Nacha, the electronic payments association, is poised to implement a new system for fighting fraud on the automated clearing house network.
The Herndon, Va., group said Monday that its voting membership had approved its proposed Network Enforcement Rule.
Elliott C. McEntee, Nacha's president and chief executive, said the rule will take effect in two phases. In the first phase, next month, Nacha will gain the power to impose fines of up to $500,000 a month against violators of its operating rules, even if it receives no complaints about the violations, he said; the fines typically would be levied if an institution is uncooperative for months in resolving problem transactions.
"We felt we needed a more effective way to create incentives for financial institutions that do not cooperate," Mr. McEntee said.
In the second phase, starting in March, Nacha will be able to require special reports from institutions that it believes are allowing practices that create risk management problems for others on the ACH network, he said.
Paul Tomasofsky, the president of Two Sparrows Consulting LLC of Montvale, N.J., and a Nacha consultant, said the rule will help by "putting some teeth in the rules and imposing some significant monetary penalties."
Until now the association has had little clout to compel originating financial institutions to clamp down on originators that they sponsor into the network, Mr. Tomasofsky said.
Mr. McEntee said that the problem is "not widespread at all." At any given time, he said, out of the 17,000 banks, thrifts, and credit unions on the ACH network, Nacha has to deal with only one or two it would classify as uncooperative.
Even so, he said, "It's always good to have strong tools in your toolkit when problems do come up."
Nacha has a counseling program in which it can work with institutions where patterns of problems develop, and there is a system of fines in which one institution can file a complaint against another for violating the Nacha operating rules, Mr. McEntee said. "Those two programs will merge together."
The fines are not designed to penalize, for instance, the bank of a health club that debits a customer's account after the customer has stopped visiting the club and wants to stop paying membership fees, he said. The fines would come into play only in cases of fraud.
He cited the example of an originator — a corporation or a third-party ACH aggregator — trying to send ACH credits of only a few pennies to an institution's accounts. "You can tell from the pattern that it looks like some crook is trying to search for legitimate account numbers. If they find them, then they'll hit them for big debit transactions."
Roy DeCicco, the chairman of Nacha's risk management advisory group, said the rule authorizes the group to develop an automated tool to monitor transactions.
"There is a finite and limited number of originators out there where you can see patterns of activity that raise question marks," said Mr. DeCicco, a senior vice president at JPMorgan Chase & Co.
Mr. McEntee said, "The ultimate sanction would be to ask the ODFI to suspend originations by that originator."
Mr. Tomasofsky said that fraud is not a big problem in the ACH industry, but that the risks are rising, in part because of "spontaneous transactions" such as checks that are converted to ACH transactions at the point of sale.
"This is part of a continuing process that Nacha is pursuing to tighten up the risk management portion of the business," he said.
William Bley, the president and chief executive officer of the Northwest Clearing House Association in Seattle, said that after opposing earlier proposals, his group voted for the rule because it offers protections to businesses, like the hypothetical health club. "Our main concern with the fees was that there was no process. It was automatic," Mr. Bley said. "Here we think there's a methodology that gives the merchant a chance to say, 'We're in a business that has a high rate of returns, and this is the reason why.'"
