ACH Rules and Regulations
There are many rules and regulations governing the transmission of ACH entries. Details on the rules and regulations having the most impact on the financial institution follow:
ACH Rules
Office of Foreign Asset Control (OFAC)
Regulation E and Electronic Fund Transfer Act (EFTA)
State law
Title 31 Code of Federal Regulation Part 210 (31 CFR Part 210)
Uniform Commercial Code Article 4A (UCC 4A)
USA PATRIOT Act
ACH Rules
The ACH Rules serve as the primary source for rules and regulations for the Commercial ACH Network and are contract law that is made binding by agreements. Commercial ACH entries are originated by the private sector, which includes individuals, companies and state and local governments.
The ACH Rules define the obligations and liabilities of each financial institution, including a provision to perform an annual audit, and provide a mechanism for a receiving institution to return an entry to the sending institution. The ACH Rules help reduce risk in the Network and protect financial institutions from potential loss.
Office of Foreign Assets Control (OFAC)
The U.S. Department of the Treasury, Office of Foreign Assets Control, administers economic sanctions and embargo programs that require assets and transactions involving interests of targeted countries, targeted country nationals and other specifically identified companies and individuals to be frozen. OFAC maintains a list of Specially Designated Nationals and Blocked Persons (SDN List) to assist financial institutions in identifying blocked parties.
All U.S. participants in the ACH Network need to be aware that they may be held accountable for sanction violations and must understand their compliance obligations. As an RDFI, the financial institution should have a process in place to determine whether any of its account holders are identified as a blocked party on a current SDN List. Financial institutions are strongly encouraged to obtain a current SDN List and other compliance information directly from OFAC.
Regulation E and Electronic Fund Transfer Act (EFTA)
Regulation E carries out the purpose of the EFTA, which establishes the basic rights, liabilities and responsibilities of consumers who use electronic fund transfer services. The primary objective of this act and regulation is the protection of individual consumers engaging in electronic fund transfer services. Regulation E also addresses the responsibilities of financial institutions regarding disclosures, stop payments and unauthorized debit transactions to consumer accounts and defines the process for resolving errors.
State Law
Some state laws may impact ACH transactions if the law is more restrictive or provides greater consumer protection than other prevailing rules or regulations. For instance, some states allow companies to mandate employees to be paid by Direct Deposit; however, most state labor codes restrict companies from offering only Direct Deposit. Many states have mandated state taxes paid by businesses and corporations be initiated through the ACH. The states’ Attorneys General Offices can provide specifics.
Title 31 Code of Federal Regulation Part 210 (31 CFR Part 210)
31 CFR Part 210 provides the regulatory foundation for the use of the ACH Network for federal government agencies. It defines the rights and liabilities of agencies, Federal Reserve Banks, financial institutions and the public in connection with ACH entries. The Green Book is the procedures manual for financial institutions processing federal government payments. Among the procedures covered by the Green Book are the handling of federal government reclamations and enrollment in federal government benefit payment programs. By accepting a federal government benefit payment, a financial institution agrees to be bound to 31 CFR Part 210, and therefore, must adhere to these procedures.
Uniform Commercial Code Article 4A (UCC 4A)
Uniform Commercial Code (UCC) is a series of state laws that govern commercial transactions. Article 4A of the UCC governs corporate ACH transactions that are referred to as “corporate wholesale credit entries.” RDFIs may identify these transactions by Standard Entry Class Codes CCD or CTX. UCC 4A also addresses the ‘commercially reasonable security procedures’ that must be in place for ACH Origination to occur.
USA PATRIOT Act
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 establishes a wide variety of ways to combat international terrorism. Title III—International Money Laundering Abatement and Anti-Terrorist Financing, which contains provisions relating to money laundering and terrorist access to the financial system in our country is the section of the Act that affects financial institutions with regard to information sharing and customer identification programs (CIPs).
CIPs require financial institutions to complete the following prior to opening a new account:
Verify the identity of any person seeking to open an account.
Maintain records of the information used to verify identity.
Consult government-known or suspected terrorist lists to determine whether the customer appears on any such list.
RULE OF THUMB: When conflicts are found among these various rules and regulations, the most restrictive rule or regulation applies. In other words, the one that benefits or provides the most protection to the consumer would be applied. Over the years, consumer and corporate customers have become more and more aware of the advantages of the electronic payments network. As a result, customers are more demanding and financially savvy. The ACH Network provides the ability to directly deposit employee payroll, permits automated bill payment services, allows for purchases online and can be used by companies to perform cash concentration and make corporate-to-corporate payments.
As migration from paper to electronic payment continues, the cost-effective ACH Network will grow and enable innovation that strengthens the industry with creative payment solutions.