IAT Processing and the “Effect of Illegality”

Posted September 20, 2010

This ACH Operations Bulletin provides guidance to Participating DFIs on their obligations for the timely processing of International ACH Transactions (IAT), and the application of the rule provision on the “Effect of Illegality.”[1]

IAT PROCESSING AND THE EFFECT OF ILLEGALITY

A Participating DFI must process each IAT entry in accordance with all requirements of the NACHA Operating Rules.  A DFI is excused from its compliance with specific obligations under the Rules only when the processing of an IAT entry would cause the DFI to be in violation of U.S. law.   The DFI must, therefore, comply with its obligations under the Rules unless it identifies an IAT as a suspect transaction. For domestic RDFIs that receive inbound IATs, these obligations include the timely provision of funds and the timely transmission of returns.

A suspect transaction, for purposes of OFAC compliance [2] , is one that potentially involves or relates to a “specially designated national” (SDN) or “blocked party,” and requires more detailed examination by the Participating DFI to determine whether the entry violates OFAC sanctions. For these suspect entries only, the Rules, through the effect of illegality provision, excuse the Participating DFI  from its  obligations  to  comply  with  any  provision  of  the  Rules, such  as crediting or debiting an account, if such compliance is inconsistent with U.S. law.

Since the IAT application was implemented in September 2009, NACHA has received reports that some domestic RDFIs have liberally applied the provision on the effect of illegality.   In these cases, RDFIs have assumed that, solely because these entries are coded as IATs (and not because they are suspect transactions), they do not have to meet the timing requirements of the Rules for funds availability or returns. This is inconsistent with the requirements of the Rules and, as with any other infraction of the Rules, can subject the DFI to enforcement action through the National System of Fines.

ADDITIONAL INFORMATION AND RESOURCES

NACHA IAT Resources

Office of Foreign Assets Control (OFAC)

FedACH IAT Resource Center

Electronic Payments Network

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NACHA CONTACTS

Questions about this ACH Operations Bulletin should be submitted via info@nacha.org.

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1 2010 NACHA Operating Rules, Subsection 1.2.6 (effective January 1, 2011 this provision will be found in the
2011 NACHA Operating Rules as Subsection 1.2.1).
2 This ACH Operations Bulletin is for information purposes only, and is not intended to provide legal advice. Readers should seek advice from legal advisors with regard to their obligations under programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control.

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