Identifying Third-Party Sender Relationships

8/17/2017 - By Janice Weisz, AAP

In a previous FAQ for the new NACHA rule, I addressed common concerns about the upcoming Third-Party Sender Registration rule, which takes effect on September 29, 2017. A key component of this rule is being able to properly identify Third-Party Sender relationships before the registration period begins.

Many times, while performing audits, it is determined that the financial institution has customers acting as a Third-Party Sender and don’t even know it. To help make sure that you are not one of those institutions, here is some information that describes what a Third-Party Sender is and some guidance on how to identify a Third-Party Sender, so you won’t be caught off guard.

NACHA’s Definition of a Third-Party Sender

The NACHA Operating Rules defines a Third-Party Sender as a type of Third-Party Service Provider that acts as an intermediary in transmitting entries between an originator and an ODFI, including through Direct Access, and acts on behalf of an originator or another Third-Party Sender. A Third-Party Sender must have an origination agreement with the ODFI of the entry. A Third-Party Sender is never the originator for entries it transmits on behalf of another organization. However, a Third-Party Sender of entries may also be an originator of other entries in its own right.

My Basic Explanation of a Third-Party Sender

A Third-Party Sender relationship exists when an ODFI has executed an origination agreement with a company (Third-Party Sender), which transmits entries through the ACH Network, on behalf of and for the benefit of, one or more additional companies (originator); and the ODFI has not executed origination agreements with the additional companies (originator). Make sure to determine who the ultimate beneficiary is for the transaction being debited/credited. If the ultimate beneficiary is a company that the ODFI has not executed an origination agreement with, then it is Third-Party Sender relationship.

How to Spot a Third-Party Sender

There are three main chances to spot a Third-Party Sender: 1) during the initial approval process, 2) during the on-boarding and testing process, and 3) during the routine originating customer review process.

Look for Red Flags: If these key words are in the name of a company, it could potentially be a Third-Party Sender: CPA, Accounting Firm, Employer, Payroll Services, Management Company, and Professional Services.

If the financial institution is about to execute or has already executed an origination agreement with a company whose name contains any of these key words, be sure to ask additional questions and investigate further. Ensure you thoroughly understand what is being originated and verify whether or not that company is originating only for their own benefit or are they also originating for the benefit of others.

Key Factors to Understand:

Know who the ODFI origination agreement is between.
Understand the details of the types of entries that are being originated.
Understand who the ultimate beneficiary of the transaction is.
Understand whether the customer is originating entries specifically for their own company or on behalf of other companies.

Third-Party Sender Scenarios

There are many Third-Party Sender relationship scenarios. Here are two common Third-Party Sender scenarios that have been found during our audits.

Scenario 1 - Payroll Processor

The ODFI executes an origination agreement with an Accounting Firm or CPA Firm, which transmits credits through the ACH Network on behalf of multiple companies to process that company’s payroll. The ODFI has not executed origination agreements with the individual companies that the Accounting Firm or CPA Firm transmits on behalf of.

In this scenario, your financial institution is the ODFI, the Accounting/CPA firm is a Third-Party Sender, and the different companies are the originators. This is because the Accounting/CPA firm is transmitting entries on behalf of and for the benefit of the different companies; and the ODFI has only executed an origination agreement with the Accounting/CPA firm and not the individual companies.

Scenario 2 - Property Management Company – Homeowners Association (HOA) Dues

The ODFI executes an origination agreement with a Property Management Company, which transmits debits through the ACH Network on behalf of multiple Homeowner Associations (HOA) to collect that HOA’s association dues. The ODFI has not executed origination agreements with the individual HOA’s that the Property Management Company transmits on behalf of.

In this scenario, your financial institution is the ODFI, the Property Management Company is a Third-Party Sender, and the different HOAs are the originators. This is because the Property Management Company is transmitting entries on behalf of and for the benefit of the different HOAs; and the ODFI has only executed an origination agreement with the Property Management Company and not the individual HOAs.

These are only two very simplified scenarios, which are commonly found during our audits. Additional scenarios and resources can be found on NACHA’s website.

Conclusion

Trying to determine whether a customer is acting as a Third-Party Sender can be very confusing and challenging. It is important for financial institutions to understand these relationships and that appropriate agreements and risk controls are in place and rules are followed. So, if you have any questions or need assistance, email me or a member of our Financial Institutions Team so we can help you through the entire process.

About the Author | Janice Weisz, AAP

Janice is a consultant in the Financial Institutions Advisory Group at Saltmarsh, Cleaveland & Gund. Janice has been working with financial institutions since 2001 with an emphasis on operations, compliance, audit and internal controls. She currently provides ACH compliance, internal audit, NACHA compliance, and other consulting services to the firm’s financial institution industry clients.

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