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OFAC Compliance in 2024: Who Needs to Comply?

OFAC compliance

OFAC Compliance in 2024: Who Needs to Comply?

The Office of Foreign Assets Control (OFAC) regulates financial transactions between U.S. and foreign parties. While most U.S. bank executives are familiar with OFAC’s requirements, OFAC’s enforcement authority extends far beyond traditional financial institutions operating on domestic soil.

Who must comply with OFAC’s regulations and sanctions programs in 2024? As discussed below, OFAC compliance is a concern not only for numerous types of businesses, but also many individuals. This is true both in the U.S. and abroad. As non-compliance with OFAC’s regulations and sanctions programs can lead to steep penalties, all entities and individuals that are subject to OFAC’s oversight need to prioritize compliance.

“Many people are surprised to learn just how wide OFAC’s enforcement net reaches. All entities and individuals that engage in or facilitate cross-border transactions are potentially subject to OFAC’s oversight—and they must address OFAC’s regulations and sanctions programs accordingly.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

While there are several aspects to OFAC compliance, assessing an entity’s or individual’s compliance obligations starts with understanding its specific risks. As OFAC explains in A Framework for OFAC Compliance Commitments (the “Framework”), conducting a risk assessment is one of the agency’s “five essential components of compliance.” With a clear understanding of the specific risks at hand, entities and individuals can tailor their compliance efforts accordingly, and they can effectively mitigate their risk while also avoiding unnecessary compliance-related expenditures.

What Entities and Individuals are Subject to OFAC’s Oversight?

So, what entities and individuals are subject to OFAC’s oversight? OFAC itself provides guidance in its online FAQs:

“U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, all U.S. incorporated entities and their foreign branches. In the cases of certain programs, foreign subsidiaries owned or controlled by U.S. companies also must comply. Certain programs also require foreign persons in possession of U.S.-origin goods to comply.”

As you can see, this is extremely broad—far broader than most people realize. To get a sense of the scope of OFAC’s enforcement authority, we can begin by looking at the definition of a “financial institution” under the Bank Secrecy Act (BSA). The BSA is one of several federal statutes that OFAC enforces; and, while OFAC’s enforcement authority is by no means limited to these “financial institutions,” the list is nonetheless instructive when it comes to understanding the scope of OFAC’s authority. Under 31 U.S.C. Section 5312, “financial institutions” that are subject to the BSA (and OFAC’s enforcement authority) include:

  • Automobile, airplane, and boat dealers
  • Brokers and dealers registered with the U.S. Securities and Exchange Commission (SEC)
  • Casinos and other gambling establishments
  • Commercial banks and trust companies
  • Credit card system operators
  • Credit unions
  • Currency exchanges
  • FDIC-insured banks
  • Futures commission merchants, commodity trading advisors, and commodity pool operators registered under the Commodity Exchange Act (CEA)
  • Insurance companies
  • Investment bankers
  • Investment companies
  • Issuers, redeemers, and cashers of traveler’s checks, money orders, and “similar instruments”
  • Licensed money transmission businesses
  • Loan and financing companies
  • Pawnbrokers
  • Precious metals, stones, and jewels dealers
  • Private bankers
  • Telegraph companies
  • Thrift institutions
  • Travel agencies
  • U.S. agencies and branches of foreign banks
  • Unregistered securities and commodities brokers and dealers
  • Other businesses and agencies designated by the U.S. Treasury Department

As you can see, this list includes not only banks and other entities traditionally classified as financial institutions, but also a wide range of other businesses. Certain individuals can be classified as “financial institutions” under the BSA as well.

Again, however, even this list is not exhaustive. As noted in OFAC’s FAQs, all domestic entities and individuals are potentially subject to OFAC’s oversight, and many foreign branches, foreign businesses, and foreign residents are subject to OFAC’s oversight as well.

Identifying Transactions that Implicate OFAC’s Sanctions Programs

Along with understanding the nature and location of an entity’s or individuals’ financial operations, identifying the counterparties involved in their transactions is a key aspect of determining their OFAC compliance obligations. Complying with OFAC’s sanctions programs is a key aspect of overall OFAC compliance, and these programs identify countries, entities, and individuals with which financial transactions are either prohibited or restricted.

