Wire Transfers vs. ACH: An Overview for Compliance Professionals
Disclaimer: The contents of this article are intended to provide a general understanding of the subject matter. It is not intended to provide legal or other professional advice, and should not be relied on as such.
Wire transfers and Automated Clearing House, or “ACH” transfers are two types of electronic funds transfers, or “EFTs”. EFT is a general term that refers to the use of computer networks to transfer funds from one party to another. Common types of EFTs include direct deposit, online bill payment, money service business transfers, and person-to-person transfers like PayPal or Venmo.
Wire transfers and ACH are two of the most common forms of EFTs, and both move funds between two parties using computer networks. This article provides an overview of these two payment types, how they differ, and how their characteristics make them appealing in money laundering and fraud schemes.
What is a Wire Transfer?
The term “wire transfer” came about in the late 1800’s in the United States, when the earliest form of wire transfer was made using telegraph networks (primarily Western Union). A person who wished to send money to another would give cash to one telegraph office. The telegraph operator would transmit a message to the recipient’s nearest telegraph office, which would pay the recipient in cash. The operators used passwords and code books to authorize the release of the funds to the recipient. In essence, the money was sent “by wire.” This brought about the term “telegraphic transfer” which is on occasion still used today.
While the logistics have changed over the decades, the underlying principle remains the same: A wire transfer is still effectively a message from one financial institution to another, to debit the sending party’s account and credit the receiver’s account.
Wire transfers are processed between financial institutions in the United States primarily through the Federal Reserve Banks’ system, FedWire.[i] The sending and receiving institutions’ Federal Reserve accounts are used to settle each individual wire transfer payment. The Fed debits the sending institution’s account and credits the receiving institution’s account, while sending a message to the receiving institution containing all the transaction’s details.
How are ACH Transfers Different From Wire Transfers?
Like wire transfers, ACH transfers are electronic money transfers between parties through financial institutions, settled through each institution’s Federal Reserve account. An ACH is also a message from one financial institution to another. This, however, is where the similarities end.
The ACH Network
ACH transfers are processed through a proprietary system known as the ACH Network. The ACH Network is owned and operated by the National Automated Clearing House Association, or “NACHA.” NACHA is a private, industry-owned, self-regulated organization that establishes and enforces the rules for ACH payments in the United States, called the NACHA Operating Rules. Any entity that participates in the ACH Network must abide by the Operating Rules.
Batch Processing and Settlement
One fundamental difference between wire transfers and ACH is that wire transfers are processed as single, ad-hoc transactions from one financial institution to another, as they are submitted. This is referred to as real-time gross settlement. ACHs, however, are processed in large batches of payment transactions at pre-established intervals throughout the business day. These batches are compiled from thousands of smaller batches submitted to the ACH Network from across the United States.
ACH transfers may be debits or credits (more about this below). The debit and credit transactions in an ACH batch are netted in the batch settlement. ACH, therefore, uses a deferred net settlement process.
Wire transfers are relatively expensive for senders, because each transaction is processed individually by the financial institution. Fees range on average from $25 to $50 for a domestic wire transfer, and even more for international transfers. Many institutions charge the recipient account holder a fee for an incoming wire transfer as well.
Due to the economies of scale offered by batch processing through a centralized network, the per-transaction cost to a financial institution for a single ACH transfer is pennies to a few dollars. This low cost is reflected in the institution’s charge, if any, to ACH senders. Most U.S. financial institutions offer free incoming and outgoing ACH transfers to their account holders in the form of online bill payments and direct deposit. Person-to-person payment systems such as PayPal, Venmo, Google Pay and Apple Pay are also using ACH transfers to process these payments, which are typically free to consumers.
Often funds from a domestic wire transfer will be available to the recipient on the same business day, or at the latest the next business day, depending on the time of day the payment request was initiated and the receiving bank’s posting processes. Financial institutions establish cut-off times for same-day wire transfer processing based on Federal Reserve timeframes and internal processing requirements. An international wire transfer, however, may take up to two or more business days to post to the recipient’s account due to time zones differences, currency conversion, national holidays, and how many financial institutions are involved in completing the transfer.
