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Discussion Boards > Remote Deposit Capture Discussions > OFAC and Payees View modes: 
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wilfredo.jaurgeui - 6/22/2019 3:11:06 PM
   
OFAC and Payees
I would be interested on how FIs are handling the OFAC review of the payee. Would be great to see size of FI, how are false positives managed, handling handwritten checks vs machine generated. 

Can you provide feedback and how is it handled on Mobile RDC? Have regulators opined on this as a requirement? 

Thanks

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michaelj1987 - 6/27/2019 4:25:38 PM
   
RE:OFAC and Payees
Your post doesn’t tell me who you are in relationship to the check.

You did mention mobile remote deposit capture, which means that you are also acting as the depositary bank for some transactions. As for remote deposit capture, it is entirely possible that your customer has given his password to his true love in the Ukraine who is now depositing items and siphoning the proceeds. As the depositary bank, you must know your customer. It is prudent to monitor the geography of the deposited checks. It’s possible that your customer may use RDC while visiting the Ukraine, but if your customer just completed a debit card transaction at the local grocery store, the red flags should wave.

For the rest of this discussion, I assume you are the paying bank because the depositary bank would have completed its customer identification program (CIP) process for their customer—the payee.

For a check, the paying bank conducts a financial transaction with two persons—their drawer and the person presenting the check. The paying bank does not conduct a transaction for the other possible parties to the check, for example, the original payee and subsequent indorsers.

Title 31 Code of Federal Regulation Chapter 5, which contains the Office of Foreign Assets Control part of title 31, defines a transfer as,

"Any actual or purported act or transaction, whether or not evidenced by writing, and whether or not done or performed within the United States, the purpose, intent, or effect of which is to create, surrender, release, convey, transfer, or alter, directly or indirectly, any right, remedy, power, privilege, or interest with respect to any property."

I take this to mean the transfer the paying bank does with person presenting the check and then, assuming the check is paid, the drawer. The drawer is your own customer for whom a CIP process, surely, was completed when the account was opened and when the Specially Designated Nationals (SDN) list is updated.

The person presenting the check will either be the holder (perhaps the payee) or a collecting bank.

If a holder (whether the payee or subsequent holder) presents the check in person, it is logical to ask for a form of identification your procedures and compliance team agrees to take. On the identification, the paying bank can find the name of the payee, address, city, state, and postal code—all the pieces of information necessary to conclude if the person is a blocked party.

In all other instances of check clearing, the person presenting the check is a collecting bank. If the collecting bank is a domestically chartered financial institution, the bank will not be found on the SDN list.

You are not required to screen every party to the transaction unless the transaction includes a financial institution outside the jurisdiction of the United States.

We see this logic played out in every payments channel. For an automated clearing house entry, the receiving institution does not OFAC the originator of the direct deposit transaction to its customer. In a wire transfer, the originator’s bank does not OFAC the beneficiary on behalf of the beneficiary’s bank. They rely on the other domestic financial institution to know their own customer.

The exceptions to the above scenarios are for the ACH or wire transactions that involve a financial institution outside the jurisdiction of the United States. For an international ach transaction and for inbound and outbound international wires, the domestic financial institution must screen all participants to the transactions.

Checks are a powerful form of a negotiable instrument. For example, Sue Public can issue a check to John Smith to satisfy her obligation. John may negotiate the check with Nicholas Johnson to satisfy his obligation. The negotiation can continue to a holder after that and then another holder after that until a holder finally decides to convert the check into cash by making presentment at the paying bank.

I’m curious, how does your compliance team believe it possible to know the customer of another financial institution? For example, the payee is named John Smith (assuming the writing is legible). Which John Smith? How about all the subsequent indorsers: Nicholas Johnson, et al? The impossibility of such a screening is why I cannot fathom OFAC requiring it. It’s not because it’s easier. I’m not trying to advocate for lazy processes. It’s simply not knowable who John Smith is, let alone other indorsers.

Regarding a domestic check clearing, the good news is the paying bank does not need to know which John Smith. The paying bank knows the depositary bank vetted its own customer. Furthermore, the depositary bank is the appropriate person to screen the payee because the depositary bank conducts the transfer of property with the payee. The paying bank does not (unless the payee presents the check in person). The transfer of property to a blocked party is what OFAC wants to prevent.

It’s impossible to complete such an OFAC investigation with just names. OFAC has fined financial institution for their gaps in screening for foreign items and for gaps in screening their own account base. I’m not aware of any fine assessed for failure to screen the payee (unless the payee is also the paying bank’s customer—an on-us check).

Regulators opine (love your choice of words, by the way) on OFAC requirements as they relate to transactions that involve foreign financial institutions and for the person(s) with whom the financial institution transfers the property. See FFIEC retail payments systems handbook for operational guidance on checks (https://ithandbook.ffiec.gov/it-booklets/retail-payment-systems/retail-payment-systems-risk-management/retail-payment-instrument-specific-risk-management-controls/checks.aspx) and the FFIEC wholesale payments systems guidance on legal / compliance risk (https://ithandbook.ffiec.gov/it-booklets/wholesale-payment-systems/wholesale-payment-systems-risk-management/legal-(compliance)-risk.aspx).

