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May 19, 2010
Categories: Accounts

Regulation GG - Existing Commercial Customers & Actual Knowledge

Written by Steve Van Beek

As Sarah mentioned in yesterday’s blog post, the Reg GG deadline is coming up June 1st.  Sarah discussed the need for policies and procedures and this post will discuss how to handle existing commercial accounts and situations where the credit union obtains “actual knowledge” that a member is conducting restricted transactions.

The best place to look when preparing for the deadline is Regulation GG itself.  The regulation is not long and contains example policies and procedures.  Unfortunately, there is no model policy to follow as each credit union will need to tailor the requirements to their own operations.

Existing Commercial Members
The example policies and procedures list due diligence procedures – including those needed for existing commercial members:
“(3) The participant notifies all of its commercial customers, through provisions in the account or commercial customer relationship agreement or otherwise, that restricted transactions are prohibited from being processed through the account or relationship.”  12 C.F.R. 233.6(b)(3).
Of course, this means the credit union will need to determine which members qualify as “commercial customers” under the regulation.  The definition of “commercial customer” is:
"a person that is not a consumer and that contracts with a non-exempt participant in a designated payment system to receive, or otherwise accesses, payment transaction services through that non-exempt participant.”  12 C.F.R. 233.2(i)
The key being “a person that is not a consumer” as consumer is defined as “a natural person.” 12 C.F.R. 233.2(j). Therefore, any trust account, doing business as (d/b/a), organizational, partnership, corporate or other non-natural person account would fall under the definition of “commercial customer” and would need to be sent notification.  [Note: The "non-exempt participant" in the definition would be the CU.]

The example policies and procedures do not contain sample language to send to existing commercial members and credit unions will need to draft their own notice to their members.  The regulation does not specify a format for the notice so credit unions have some flexibility – but considering the fast approaching June 1 deadline, a letter might be the best solution (CUs could also send the notice electronically as it does not need to be "in writing.")  Cross-listing this notice on the CU’s online banking homepage and website could be a useful secondary notice procedure (but would probably not be sufficient alone due to the requirement to notify all of the commercial members).  

Policies and Procedures for when Obtaining “Actual Knowledge”
In order to comply with Reg GG, the credit union needs to have policies and procedures to block and prevent “restricted transactions” and also procedures to follow if the credit union obtains “actual knowledge” of the commercial members’ attempt to conduct restricted transactions.
“(a) Actual knowledge with respect to a transaction or commercial customer means when a particular fact with respect to that transaction or commercial customer is known by or brought to the attention of:
(1) An individual in the organization responsible for the organization's compliance function with respect to that transaction or commercial customer; or (2) An officer of the organization.”  12 C.F.R. 233.2(a).
The procedures for taking action when the credit union obtains actual knowledge are crucial as they prevent a commercial member from continued attempts to use the CU’s payment system for restricted transactions.  

This reminds me of a Seinfeld scene where Jerry is trying to obtain a rental car.  The rental car company took Jerry’s reservation but they don’t have any cars available.  Jerry then delivers the classic line: “you know how to take the reservation, you just don’t know how to hold the reservation.”  

Similarly, with policies and procedures – it is one thing to write policies and procedures and a different thing to follow the policies and procedures.  And, for when the CU obtains “actual knowledge” the procedures are key to ensuring the member can no longer attempt to facilitate restricted transactions through the CU.  

The example policies and procedures in 233.6 indicate the steps the CU could take if and when it obtains “actual knowledge” that a commercial member has attempted “restricted transactions.”  For example, under the ACH payment system – the examples suggest the CU determine:
“(A) The circumstances under which the commercial customer should not be allowed to originate ACH debit transactions or receive ACH credit transactions; and
(B) The circumstances under which the account should be closed.”  12 C.F.R. 233.6(c)(1)(iii)(A-B).
Thus, the CU's policies and procedures may be written to prevent commercial members engaging in any restricted transactions from opening an account - and closing the accounts of members who subsequently conduct such transactions against the CU's policies.  But, keep in mind that although the CU can close the member’s account and otherwise reduce services to the member, the CU may not be able to revoke membership without a vote of the member’s at a special expulsion meeting (as provided in the FCU Act). 

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