Nacha Smackdown Series - Part 1 The Reversal Rumble

Episode Summary

In this episode of Wrestling Payments, Joseph Casali launches a three-part "SmackDown Rules Violations in the Ring" series, examining ACH rule violations through wrestling metaphors. He analyzes two critical NACHA case studies that payment professionals should understand to avoid costly compliance mistakes.

The first case involves Glenn Transportation's unauthorized $50,000 reversal attempt against KJN Storage, earning them a warning letter as a first-time offender. The second, more severe case examines a complex arrangement between Macklan Development, Workforce Assist, and Processing for You Inc., where improper payroll reversals led to a substantial $100,000 fine.

Joseph details how the third-party payment processor initiated unauthorized reversals when their customer failed to fund payroll credits, causing consumer accounts to be debited multiple times. This "nested third-party" arrangement lacked proper oversight and controls, resulting in widespread harm to employees, businesses, and financial institutions.

"Just like in wrestling, when you try to reverse the outcome after the match is over, you'll find yourself facing the regulatory referee," warns Casali. "In the NACHA ring, proper reversals require proper cause, not just a desire to take back what you've already given."

Key Insights

Prevention Beats Correction in Payment Operations
The root of most improper reversals isn't misunderstanding rules—it's inadequate front-end controls. Rather than focusing on when reversals are permitted, payment professionals should strengthen transaction validation before payments enter the network. Organizations eliminate the scenarios that tempt improper reversals by implementing proper authorization checks, sufficient funding verification, and receiver confirmation processes up front.

Prevention not only avoids NACHA enforcement but creates more efficient operations overall. Smart payment managers know that building guardrails before transactions occur costs far less than attempting corrections after funds have moved.

Clear Accountability Is Essential in Third-Party Relationships
When payment services involve multiple providers, responsibility becomes dangerously diluted. The "nested third-party" arrangement in the payroll case demonstrates how quickly problems cascade when accountability chains break down. Financial institutions must establish explicit contractual requirements defining precisely who bears responsibility for compliance at each processing stage.

Regular audits, performance monitoring, and transparent communication channels between all parties are essential. The most successful payment operations leaders create relationship maps that establish clear lines of authority and ensure visibility across the entire transaction lifecycle.

Consumer Impact Elevates Regulatory Response
What regulators might treat as minor procedural issues in B2B contexts become major enforcement priorities when consumers feel the impact. Payment operations teams need separate, enhanced control frameworks for transactions touching consumer accounts. Payroll processing, direct debits, and other consumer activities demand heightened verification steps, stronger reconciliation processes, and faster exception handling. 

The immediate financial hardship consumers experience from improper transactions—and the resulting reputational damage—justifies investing in these stronger safeguards. Smart operations leaders recognize this regulatory reality and allocate resources accordingly.

Transcript

NEACH - Wrestling Payments  
SMACKDOWN SERIES-EPISODE 1: "THE REVERSAL RUMBLE"
Season 3, episode 10

Joseph Casali: [00:00:00] Hello and welcome to Wrestling Payments. We are going to be doing something different this time we are going to start a three part series on and named the not just SmackDown Rules Violations in the Ring. I can tell you if I commit to this, if you're a payments fan, I think you'll enjoy it. If you're a wrestling fan, I think you'll enjoy it.

There's lots of information we're going to go over, and I'm hoping to do it in a wrestling theme. It's the reason I got this podcast started. I was hoping to have some fun talk about some payments and. Educate folks and make this information available. I can tell you I am working from the Nacha System of Fines, ACH Rule Enforcement case studies.

It's a document available to payment association members. NEACH is going to be making it available very soon. You can research all of these cases yourself if you [00:01:00] want to see when things go wrong. How wrong do they go? So today is episode one. We are going to be talking about the Reversal Rumble. When the tables turn, who gets slammed.

You liking this? Hope you're liking this. So we got two case studies we're going over and I'm going to do a little bit from the script I wrote and a little bit from the actual document talking about the case study. So first we have up the improper reversal take down it is, and all the names have been changed to protect the innocent Glenn transportation versus KJN storage.