Standard ACH transfers, however, “settle” to the receiver’s account within one to two business days. The transaction originator could, however, designate an ACH payment to settle up to 90 days in the future.
In 2016, NACHA introduced “same day” ACH payments to compete with wire transfers. The implementation of same day ACH took place in phases through September 2020. “Same day” means funds must be available to the recipient no later than 5 p.m. in the receiving bank’s local time on the settlement date.
Yet for an ACH transfer to settle on the same day, a financial institution must enter it into the ACH Network by 4:45 PM Eastern time/1:45 PM Pacific time, with net settlement of funds occurring at 6:00 PM Eastern time.
NACHA has however established a maximum dollar limit for a single same day ACH transaction. Initially, this limit was $25,000. It is now $100,000 and will rise to $1 million in March of 2022. Wire transfers have no single transaction dollar maximum; the amount of a wire transfer is limited only by the balance in the sender’s account.
Debit or Credit
A wire transfer represents the withdrawal of funds from, or a debit entry to, the originator’s account. These funds are then deposited in, or credited to, the receiver’s account. ACH transfers, on the other hand, may be either a debit or a credit. Regardless, there is always an originator and a receiver, and an ACH transaction may credit the receiver’s account similarly to a wire transfer.
However, ACH gives an originator the ability to draw funds from the receiver’s account which are then credited to the originator’s account. An ACH transfer is denoted as a debit or credit based on the transaction’s impact to the receiver’s account. For example, a cellular provider may originate ACH debits to its subscribers’ bank accounts for monthly service charges.
Importantly, an ACH debit originator must obtain written authorization from the receiver to debit their account, for a specific purpose.
Wire transfers are real-time, final, and irrevocable once submitted to Fedwire, and funds may be available to the recipient for withdrawal on the same day. A wire transfer may not be reversed. However, in certain circumstances, the receiving financial institution may choose to, or agree to, return the funds to the sending institution. For example, a receiving bank may choose to return a wire where the recipient’s account number is either incorrect or missing entirely. Some banks may even return a wire transfer when the recipient’s name per the wire transfer does not match the name on the account to be credited. In cases of fraud, where the customer ordered a wire transfer but later discovered they’d been duped, the receiving bank may agree to return the funds. But because of the irrevocable nature of wire transfers, the receiving bank is under no obligation to do so. If some or all of the funds have already been withdrawn from the receiver’s account when the fraud is discovered, the originating customer may not recover their loss.
ACH transfers, however, are potentially reversible. More specifically, ACH transfers may, for certain reasons, be rejected by the receiver or the receiving financial institution. For example, an unauthorized ACH debit to a consumer’s account may be reversed, either because the receiver did not give permission, or because the transaction is fraudulent. Incorrect amount and incorrect account number are other common reasons why an ACH transfer may be rejected.
A wire transfer may pass through one or more intermediary financial institutions when the transaction is cross-border and the originating and receiving institutions do not have a correspondent relationship. Alternatively, a smaller U.S. financial institution may not have access to the Fedwire system, necessitating an intermediary/correspondent relationship with another U.S. institution that can submit wire transfers on its behalf.
The ACH Network has its own types of intermediaries, known collectively as third-party service providers (“TPSPs”). A TPSP is an entity other than an ACH originator, originating financial institution, or receiving financial institution that performs any functions on behalf of one of these parties in processing ACH transactions. For example, a company could hire a TPSP to manage all its ACH activities rather than invest in its own staff and systems to do so.
A TPSP’s functions may include creating and submitting ACH batches on behalf of an originator or originating financial institution (known as a “third-party sender”); and/or submit or receive ACH batches to/from the ACH Network on behalf of a financial institution (called a “sending point”).
A third-party sender acts on behalf of an ACH originator, as an intermediary between the originator and a financial institution. For example, an insurance company may hire a third-party sender to process all of its monthly customer billings via ACH debits. In this scenario, the third-party sender is the customer of the bank that processes the ACH transactions, and there is no contractual agreement between the bank and the ACH originator.