As a United States organization, it is your job to block sanctioned parties from receiving property. Yes, there are certain money laundering components that should be observed. Financial Crimes Enforcement Network (FinCEN) FAQs can be found at this link (https://www.fincen.gov/answers-frequently-asked-bank-secrecy-act-bsa-questions). Knowing the party with whom you conduct the transfer is critical to this discussion.

The depositary bank transfers property to the depositor (payee or subsequent holder of the check) and from the paying bank. The paying bank transfers property to the person presenting the check and from the drawer.
Be that as it may, every financial institution must follow its own procedures with respect to OFAC and BSA / AML.

Should you choose to reject a check based on the believe the transaction violates OFAC sanctions or another provision off chapter 5 (Title 31 Code of Federal Regulation Chapter 5), I remind you of the reporting requirements found in Title 31 CFR Part 501.604, Reports on rejected transactions.

(a)  Who must report—(1) Persons rejecting transactions. Any U.S. person (or person subject to U.S. jurisdiction), including a financial institution, that rejects a transaction that is not blocked under the provisions of this chapter, but where processing or engaging in the transaction would nonetheless violate a provision contained in this chapter, shall submit a report to the Office of Foreign Assets Control (OFAC).


The reporting requirements are found in the same part and section, letter (b), Required information to be reported. You had better sharpen your pencils because you will have some reporting to do.

This discussion forum is extremely valuable, but I still encourage you to consult a competent payments attorney for the answers to OFAC all questions. The stakes are too high for the operations staff to make the decisions based on what I, or another person in this forum, write.

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wilfredo.jaurgeui - 6/27/2019 7:30:29 PM
   
RE:OFAC and Payees
I am the holder in due course, in other word the thrid party in the process. I warranty the item to the BOFD.

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michaelj1987 - 7/12/2019 9:36:50 AM
   
RE:OFAC and Payees
In a very rare occurance, I have good news and more good news.

The holder, which is what the person must be first, before they may make a holder in due course claim, negotiates the check with the previous holder. If there is more than one named payee and the names include an "and" or ampersand, then the transfer includes more than one named payee and the new holder. 

Be that as it may, the transfer is between the tranferer and the transferee. Those are the only people involved in this financial transaction. Since the transferee--that is you in this case, knows they are not on the Specially Designated Nationals list, the only people the the transferee needs to check is the transferer. That is the first good news. 

I bet you already ask for one or more forms of identification, preferably with a picture. That assists you determining if the transferer is someone with whom you want to do business.

You're right! You do make a warranty to the BOFD. You make the transfer warranties. But, these warranties do not include anything about OFAC. That's the more good news.

However, the transfer warranties do include "the warrantor is a person entitled to enforce the instrument" [UCC §3-416]. This particular transfer warranty is you saying, "I've verified that the person who transferd the item to me was entitled to enforce the instrument, and I've required the appropriate indorsement to make me the person now entitled to enforce the instrument."

I guess, in a way, the warranty does speak to your job to act in good faith and to exercise ordinary care to confirm you conduct a proper negotiation of the check.

Incidentally, when you make the transfer warranties to the BOFD, you also make the presentment warranties to the paying bank. You don't know when presentment will occur, but you make warranties to the paying bank, and all. To the paying bank, you make the presentment warranties. One of the presentment warranties is essentially the same as the above transfer warranty. It reads, "The warrantor is, or was, at the time the warrantor transferred the draft, a person entitled to enforce the draft or authorized to obtain payment or acceptance of the draft on behalf of a person entitled to enforce the draft." [UCC §3-417]

Why does check law make you make the same warranty twice? Because you make the transfer warranties to the transferee, the BOFD, and you make the presentment warranties to the paying bank.

 

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wilfredo.jaurgeui - 7/15/2019 1:14:48 PM
   
RE:OFAC and Payees
Thanks! Do current banks offering clearing services for third parties review payees on OFAC?

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michaelj1987 - 7/19/2019 2:35:17 PM
   
RE:OFAC and Payees
I am not certain I understand the question.

If you are asking if a bank offers OFAC checking for their depositing customers, the bank must be asked.

If you are asking if a bank completes OFAC checking on the payee, I am confident they all do! But, perhaps not the way you think of.

Take the case of a check issued by John Doe, made payable to Peter Smith. Peter is the payee that most of us immediately think of.

If Peter Smith indorses the check during negotiation with Sue Smith, Sue becomes the payee. That is because Peter either applies an in blank indorsement (his signature with no other words). That makes the check a bearer instrument--enforceable by anyone who gets their hands on it. Alternatively, Peter applies a special indorsement (his signature plus words like "payable to" or "pay to") and names Sue Smith. Sue is now the payee.

If Sue deposits the check, her bank will OFAC Sue. She is the payee. [See UCC § 3-109] She is the person her bank conducts the transaction with.

All of the above is specific to checks drawn on a U.S. bank, as that term is defined in Regullation CC Subpart A (e). If there is an item drawn on a foreign financial instution, other OFAC requirements apply.

Or, if you are asking other banks to respond to your post (and for me to butt out), I reply: I wish you all the best.

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