[00:02:00] 

Joseph Casali: Welcome to the Ring Payment Fans. Today we'll be witnessing the most controversial reversal and nacho history where competition thought they could flip the script and walk away with the money only to get caught in a reg regulatory headlock. And our first act is up. It's the, we're going to set up the case, according to my script, we're going to introduce Glenn Transportation as a heel who's tried to reverse $50,000 in payments to KJN storage without proper authorization, essentially attempting ACHeap shot after the bell has rung.

Let's do that. Let's set it up so we have in front of us, improper reversals case study. It [00:03:00] technically when you get this, we are on version 1.6 of this case study. We're on page seven, and here are the facts. The claim, K and K State Bank received a “notice of possible rules violation” related to improper reverse entry involving their originator, Glenn Transportation. So here's the brack.. background, not the brackground. The background. Glenn Transportation initiated an ACH credit entry to its trading partner, KJN storage, and the amount of $50,000. The following day, Glenn Transportation sent a ACH debit entry in the amount of $50,000 to KJN storage in an attempt to reverse the credit entry.

Upon receiving the reversal entry, the receiving bank, a claim bank, contacted their receiver, KJN storage determined if they were aware of the reversal. KJN storage stated that they were unaware of the reversal and that they were entitled to the funds based on an invoice [00:04:00] sent to Glenn Transportation at the end of the day.

That's really between them two, but let's keep going. After the after contacting K and K State Bank and failing to resolve the issue, a claim bank filed a rules violation citing Glenn Transportation, failure to notify the receiver of a reversing entry, and. The origination of an improper reversal due to the fact that the reversal entry did not meet any of the reasons for the valid reversal.

·       It was not duplicate, 

·       it was not an incorrect amount, and 

·       it did not order payment to or from a different receiver than the receiver intended. 

K and K State Bank denied the violation stating that the credit entry itself was unintended. Interesting. Okay. In act two, the confrontation, we detailed how acclaim bank representing KNJ, challenged the reversal, exposing Glenn Transportation, was trying to use the ACH network to dis [00:05:00] as a dispute mechanism, a clear violation of the rules.

Let's see. Nacha. So Nacha, if you're unaware, Nacha has a rules enforcement panel. All of the cases, go through the panel if needed to be. This probably needed to be. They go through the rules enforcement panel. The panel decides the facts of the case and whether or not a rules violation has occurred.

So let's look into the inner workings of Nacha. K and K State Bank denial of the viol oh, denied violation, and, was refuted by Nacha because the reason for the reversal did not meet any of the reasons for a valid reversal under the rules. The system of fines does not judge. Or resolve an underlying dispute between an originator and receiver, such as this case.

I think I mentioned that earlier. It's really between the parties. The resolution of the dispute between an originator and receiver should happen off or out of the ACH [00:06:00] network. Now, the other part of this case is that this fines if it is a true rules violation, there are potential fines. So in this case, was there a fine.

As it was the first instance of the infraction by K and K State Bank and its originator, the financial institution received a warning letter, which is not subject to a fine. So in this case, if it happened again, by K and K State Bank, there could be a fine as a recurrence. All right, let's get to the second feature.

Going to just search out my document. We have a special, special second feature, which, is a really interesting case. All the names have been changed. I'll just stop there. Okay. This is a really good case. All right, let me hear. Okay. Let me look a script again. Again, welcome. Hope you're enjoying this.

I'll try to [00:07:00] answer the questions that I hear you saying, even though I don't hear you saying them. Okay. This one, the second feature is called tag Team Betrayal. Tell the dramatic story of the workforce to assist failing to fund payroll credits. But processing for you, Inc. Initiating unauthorized reversals to recover funds already distributed to employees.

