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Domestic Wire Transfer Introduction

Section 410.1

The recent growth of the commercial banking industry accompanied by greater customer demand for services has increased the importance of wire transter. Wire transfer has evolved from the use of elementary Morse code to sophisticated automated switching operations linking the Federal Reserve System with various governmental agencies and commercial banks. Functions of the wire transfer operation include daily funds transfers, securities transactions and the general communication of information. The average daily transaction volume per bank over the Fed Wire alone is currently 20 percent of total bank assets. In certain large banks, the total daily volume approaches or exceeds the total assets of the institution. Therefore, adequate internal controls and audit procedures should exist to minimize losses resulting from error or fraud. Wire transfer is necessary to the bank's internal operation and provides an important customer service. Banks may initiate transfers or related messages by mail, telephone and direct access to Fed Wire, Bank Wire or several other telecommunications systems. Size and complexity of operation will determine which method the bank uses. Since speed is the primary reason for many wire transfers, mail requests are infrequent. The majority of banks make transfers and execute Fed funds transactions over the tele. phone or teletype since their size and volume does not justity maintaining automated systems. However, the tendency to automate the operation is increasing with the advent of inexpensive mini-computers. Large banks often use several wire systems with a separate department responsible for that activity. By dollar and message volume, the Fed Wire system is the largest currently in use. Federal Reserve members transfer funds, purchase and sell U.S. securities, execute Fed funds transactions and send administrative messages over the Fed Wire. The Fed Wire is a "credit transfer" system, whereby the Fed debits the originating. bank's account and credits the receiving bank's account. Banks using the Fed Wire may participate in the Fed's "book entry" method of trad. ing U. S. government securities. The Fed can verity and transfer ownership from one member bank to another by using the computer to make the accounting entries. That process eliminates the issuance of certificates and the physical movement of securities. The

use of the Fed Wire generally involves large dollar transactions. Increased use of the Fed Wire has prompted the Fed. eral Reserve to include in Regulation J (12 CFR 210) the rules and procedures for wire transfer activities. The expanded regulation (subpart B) defines terminology, explains accounting procedures, discusses the handling of exceptions, and sets time limits on transters. Individual reserve banks issue operating circulars to provide guidance to member banks. Other wire transfer systems available to banks are: the Bank Wire, Telex and TWX. Operated by Western Union, they handle smaller transactions involving correspondent bank accounts and correspondent bank balances for the benefit of individuals and corporations. Two other systems, Bank Wire il and SWIFT, are currently being developed. Bank Wire II, a product of Collins Radio Group, is a new fullyautomated transfer system that will feature additional capabilities. SWIFT (Society for Worldwide Interbank Financial Telecommunications) is planned as the largest international operation and will soon be in use at many banks across the country. The ACH (Automated Clearing House) is a wire transfer system available to subscribing banks which currently allows electronic processing of payroll transfers, social security payments and other preauthorized payments and credits through regional centers. Transactions are processed by recording payment instructions on magnetic tape rather than on checks. Banks believe increased ACH participation and capabilities will greatly reduce the volume of paper currently processed by the banking industry. The Federal Reserve is developing a third subpart to Regulation J which will establish rules and procedures governing the processing of those transactions. As a rule, ACH activities are not handled in the same area as other wire transfer functions. Banks may be "on line" or "off line" with the wire system depending on the complexity of its operations. On line systems are directly linked to the computer switch or center by a bank terminal or computer. The Fed is on line with many of its members and directly linked (computer-to-computer) with several installations. On line transactions between Fed. eral Reserve banks and regional or money-center

