization required for their Outbound IATs.
Notwithstanding this narrowing of the warranty by ODFIs, Gateways should not have to bear the risk that foreign law or payment system rules may prohibit the processing of a transaction, possibly resulting in the seizure of funds. Accordingly, the Rules also now specifically allocate to the Originator of an Outbound IAT Entry (credit or debit) the risk that foreign law or payment system rules may prohibit the processing of that transaction. Under the revised rules, the risk is borne by the ODFI as between the ODFI and the Gateway, and by the Originator as between the Originator and the ODFI. Any loss therefore would ultimately accrue to the Originator unless there is an agreement between the Originator and the ODFI, or between the ODFI and the Gateway, to allocate the risk of loss differently (or a different result is required by applicable law or regulation). It is incumbent upon Originators to understand the nature of sending payments to or seeking payments from other countries and the potential risk that international payments processing entails.
EFFECTIVE DATE AND RULE LANGUAGE
These changes to the Nacha Operating Rules regarding the ODFI’s warranty with respect to Outbound IAT Entries are effective on March 15, 2013. Rules sections impacted by these changes appear below and reflect updated language:
- Article Two – Rights and Responsibilities of ODFIs, Their Originators, and Third-Party Senders
- Subsection 220.127.116.11 Additional ODFI Warranties for Outbound IAT Entries
- In addition to the other warranties contained within these Rules, an ODFI initiating an Outbound IAT Entry warrants to each RDFI, ACH Operator, and Gateway:
- Compliance with U.S. Legal Requirements. The Originator and ODFI are in compliance with U.S. Legal Requirements with respect to the IAT Entry, including their obligations under programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FinCEN).
- Compliance with Foreign Laws or Payment System Rules Regarding Authorization. If the laws or payment system rules of the receiving country require authorization with respect to an IAT Entry, the ODFI warrants that the authorization of the IAT Entry complies with the laws and payment system rules of the receiving country.
- Subsection 18.104.22.168 Assumption of Risk (new subsection)
As between the ODFI and the Gateway of an Outbound IAT Entry, the ODFI bears the risk that the laws of the receiving country prohibit or otherwise preclude the processing, settlement, or transfer of the proceeds of the Entry, including through blocking or other sequestration or seizure of funds, unless otherwise agreed between the Gateway and the ODFI. As between the Originator and the ODFI, the Originator bears all such risk, unless otherwise agreed between the Originator and the ODFI or required by Legal Requirements.
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