10 OFAC Sanctions Defense Strategies
Violating Office of Foreign Asset Control (OFAC) sanctions can have significant consequences for both entities and individuals. Not only can sanctions violations lead to OFAC enforcement actions, but they can also trigger criminal prosecution in some cases. As a result, entities and individuals that do business with foreign parties must ensure that they are giving due consideration to OFAC compliance, and they must be prepared to defend themselves effectively if accused of violating OFAC sanctions.
What are the risks of failing to execute an effective OFAC sanctions defense strategy? OFAC regularly conducts enforcement actions, and these enforcement actions result in substantial penalties in many cases. For example, through the first three quarters of 2023, OFAC has closed 10 enforcement actions with a total of $557 million in financial penalties. OFAC has a complex enforcement regime that defines violations as either “egregious” or “non-egregious” and gives significant weight to voluntary self-disclosure; and, while OFAC has shown a willingness to settle in some cases, it has also closed enforcement actions for the maximum statutory penalty amount on multiple occasions.
Strategies for Avoiding OFAC Penalties Due to Sanctions Violations
With this in mind, what do executives, directors, and company founders need to know about OFAC sanctions defense? Here are 10 OFAC sanctions defense strategies:
Strategy #1: Prioritize OFAC Sanctions Compliance
One of the most effective strategies for avoiding OFAC penalties is to prioritize OFAC sanctions compliance. With an effective approach to compliance, financial institutions and other entities should be able to avoid sanctions violations in most circumstances. Among other things, an effective approach to OFAC sanctions compliance involves:
- Implementing policies and procedures focused specifically on OFAC sanctions compliance
- Using screening software and other tools to identify sanctioned parties (including specially designated nationals (SDNs))
- Making use of applicable OFAC general licenses as warranted
- Applying for OFAC specific licenses as necessary
- Having systems and protocols in place to prevent transactions with sanctioned parties
OFAC expects all financial institutions and other businesses to proactively address sanctions compliance, and it provides various tools that entities can (and should) use to develop their compliance programs. For entities that have effective compliance programs in place, being able to demonstrate good-faith adherence to a custom-tailored compliance program can be a key defense strategy when facing scrutiny from OFAC.
Strategy #2: Proactively Manage OFAC Compliance
Beyond simply having an OFAC compliance program, financial institutions and businesses must also proactively manage OFAC compliance on an ongoing basis. Along with screening for sanctioned parties and blocking or rejecting transactions as necessary, this includes monitoring for changes in entities’ sanctions compliance obligations.
OFAC regularly updates the SDN list and its other sanctions lists, and it occasionally adopts new sanctions programs as well (i.e., its recently-adopted secondary sanctions program). A one-time approach to OFAC sanctions compliance isn’t enough. To be able to effectively defend against an OFAC investigation or enforcement action, an entity must be able to affirmatively demonstrate that it is giving due (and ongoing) consideration to sanctions compliance.
Strategy #3: Determine When Voluntary Self-Disclosure is Warranted
As part of a financial institution’s or business’s ongoing OFAC sanctions compliance efforts, it should be able to identify any sanctions violations that occur. When they occur, financial institutions and businesses must assess the need for voluntary self-disclosure.
Voluntary self-disclosure can substantially mitigate an entity’s risk of facing civil monetary penalties for a sanctions violation. OFAC says as much in its Economic Sanctions Enforcement Guidelines (the “Guidelines”), and its recent enforcement actions have made clear that it considers voluntary self-disclosure (or the lack thereof) in deciding what penalties are warranted. To qualify as a voluntary self-disclosure, an entity’s report of an apparent sanctions violation must be self-initiated and must not:
- Follow a third party’s disclosure of the apparent violation or a substantially similar apparent violation;
- Contain false or misleading information;
- Be incomplete; or,
- Be made by an individual without the authorization of the entity’s senior management.