Comptroller's Handbook for National Bank Examiners December 1977

Domestic Wire Transfer Introduction

Section 410.1

banks account for the greatest dollar volume across the country. Increased use of on line systems will help accommodate demands for greater volume, speed and accuracy. The average dollar volume of individual transactions and the speed at which transters are completed magnifies the potential for loss resulting from error or fraud. Although a given system may require specialized equipment and trained personnel, similar internal controls can be applied to all. Initially, a bank must determine the authenticity of the transterror of funds. Telephonic transfer controls might include a "call-back" procedure, whereby an employee of the bank calls a prearranged telephone number to verify the identity of the transferror. Another control might be a unique code provided by the originator and verified by the receiver. Transfer requests are normally documented by the receiver on preprinted forms, which serve as the initial record for audit activities. Tape recording telephone calls is a satisfactory method of documenting transfer requests, but only if the bank notifies the caller that messages are being recorded. However, recording messages may be subject to state or local laws. mternal controls used to verify the authenticity of incoming wire requests involve the use of "test keys. The test key is the formula used to develop or interpret "test codes" or "test words." Test codes or words consist of a series of numbers signifying different types of intormation and usually precede the text of the message. As an example, a test code may contain a bank number, the amount of the transaction and a number indicating the day and week of the month. As an additional precaution, many test codes contain a variable (sequence number) based on the number of messages received. A current list of test keys, available only to authorized personnel, should be on file for each customer or correspondent bank. The person receiving the incoming request should not be responsible for veritying authenticity. When not in use, test keys should be kept under dual control. Banks normally verity signatures or use a call-back arrangement to authenticate transfer requests received by mail. Mail transfer requests may include a test word to provide additional protection for the bank and the customer. When signature verification is required, banks must maintain an up-to-date list and should limit the number of authorized signers to a minimum.

The bank should establish guidelines for types of allowable transfers, especially on transactions involving a third party. Procedures should be in effect to prevent transters drawn against uncollected funds. Unless pre-authorized credit lines exist, banks should not transter funds against simple ledger balances. Job descriptions should be well-defined, providing for logical flow of work and adequate segregation of duties. No one person in a wire transfer operation should be responsible for the origination, testing, processing and balancing of a request. The daily balancing process should include a reconciliation of both the number and dollar amount of messages transmitted. Wire transfer personnel should promptly inform other bank departments affected by a transfer of funds so that the proper accounts may be updated. All adjustments required in the processing of the transter request should be approved by supervisory personnel and the reasons for adjustment adequately documented. Transfer requests "as of" a past or future date should require supervisory approval with the reasons for those requests well-defined. Only authorized persons should have access to wire transfer machines, code books, account information and terminal facilities. Wire transfer devices should be inactivated during non-operational hours to prevent unauthorized use. Computer programming personnel should not be allowed access to the bank ter. minals or other sensitive materials nor should terminal operators or other wire transfer operation personnel have access to computer areas or programs. Considerable documentation is necessary to maintain adequate accounting records and auditing control. Many banks retain logs recording transfer request intormation, assign sequence numbers to incoming and outgoing messages, and keep an unbroken copy of all messages received on wire transfer equipment. Use of prenumbered forms is also common. At the end of each business day a department employee should compare request forms to the actual transfer to ensure that all transters were properly recorded. As banks seek ways to more efficiently move funds across the nation, the continuing development and use of automated systems is inevitable. Therefore, the commercial examiner should evaluate the bank's safeguards at the terminal facilities, calling upon EDP examiners for assistance when bank service corporations or bank computer facilities are involved.

Comptroller's Handbook for National Bank Examiners

December 1977

Domestic Wire Transfer Examination Objectives

Section 410.2

1. To determine it wire transter objectives, policies,

practices, procedures and internal controls are

adequate. 2. To determine it bank officers and other wire trans

ter personnel are operating in conformance with

established guidelines. 3. To determine the scope and adequacy of the au

dit function.

4. To determine compliance with applicable laws,

rulings and regulations. 5. To initiate corrective action when objectives, poli

cies, procedures or internal controls are deficient or when violations of laws, rulings or regulations have been noted.

Comptroller's Handbook for National Bank Examiners December 1977

Domestic Wire Transfer Examination Procedures

Section 410.3

1. Complete or update the Domestic Wire Trans

fer section of the Internal Control Question

naire. 2. Based upon an evaluation of internal controls

and work performed by internal/external auditor (see separate program). determine the

scope of the examination. 3. Test for compliance with policies, practices,

procedures and internal controls in conjunction with performing the remaining examination procedures. Also, obtain a listing of any deficiencies noted in the latest review done by internal/ external auditors from the examiner assigned "Internal and External Audits," and determine if

appropriate corrections have been made. 4. Perform appropriate verification procedures. 5. Obtain or construct an organizational chart and

flowchart for the wire transter area and determine job responsibilities and flow of work

through that department. 6. Review the bank's standard form or other writ

ten agreements with its customers and vendors and determine whether those agreements clearly define the liabilities and responsibilities

of all parties. 7. Review the bank's policies with respect to third

party transactions and determine their reason

ableness. 8. For transactions involving the Federal Reserve

bank and other due from bank accounts, conter with the examiner assigned "Due from Banks" and determine the propriety of any out

standing funds transter items. 9. Skim suspense or adjustment accounts for any

unusual items, abnormal fluctuations or evidence of inefficient operation and agree to departmental control totals and to the general

