Use of the ACH Network for Illegal Internet Transactions

Posted May 16, 2006

The National Association of Attorneys General (NAAG) has advised NACHA of a problem with violations of federal and state laws governing the sale of tobacco products by Internet tobacco retailers.  Internet tobacco retailers use electronic payment systems, including the ACH Network, for such sales.  As a result, NAAG has requested NACHA’s assistance in their efforts to stop the illegal sale of tobacco over the Internet, asking that the NACHA membership refuse to provide electronic payment processing services to Internet tobacco retailers engaged in illegal sales.

According to the attached letter from NAAG, “virtually all Internet tobacco retailers engage in illegal sales for at least one of the following reasons: (1) they make no effort to verify the age of their customers, as required by state and local laws; (2) they violate the federal Jenkins Act (15 U.S.C. §375 et seq.) by failing to report shipments of cigarettes to the tobacco tax administrator of  the  state  into  which  such  shipments  are  made;  (3)  they  violate  laws  in  certain  states specifically prohibiting or regulating the sale of tobacco products over the Internet; (4) they violate state tax laws; and/or (5) they utilize the Internet and the mail to complete illegal tobacco transactions, in violation of federal wire fraud and mail fraud statutes.”

ODFIs are strongly encouraged to review their internal procedures to ensure that they have employed adequate procedures to know their customers, and that those customers are engaging in responsible business practices.  When the ODFI’s customer is a Third-Party Sender, the ODFI does not have a direct relationship with the actual Originator of a transaction, making it difficult to know the Originator’s business or the risk associated with that business.  To minimize its risk and potential liability for ACH entries initiated through a Third Party Sender, the ODFI should also employ practices and procedures to know its customer’s customers (i.e., the actual Originators on whose behalf the ODFI is processing).  ACH participants are strongly encouraged to establish business practices that ensure that ACH transactions do not facilitate illegal activity.

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