Strategy #4: Identify Any Applicable “Aggravating Factors”
Along with voluntary self-disclosure, OFAC also considers the relevance of any “aggravating factors” when determining what penalties are warranted for sanctions violations. Identifying these factors (if any) and addressing them proactively can be a key defense strategy as well. Some examples of aggravating factors in OFAC sanctions violation cases include:
- Evidence of willful disregard for OFAC’s sanctions (including actual knowledge of relationships or transactions with sanctioned parties)
- Evidence of a reckless disregard for OFAC’s sanctions
- Repeated sanctions violations over an extended period of time
- Violation that harm foreign policy objectives
- An entity’s size and sophistication (OFAC expects large financial institutions and companies to have robust sanctions compliance programs)
Strategy #5: Focus on the Applicable “Mitigating Factors”
In addition to considering these aggravating factors (among others), OFAC considers several “mitigating factors” when imposing penalties for sanctions violations as well. By focusing on the applicable mitigating factors, entities targeted in OFAC enforcement actions will be able to significantly reduce their penalty exposure in many cases. Along with voluntary self-disclosure, some examples of relevant mitigating factors may include:
- Sanctions violations that are “isolated or atypical” in nature
- A prompt and effective remedial response
- Violations that involve transactions dealing in products that are of a “benign consumer nature”
- Violations that involve a small portion of the entity’s overall business
- Cooperation during OFAC’s investigation into the sanctions violation
Strategy #6: Address the Broader Implications of the Applicable OFAC Sanctions
Beyond addressing the apparent violations at issue and any applicable aggravating or mitigating factors, entities targeted for OFAC sanctions violations should also address any broader implications when developing their defense strategies. For example, in imposing a $508.6 million civil monetary penalty against British American Tobacco P.L.C. in April 2023—which was the maximum statutory penalty amount—OFAC went to great lengths to discuss how the company’s systemic violations compromised foreign policy objectives and the consequences of failing to maintain a top-down culture of compliance. Proactively addressing these types of considerations can be critical for executing an effective defense as well.
Strategy #7: Determine Whether Civil Monetary Penalties Are Warranted
Of course, aggravating and mitigating factors and the broader implications of OFAC sanctions violations are irrelevant if no civil monetary penalties are warranted. When facing OFAC enforcement actions, financial institutions and companies should work with their defense counsel to assess the veracity of the allegations at issue and form their own informed decisions about compliance. If OFAC’s enforcement action is misguided, determining this—and being able to prove it—should be the primary focus of the entity’s defense.
Strategy #8: Focus on Settlement (if Necessary)
If it is not possible to disprove OFAC’s allegations of sanctions non-compliance, then the entity’s defense strategy will most likely need to focus on settlement. Here, a key factor is whether OFAC characterizes the violation at issue as “egregious” or “non-egregious.” OFAC makes this characterization based on the General Factors outlined in the Guidelines, which include (among others):
- Evidence of willfulness, recklessness, concealment, or a pattern of conduct
- Evidence of management’s awareness of, and involvement, in the violation
- Any harm to the applicable sanctions program’s objectives
- Whether the transactions involved would have been eligible for an OFAC license
- Whether the entity had an adequate OFAC sanctions compliance program
- Whether the entity engaged in a remedial response and cooperated with OFAC
- The entity’s size, financial condition, and commercial sophistication
- The entity’s overall volume of transactions in comparison to the volume of transactions that violated OFAC sanctions
The base penalty amounts for non-egregious violations are substantially lower than those for egregious violations. As a result, if a targeted financial institution or business can convince OFAC that a non-egregious characterization is warranted, this can help set the stage for favorable settlement negotiations.
Strategy #9: Fix the Compliance Failures that Led to the Sanctions Violation
As noted above, an entity’s remedial response (if any) is a key factor in OFAC’s enforcement calculus. By promptly fixing the compliance failures that led to the sanctions violation at issue, financial institutions and businesses can not only help facilitate a favorable outcome in the instant enforcement action, but also establish a positive relationship with OFAC and mitigate the risk of committing similar sanctions violations in the future.
Strategy #10: Consider the Potential for Criminal Prosecution
Finally, along with addressing the risks presented by OFAC’s enforcement action, targeted entities must also consider the potential for criminal prosecution when dealing with apparent OFAC sanctions violations. Evidence of willful or reckless conduct may warrant criminal charges; and, when the U.S. Department of Justice (DOJ) pursues an indictment for violations of the Bank Secrecy Act (BSA) and other pertinent statutes, substantial fines and even federal prison time can be on the table.
Speak with an OFAC Sanctions Defense Lawyer at Oberheiden P.C.
Our lawyers, including our former federal prosecutors, provide experienced legal representation for entities and individuals facing allegations of OFAC sanctions violations. If you (or your financial institution or company) have been contacted by OFAC, we encourage you to contact us promptly for more information. To speak with a senior OFAC sanctions defense lawyer at Oberheiden P.C. in confidence, call 888-680-1745 or request an appointment online now.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.