Oh, this is a bad one, folks. This is the ultimate hael turn. This if you. No, the ACH at all. The first and primary rule, you cannot issue a reversal simply because the fund's unavailable to pay a payroll. That is not an a reason for reversal. All the steps should have been taken prior to that file hitting the network, to not allow an ODFI or originator to say, oh, nevermind, okay. There's some repercussions in this case, maybe an injury, that we're going to have to talk about. Afterwards, but let's read the case. This is a real, real [00:08:00] interesting case. Really happened. Very. There's a lot of lessons to be learned here from, originator and third-party, sender underwriting and monitoring.

How do you know if you are an, if you're an ODFI, how would you know that a third-party sender isn't doing this? How would you know? So let's talk about the case. The claim. Norton Bank, a receiving financial institution for some of Macklan development employees. I never hope I'm right the case. Yeah, let's go with the right case.

They're the, RDFI from Macklan Development employees. They began to receive numerous phone calls from their customers complaining about the reversal of payroll credit. In some cases, Norton Bank customers had received multiple payroll reversals. Yes, I said that. They got their regular payroll.

They then received the res reversal of that payroll and received another reversal of that payroll. What you say? [00:09:00] How could that happen? Let's see. So the background of the case, I. Macklin Development began receiving phone calls from their employees. So not only did the bank started receiving phone calls, the company started, the originator started receiving phone calls.

They began receiving phone calls from their employees complaining about payroll funds being withdrawn as ACH reversals from the bank, from their bank accounts. Having employed Workforce assist to handle all of the payroll needs, Macklan Development reached out to work for this workforce assist to determine if they were aware of any issues, with the company payroll, Macklan Development confirmed that their, that its account had been debited.

For the company's payroll. So if you're aware, typically a day or two before payroll, a third-party sender, a third-party service provider, probably a third-party service provider in this case, would debit the funds out of Macklin's account to fund the payroll and then send out the [00:10:00] credits.

They want to make sure that Macklin had the funds to pay the payrolls before they actually sent out credits. But they did that, they took the money outta the account and they sent out the payrolls. Ooh. Calls to workforce force assist went unanswered, not a good sign. Macklin Development contacted the financial, the Its financial institution, Crawford Bank for advice on how to address this issue.

Crawford Bank's advice was for Macklin, employees to work directly with their respective financial institutions and request that the reversals be returned. As unauthorized. Okay. So what they're saying is all the receivers should go to the bank and say, those reversals are unauthorized. Send them back.

Okay. Okay. Due to the increasing customer phone calls, and withdrawn Wages. Norton Bank, a receiving financial institution for some of Macklan Development's employees filed a notice of possible ACH rules violation against the ODFI of the reversal Simon Bank. It's a [00:11:00] very good point, very good thing.

I do not imagine. This happened between the phone calls from the receivers, I imagine this was after the fact. After they figured out what happened. They did Notice of possible rule violation. Norton Bank stated that the reversal did not meet the criteria for a valid reversal according to the nacho rules, and were therefore unauthorized.

It's good claim. Simon Bank acknowledged the rule violation after working with its third-party center. Ooh, interesting. So the ODFI said, yep, we did it processing for you. Where did they come from? Processing for you, which initiated the payroll reversals. So processing for you Inc. A third-party payment processor worked directly with the workforce assist.

Oh, there it is. To provide ACH processing. We have a case of nested third parties here where workforce assist the company we started off with as the third-party service provider [00:12:00] is using processing for U Inc. To. Handle part of that process and in, in this case, processing for you sent out the reversing entries.

So more, more from the ODFI. As Simon Bank stated, once processing for you, had learned that its customer workforce assist had not funded the payroll credits, it initiated the reversal in order to recover the funds that had been distributed via payroll credits. Now, Uhuh, do you guys remember, Jurassic Park?

Uhuh. Uhuh? That is not an option. Not allowed. Not an option. As you see, I'm saying it's not an option, but it happened. The technology can happen. So it's important for OD fives to have controls on these third-party service providers so that they know, hey, they're doing something that's not okay. But let's continue with the case processing for you.