ledger. 10. Skim income and expense accounts related to

wire transfer operations for frequency of entries caused by inaccurate execution of transter re

quests. 11. By observing space and personnel allocated to

the wire transter area and location of communi

cations terminals, determine whether existing

conditions are adequate to provide security. 12. Determine compliance with laws, rulings and

regulations pertaining to the wire transfer area
a. Reviewing previously obtained material and

comparing it to Federal Reserve Regulation

J, subpart B (12 CFR 210.50 - 210.65).
b. Analyzing compliance with the record reten-

tion requirements of 31 CFR 103.33, 103.34,
and 103.36 by:
1. Determining if the bank maintains a record

of advises, requests or instructions given
to another domestic financial institution
regarding a transaction intended to result
in the transfer of funds of more than
$10,000 to a person, account or place
outside the United States for a period of 5

years. 2. Determining if the bank retains an original

or copy of documents granting signature authority over wire transters from deposit

accounts for a period of 5 years. 13. Discuss with appropriate officer(s) and prepare

summaries in appropriate report form of:
a. Internal control exceptions and deficiencies

in, or non-compliance with, written policies,

practices and procedures. b. Uncorrected audit deficiencies. c. Violations of law, rulings and regulations. d. The level of understanding by supervisory

officers of definitions, terminology, operating arrangements, accounting procedures and time limitations concerning wire transfer op

erations. e. The operating efficiency and physical secu

rity of the bank's wire transfer operation. f. Recommended corrective action when poli

cies, practices or procedures are deficient. 14. Prepare a memorandum and update work pro

grams with any information which will facilitate future examinations.

Comptroller's Handbook for National Bank Exarniers Docernoer 1977

Domestic Wire Transfer Internal Control Questionnaire

Section 410.4

Review the bank's internal controls, policies, practices and procedures regarding domestic wire transfer activities. The bank's system should be documented in a complete, concise manner and should include, where appropriate, narrative descriptions, flowcharts, copies of forms used and other pertinent information. Items marked with asterisks require substantiation by observation or testing. Signature Card Considerations 1. Does management maintain a current list of

bank personnel authorized to initiate transfer

requests? 2. Does the bank limit the number of authorized

employees? *3. Are authorized employee signature cards kept

under dual control? 4. Does the bank maintain a current list or card

file .of authorized signers for customers who

use the bank's funds transfer services? 5. Does the bank limit the number or authorized

signers for bank customers? 6. Are customer signature cards maintained under

dual control or otherwise protected? 7. Do customer signature cards limit the amount

of funds that an individual is authorized to

transfer? 8. Does the bank advise its customers to maintain

their lists of authorized signers under dual con

trol? 9. Do bank personnel compare the signature on

an original mail request with the authorized sig.

nature on file? Test Key Considerations *10. Are the files containing test key formulas main

tained under dual control or otherwise pro

tected? 11. Are only authorized personnel permitted in the

test key area or allowed access to computers,

teletapes or terminals? 12. Does the bank maintain an up-to-date test key

file? 13. Does management maintain a list of those per

sons who have access to test key files? 14. Are alt messages and transfer requests that

require testing authenticated by the use of a

test key? *15. Are test codes verified by someone other than

the person receiving the initial transfer request? 16. Are call-back or other authentication proce

dures performed on all transfers that do not

have a test key or signature card on file? 17. Do mail transfer requests include a test word

as an authentication procedure? 18. Does the bank's test key formula incorporate a

sequence number resulting from an agreement

between the bank and the customer? 19. Does the bank have procedures in operation

for the issuance and cancellation of test keys? *20. Is the responsibility for issuing and cancelling

test keys assigned to someone who is not responsible for testing the authenticity of transfer

requests? Telephone Transfer Requests 21. Has the bank established guidelines for what

information should be obtained from a person

making a funds transfer request by telephone? 22. Does that information include a test word au

thentication code? 23. Does the bank limit call-back to transactions

over a certain dollar amount? 24. Does the bank maintain a current list of per

sons authorized to initiate telephonic funds

transters and messages? *25. Does the bank have procedures in effect to

prohibit persons who receive telephone trans

fer requests from transmitting those requests? 26. Does the bank use a call-back procedure that

includes a test code authentication to verity

telephone transfer requests? 27. Does the bank use devices that record all in

coming and outgoing transfer requests? 28. Does the bank advise its customers in written

contracts, by audible bleeping signals or by informing the caller that telephone calls are be

ing recorded? 29. Are pre-numbered or sequentially numbered (at

a central location after initiation) transfer request forms used?


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