New Banking Industry Rules
There has recently been a change in the banking industry rules (NACHA Operating Rules) which the State of North Carolina must adhere to when remitting vendors their payments via Direct Deposit. The new rules require the State, as originator of electronic payments made through the ACH network, to identify payments made to payees where the entire payment amount is subject to subsequently be transferred to a foreign bank account. The rules are referred to as “International ACH Transaction (IAT) rules” and are pursuant to requirements of the Office of Foreign Assets Control (OFAC). The IAT rules became effective September 18, 2009. The IAT rules do not apply to payments made via paper check.
Purpose of IAT Rules
Under US Law, banks are required to screen all ACH payments to ascertain if the funds associated with a payment are being remitted to (or being received from) any party subject to OFAC sanctions. OFAC administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. OFAC acts under Presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under US jurisdiction. The IAT rules are intended to assist the banking industry in performing this screening process.
State’s Responsibility to Comply with the IAT Rules
In order for the State to comply with the IAT rules and the applicable US Law, vendors are being notified of the new rules. Additionally, in cases where current vendors meet certain criteria to consider them as a potential IAT payee, an inquiry may be made of the vendor, requesting additional information regarding the designation of payments made to them electronically. For vendors that are identified as an IAT payee, the State is required to submit all future electronic payments to the vendor’s bank either in a special format, or remit the payment to the vendor via paper check.
In the case of vendors that are designated as an IAT payee, the State has elected to only remit payments to the vendor via paper check. The small number of vendors that would meet the definition of an IAT payee does not justify the added cost the State would incur to create and submit the specially formatted ACH file required by the banking industry.
Vendor’s Responsibility to Comply with the IAT Rules
In order to warrant that payments the State originates through the ACH network comply with all US Laws, the State must rely upon the vendor to advise if the full amount of the payment the vendor receives electronically is being forwarded to a bank in another country. In order for the IAT rule to apply, the entire amount of the payment must be forwarded.
Responsibility of Vendors Currently Enrolled in Direct Deposit
Should you receive your vendor payment via direct deposit at a U.S. financial institution and then have the entire payment amount forwarded to a bank in another country, you should advise the State, or the remitting agency that may be making an inquiry. An agency may provide a general notice regarding the IAT rules, or it may make a specific inquiry of you. If you do not respond to an agency’s specific inquiry to affirm that you do or do not meet the definition of an IAT payee, you will be presumed by the agency to be an IAT payee. In such case, all future payments may be remitted to you via paper check. Should your IAT status change at any time in the future, you should notify the State or the agency.
Criteria Used to Identify Potential IAT Vendors – For Specific Inquiry
While any vendor could be classified as an IAT payee, the State Controller has established due diligence criteria for which vendors meeting certain conditions should receive a specific inquiry, in addition to the general notification provided to all vendors. The conditions are primarily those used by the Internal Revenue Service screening for federal income tax withholding purposes, and are as follows:
- Physical or mailing address of payee is a foreign address, or
- No US Tax ID number or social security number is on file, or
- Vendor is known not to be a domestic corporation recognized by the Internal Revenue Service (not created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia), or
- Payee is known to be a “foreign person” as defined by the Internal Revenue Service, which includes nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, international organizations, and any other person who is not a U.S. person (Generally, the U.S. branch of a foreign corporation or partnership is treated as a foreign person), or
- Payee meets the definition of a “nonresident alien” for IRS tax withholding purposes pursuant to the Internal Revenue Code
Responsibility of Vendors Not Yet Enrolled in Direct Deposit
Going forward, upon enrolling in a direct deposit program, the Enrollment Form will have a place for you to affirm whether the entire payment amount, is or is not, subject to being forwarded to a bank in another country. Should your IAT status change at any time in the future, you should notify the State or the inquiring agency.
Know Your Customer Principle
The NACHA Rules specifically require all parties to adhere to all US Laws, and transactions conducted through the ACH network carry such warranties with them. The NACHA Guidelines indicate that all parties have an obligation to “know their customer.” In many cases, the state agency is in the best position to know that the payment to a person or company could potentially be part of a transaction where the funds could be remitted upstream to a party that is sanctioned by the OFAC.
NACHA acknowledges, partly because of bank privacy regulations, that it is not always possible for the State, functioning as an originating company, to know whether funds remitted to a payee’s designated financial institution are subject to being subsequently forwarded to a foreign bank. Information known by the agency alone is not necessarily a sufficient reason to designate payments to the vendor as an IAT, but it can be enough to prompt the agency to make a due diligence inquiry of the vendor. Any inquiry made of a vendor by a state agency is done to fulfill its due diligence obligation to adhere in spirit with the US law and the IAT rules.
Impact on Payee Designated as an IAT-Payee
Being designated as an IAT payee, by virtue of your payment being forwarded to a foreign bank, should have a minimum affect on the payment being credited to your designated bank account. There should only be a problem if your name is one that is contained on OFAC’s sanction list. However, availability of funds credited to the account will be subject to your receiving financial institution’s policies and procedures.
The State of North Carolina has multiple vendor databases. The State Controller’s Office has two vendor databases that are used by those agencies utilizing the North Carolina Accounting System (NCAS). One NCAS vendor database is for “trade vendors” (maintained centrally by OSC), and one is for “non-trade vendors” (maintained by each individual agency). Other governmental entities not utilizing NCAS (e.g., universities, community colleges, etc) each maintain their own vendor databases, which they are responsible for maintaining on a decentralized basis.
The criteria used by agencies utilizing the State Controller’s NCAS databases to identify potential IAT vendors may be different than the criteria used by other agencies. Consequently, if you are a vendor doing business with multiple agencies, you may receive multiple inquiries. You should respond to each inquiry separately.
You are reminded that the IAT rules do not apply if you are receiving payments from an agency via paper check, only if they are being received through the ACH network.
All questions should be directed to the agency which submits payment to you.