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Managing. The risk of Payment System - Turner P.

Turner P. Managing. The risk of Payment System - John Wiley & Sons, 2003. - 253 p.
ISBN 0-471-32848-0
Download (direct link): managingtherisksofpayment2003.pdf
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The setting for an ACH item initiated by a federal agency differs from the standard ACH setting in one major respect. A federal agency, as an Originator, does not use an ODFI; instead, it usually uses the Financial Management Service (FMS). The FMS is a bureau of the Department of the Treasury and serves as the U.S. government’s financial manager. Besides managing federal payments and collections, the FMS is mandated to promote sound financial management practices by federal agencies, to oversee the government’s central accounting and reporting system, and to provide a variety of other financial services. The FMS operates through seven financial centers throughout the United States. The originating agency delivers the items to the FMS Financial Center, usually on tapes. Payment information is then passed on to the Federal Reserve Bank in the RDFI’s region.
An FMS Financial Center acts as an ODFI only insofar as communication and accounting for the Originator are concerned. The FMS is not a depository financial institution holding funds for the originating federal agency. A Federal Reserve Bank debits and credits the account of the United States Treasury for the daily ACH and checking activity, as well as for each Fedwire
Risks of the ACH Payment System
transfer and the clearing of government checks. Agency accounting is carried out at the FMS. And, unless a federal government or agency has expressly agreed to be bound by the ACH Rules,
the Rules do not apply to entries initiated by that entity or
A Reserve Bank makes the amount of all credit items sent to a receiving bank available for withdrawal or use by the receiving bank at 8:30 a.m. Eastern Time. A Reserve Bank may cease acting on a government ACH item at any time at the direction of the Treasury Department and will so notify the bank.
Pertinent Treasury regulations, together with detailed procedures and practices, are included in the Green Book, a procedural manual serving as a reference tool for all aspects of the federal government’s use of the ACH system.
The ACH Rules are very specific, and the experience of financial institutions in ACH processing has, after many years, been well established. The ODFI bears the primary responsibility under the ACH Rules for the integrity of ACH transactions. The Originator, however, especially the Originator in a credit transfer, is bound by its contractual relationship with the ODFI and can expect that the ODFI will pass some liability to it in its ACH service agreement.
An originating business entity should focus on four areas for controlling its ACH payment system risk. The controls reflect the issues associated with computer processing of checks and electronic terminal processing of outgoing wire transfers. In general, the methods of controlling electronic funds transfers should also be applied to ACH transactions.
1. The business should train its accounting and treasury personnel to have a clear understanding of the ACH Rules and any notices or reports it may receive, either as an Originator or a Receiver.
Risks of Automated Clearing House Payments
2. The business should have a daily reconciliation procedure and be prepared to notify its ODFI or RDFI of any errors or questions. The business should not neglect timely review and never miss the time deadlines of the ACH Rules. Management should review the daily procedures to be sure they are being followed properly.
3. The business should plan its continuing controls for the risks of electronic origination of entries to receive funds and the timely and accurate accounting for receipt of those funds.
Authorizing the receipt of funds by ACH processing requires internal controls. Vendor accounts need to be so noted. Withdrawals from consumer accounts require prior written authorization.
Electronic or manual treasury processing of ACH receipts and accounting for credit entries should be attended to, following the same criteria as for other deposits the business receives, to ensure that the correct accounts are fully credited with funds received.
4. The business should plan its continuing controls for the risks of electronic payments—controls for payment authorization and debit processing review.
Some businesses use a separate bank account for withdrawal of ACH debits, thus limiting electronic access to its funds concentration account(s)—an ACH-controlled disbursement account.
For both debit and credit ACH transactions, dollar limits can be arranged for transactions to be processed or for warning messages. For example, a business can establish a maximum dollar amount for individual ACH debits and credits, a maximum amount for a single account, or a maximum total amount for a file of ACH transactions.
A business should remember that the greatest risk in the ACH payment system is to the financial institution that originates the transaction—that is, the ODFI—and that risk is return item risk. Return item risk occurs when institutions receiving ACH debit transactions cannot, for many potential reasons, fund the
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