Had been making, made aware of the allowable reasons for initiating reversing entry. [00:13:00] Failure to be funded by its customer workforce assist is not a valid reason for reversing entry. Okay. Processing for you was informed by Simon Bank that they, that all the returns of the reversals would be honored, so that's great.

Simon Bank said, we're going to do the right thing. We're going to take all of those back. Simon Bank developed and delivered a letter of indemnity to all the impacted r dfi. Great good party of the rules. Simon Bank indicated that it would develop automated controls to monitor and suspend ACH reversals that exceeded normal activity.

Great. That's a, a great story. Simon did the right thing. Let's see. Oh. So that's Simon responding. I. To Nacha, they said, Hey, here's our plan on fixing this for the rules violation. We just admitted to com committing. What did the panel decide? Nacha classified this violation as potential class [00:14:00] two infraction because of its impact to the consumers businesses, RDFIs and the ACH network.

So for you folks, the last example we went over was. The normal process, a rules violation comes in a notice of possible rules. Violation comes in, NA just says, okay, this is the first time we've gotten something from them. We're going to start the rules process. We're going to go through, class one, class two.

In this case, they went right to class two. None of the none messing around. They went right to class two, a serious violation, consumer accounts. Oh, so this was, this caused harm or could cause harm to the network. So the Aach H Rules Enforcement Panel determined the ODFI. The ODFI in its third-party sender had committed a Class two rules violation and had caused excessive harm as follow.

I can tell you if you're ever involved in one of these, if you see the word excessive harm, it's bad. Consumer accounts were drained when the third [00:15:00] party center initiated reversing in order to claw back the funds. Some consumers receiving more than one reversal, businesses had to access reserve funds to pay the employees again.

The ACH network suffered substantial reputational risk. As these transactions were processed via ACH receiving banks were greatly impacted by having to deal with angry customers and the processing of. Unauthorized reversals. So what was the fine, and I got some words after this that are important. What was the fine as a class two violation?

The financial institution was subject to a fine between $0 and a hundred thousand dollars per month until the issue was resolved. A onetime fine of a hundred thousand dollars was imposed against. Simon Bank, that is a serious fine. In this episode, we had a $0 fine and we had a hundred thousand dollars fine.

This was a real case. I [00:16:00] actually remember it happening. I'm still name not going to name names to protect the innocent. The third-party didn't really know what they were doing. They. Never created the reversing file. Hence, when they tried, they sent one out that was incorrect, but not incorrect enough to be stopped in the network.

So it did go through and debited all the employees. They then sent, submitted the corrected reversing file, which went through and debited them again, rds. Get the reputational issues here. It's the, look what my bank did. They took my money. Why would the bank take my money? The bank didn't take the money.

Whoever the originator was using to send the payrolls took the money. It was a very bad thing. Companies, companies, small businesses work, I don't want to say work paycheck to paycheck, but do they have enough money on hand to pay a second [00:17:00] payroll in any given time?

Plus, which before all the details are in there, is not one concerted effort to say, okay, everyone hold up. Because people are like, where's my money? I gotta pay my rent. Things are bad. So what's happening, in some cases, the employers were issuing paychecks, again, lit, literally writing paychecks. In some cases, the RFIs were making amends, still not having gotten that money back.

They were giving the money to, customers. So it was a big mess. It was all over the news. And when you hear things like this in the news, it's not, oh, a third-party, processor didn't follow proper risk management, steps. And, they'd send something out. They shouldn't, they hear the banks are taking back your direct deposits.

So there definitely was potential reputational risk there. Interesting. This is a, an add for good due diligence, proper management, proper oversight, things that, [00:18:00] that originators and ODFIs should be aware of. All right, let's turn back on the wrestling. The wrestling bug. Just like in wrestling, when you try to reverse the outcome after the match is over, you'll find yourself facing the regulatory referee in the not Your ring proper reversals require proper cause, not just a desire to take back what you've already given.

Dun. Hope you enjoyed this episode. There's going to be another episode, next week or sooner. Depends on, how, how it all turns out. Thank you for listening. Stay tuned for the next, not your rumble. 

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