A sending point is an entity that transmits batches to the ACH Network on behalf of an originating financial institution and/or receives incoming batches from the ACH Network on behalf of a receiving financial institution.
Wires vs. ACH: Money Laundering and Fraud Considerations
Any type of EFT that allows rapid funds movement, especially across borders, presents a higher potential risk for money laundering. Wire transfers have historically been the tool of choice for money launderers, given their irrevocability and rapid funds availability. Anti-money laundering regulations in the United States and other countries specifically target wire transfers by requiring financial institutions to include certain information on the transaction record about the originator, beneficiary, and the financial institutions involved.[ii]
ACH transfers were originally designed for batch processing of high volume, low-dollar domestic transactions (primarily consumer payments) which are relatively low risk from a money laundering perspective. Over the years, this original purpose has now expanded with the intent to compete with traditional wire transfers. For example, same day ACH, with its steadily increasing transaction dollar limit (soon to be $1 million per transaction in early 2022) offers a much lower cost alternative to a wire transfer.
Unlike a wire transfer, a domestic ACH transaction record has extremely limited information about the payment’s originator and receiver, making ACH transactions appealing to money launderers in the layering and integration stages of the laundering cycle. As well, ACH may be used to legitimize frequent and recurring transactions so they may be less noticeable to banks’ transaction monitoring systems.
For many years, cross-border ACH transfers were indistinguishable from their domestic counterparts, with the same limited information requirements. Pressure on NACHA from the U.S. Office of Foreign Assets Control, and on the U.S. anti-money laundering regulatory regime from the Financial Actions Task Force (FATF) ultimately resulted in the creation of a new category of ACH transfer called the IAT (international ACH transaction).[iii]
IATs must include all information about the originator and receiver as is required for wire transfers pursuant to Bank Secrecy Act regulations[ii] as well as additional information not considered mandatory by these regulations – such as the purpose of the payment, the receiver’s full address, and a distinct field for the destination’s ISO country code. As a result, financial institutions may now easily identify, segregate, and OFAC screen cross-border ACH payments as they have always done for wire transfers.
Both wire transfers and ACH credits/debits are used extensively by fraudsters in social engineering schemes. The essence of all social engineering is to convince the victim to send funds to a third party, and that the transaction is legitimate and important. Wire transfers may still hold the most appeal, however, because of their immediacy and irrevocability, which gives the victim very little time for a change of heart. Depending on the time of day that a same day ACH transaction is requested, it could still be deleted from the pending ACH batch prior to transmission to the ACH Network. This “lag time” could be just enough for the victim to think twice and perhaps realize they’ve been duped.
Fraudsters have been known to partner with a colluding ACH third-party service provider in scams targeting the elderly. These scams typically involve ACH debits to the victims’ accounts for services that are never actually provided, or the fraudsters may impersonate a government or healthcare organization and convince the victim they must authorize the ACH debits. Because the TPSP is the entity with the ACH processing and account relationship with the financial institution, the fraudsters are shielded from the bank’s customer due diligence and transaction monitoring. As well, a TPSP may process thousands of ACH transactions per day for hundreds of originators, making detection of any suspicious activity nearly impossible.
Compliance professionals must understand the key differences between the two most common forms of EFTs – wire transfers and ACH – in order to properly assess the risks these products pose for their own financial institutions. While wire transfers are relatively straightforward, readily traceable, and clearly documented, ACH transactions are far more complex and less transparent. Yet it is not these payment methods themselves, but rather how and when they are used by bad actors that is of utmost importance in preventing and detecting financial crimes.
[i] Two other systems, CHIPS (Clearing House Interbank Payments System) and SWIFT (Society for Worldwide Interbank Financial Telecommunication), are also used to process wire transfers. CHIPS is a closed system used by the very largest global financial institutions; SWIFT is used by financial institutions worldwide to send funds across borders.
[ii] In the United States, the regulation is titled Records to be Made and Retained by Financial Institutions (informally known as the Travel Rule), 31 CFR 1010.410.
[iii] The NACHA Operating Rules were amended effective September 18, 2009, to require the use of the IAT format for all cross-border payments.