December 19, 2005

Maribel Bondoc
Manager of Network Rules
NACHA
13665 Dulles Technology Drive, Suite 300
Herndon, VA 20171

Re: Request for Comment, Rules Work Group #22, OFAC and Operator Related Changes to the ACH Network

Dear Ms. Bondoc:

America’s Community Bankers (ACB) is pleased to respond to the NACHA Request for Comment on the Office of Foreign Assets Control (OFAC) and Operator Related Changes to the ACH Network. ACB appreciates the opportunity to submit comments on this rule change that would expand the scope of Cross-Border Payments (CBRs) by expanding the definition of such transactions and increasing the associated amount of information that must “travel” with each payment.

ACB Position

ACB supports OFAC in its efforts to thwart terrorism and drug trafficking through its ability to monitor and track suspect financial transactions. ACB is in favor of effective ACH network rules to constrain these activities.

ACB appreciates the analyses of the four Options outlined in the October 19th, 2005 Request for Comment. Of the four Options, ACB agrees that two are not tenable; (2) Make no substantive changes to existing CBR ACH rule provisions, and (3) Prohibit use of the ACH network for International ACH transactions.

Option 2 is not acceptable because it does not provide OFAC with the clarity it requires to monitor international transactions. Option 3 is not acceptable because it would take away the ability of ACB members to provide cross-border ACH services to their customers.

ACB shall focus its comments on Options 1 and 4.

The Request for Comment concentrates on Option 1 and would expand the definition of cross-border transactions and increase the amount of information that would be required to “travel” with that payment. Option 1 is the preferred solution in the proposal. There is also a discussion of Option 4 that would allow Network participants to decline to accept cross-border ACH transactions. This alternative was dismissed in the proposal’s analysis because the integrity of the Network would be damaged if not all participants were to accept all payments.
ACB has two main concerns regarding this proposed change: there is no firm quantitative data that provides an estimate for the number of transactions that will be covered by the new definition of CBRs and subject to the additional data requirements, and given the composition of the ACH network, there are likely to be a few very large volume ODFIs initiating these transactions and multitudes of RDFIs that will be accepting smaller transaction volumes.

According to the proposal, in 2004 there were 116,334 transactions that were either CBR or PBR transactions. Under the new rule, these would be placed in a single CBR category. In addition, NACHA estimates that 1-1/2 percent of all entries using PPD and other SEC codes would fall under the new definition and be subject to the new requirements. NACHA acknowledges that estimates are difficult because a majority of traffic is routed through proprietary systems and on-us transactions.

The second factor in the analysis of concern to ACB is the expense each bank will incur to comply with the requirement without knowing how many CBRs to expect. Without a projection of the increase in covered payments, it is difficult to gauge the effects on ACB members. Again, based on the current model, the few large ODFIs will be able to offset their additional expenses against a large volume of transactions. Smaller RDFIs will have set expenses, but a much smaller transaction pool available to recoup costs.

Under Option 1, all banks that participate in the network would be required to undergo significant system upgrades to accommodate the new formats whether they generate and/or receive thousands of covered transactions each day or have no volume at all. This would create an imbalance for ACB members that are required to undertake large expenses to accommodate low transaction volumes.

ACB Recommendations

ACB is submitting these comments with the belief that due to OFAC’s concerns and the threat posed by undocumented foreign transactions, the “expanded” CBRs under Option 1 will be implemented in some form. However, ACB does not believe that all banks should be forced to participate in CBR transactions and exceptions should be made for those banks that choose to opt out.

The uncertainty of the size of the CBR universe under the Option 1 definition encourages further review of Option 4. A bank that is presented with the need to upgrade its ACH systems to provide service for an unknown number of transactions should have the option not to participate in that transaction type. Banks should have the option to decline transactions. A bank that analyzes its ACH activity and estimates that it would not receive enough new CBR payments to justify a system upgrade should not be forced to incur an unwarranted expense and enter into an unprofitable business line.

The preferred alternative is to modify Option 4 and have ODFIs be responsible for not sending CBRs to RDFIs that choose not to accept them. Further, the ODFI would be responsible for any fines imposed on the RDFI if a CBR payment were sent in error. This alternative places the burden of filtering out CBR transactions to the ODFIs.

A less preferable alternative would be to allow the RDFI to return all CBRs to the ODFI without risk of penalties. This alternative is not attractive because the burden of filtering CBRs and instituting software changes would rest with the RDFI and the ODFI would have to process the returns. If the preferred alternative were enacted, the ODFI would not send the payment at all.

Banks that opt to originate CBR payments should also be required to receive them. Banks should also be given the opportunity to accept CBR payments under the proposed rule, but not be obligated to initiate the payments for their customers. Finally, a bank that chooses not to participate in CBR transactions at all should not be unduly obligated.

Adopting a modified Option 4 in conjunction with Option 1 does not conflict with OFAC’s intentions. ACB recognizes the potential downside of not having 100% of the Network accepting 100% of the payments. However, the effects of these “opt-out” alternatives are difficult to determine because there is no estimate of the number of transactions that would be created by this rule change.

Conclusion

ACB recommends adopting a modified Option 4 under the general principles outlined below:

• Banks that choose to originate CBRs should be required to receive CBRs and be subject to the new requirements.
• Banks that choose to receive CBRs should be subject to the new requirements, but not be obligated to originate CBRs.
• Banks that choose not to participate in CBR transactions at all should be permitted to formally opt out of the process. ODFIs that send CBRs to RDFIs that have opted out of CBR activity shall be responsible for all fines and penalties associated with the payments.

ACB appreciates the opportunity to comment on this important matter. If you have any questions, please contact Steve Kenneally at (202) 857-3148 or [email protected].

Sincerely,

Stephen K. Kenneally
Director
Payments and Technology Policy