Given the breadth of OFAC’s enforcement authority (covering all domestic entities and individuals as well as many entities and individuals located abroad), all entities and individuals that engage in or facilitate cross-border transactions should work with their legal counsel to assess the implications of OFAC’s sanctions programs. These programs fall into four categories—and, here too, the breadth of OFAC’s enforcement authority becomes apparent when you examine the categories of transactions that may be prohibited or restricted. The categories of OFAC sanctions programs are:

1. Country-Based Sanctions

OFAC’s country-based sanctions prohibit or restrict financial transactions with parties in several nations around the world. Some of these prohibitions and restrictions apply globally within the sanctioned country, while others are limited to specific transactions or industry sectors. The countries currently subject to OFAC sanctions include:

  • Afghanistan
  • Belarus
  • Burma
  • China
  • Cuba
  • Ethiopia
  • Hong Kong
  • Iran
  • Nicaragua
  • North Korea
  • Russia
  • Somalia
  • Sudan, Darfur, and South Sudan
  • Syria
  • Ukraine
  • Venezuela

2. Sector-Based Sanctions

OFAC’s sector-based sanctions apply to specific industry sectors. While these sanctions are generally country-specific, there is some overlap among OFAC’s sector-based sanctions that apply to different nations. The list of sector-based sanctions (or “sectoral sanctions”) is long and dense, and wading through the prohibitions and restrictions on the list requires a patient and detail-oriented approach along with a clear understanding of the nature of OFAC’s sanctioning authority.

3. List-Based Sanctions

OFAC maintains several sanctions lists, the most well-known of which is the Specially Designated Nationals (SDN List). All of OFAC’s sanctions lists are searchable online. The SDN List identifies specific entities and individuals in both sanctioned and non-sanctioned countries; and, as OFAC explains, “[t]heir assets are blocked and U.S. persons are generally prohibited from dealing with them.”

4. Secondary Sanctions

OFAC has recently begun to impose secondary sanctions on entities and individuals that are affiliated with SDNs. Thus, even if an entity or individual is not an SDN and is not located in a sanctioned country or involved in a sanctioned industry sector, this doesn’t necessarily mean that it is safe to do business with that party. While OFAC has implemented relatively few secondary sanctions to date, the risk of a secondary sanction prohibiting a transaction expands the burdens of effectively managing OFAC compliance.

While the SDN List identifies entities and individuals with which U.S. parties are generally prohibited from doing business, OFAC’s other sanctions programs may prohibit or restrict transactions with other entities and individuals as well. Conversely, even if OFAC has not sanctioned a particular country or industry sector, specific individuals and entities in that country or sector may still be designated as SDNs. As a result, evaluating entities’ and individuals’ OFAC compliance obligations is not easy. However, it is extremely important, as even inadvertent violations can lead to substantial penalties.

What Are the Consequences of Failing to Maintain Strict OFAC Compliance in 2024?

OFAC sanctions violations can trigger enforcement proceedings, and these proceedings can create exposure to significant civil monetary penalties (CMP). To date in 2024, OFAC has finalized eight enforcement actions (all of which resulted in settlements), with a combined CMP value of $556.5 million. Notably, $508.6 million resulted from a single enforcement action targeting British American Tobacco P.L.C., which agreed to settle allegations that it illegally exported tobacco to North Korea by disguising the source of transactions executed through U.S. financial institutions.

The CMP triggered by OFAC sanctions violations can vary greatly depending on the circumstances involved. The circumstances involved in any particular case can also greatly influence OFAC’s willingness to settle for a reduced amount. For example, while British American Tobacco P.L.C.’s settlement reflected the maximum CMP for the alleged violations at issue, in another case OFAC agreed to reduce the maximum CMP of more than $19.6 billion to just $7.5 million.

How Can Entities and Individuals Maintain OFAC Compliance in 2024?

Given the breadth of OFAC’s enforcement authority and the risks of violating OFAC’s sanctions, what can (and should) entities and individuals do to maintain OFAC compliance in 2024?

Effectively managing OFAC compliance starts with understanding an entity’s or individual’s specific compliance obligations. OFAC’s Framework is a good place to start, and its Risk Matrix provides additional insight into the types of issues that can result in sanctions violations and trigger enforcement action. However, these are far from the only resources that require careful consideration, and it is imperative that all entities and individuals develop and implement OFAC compliance programs that are custom-tailored to their specific risks and needs.

For those that already have OFAC compliance programs in place, monitoring and enforcement are critical. Entities and individuals should re-assess the sufficiency of their OFAC compliance programs at least annually, and they should conduct periodic tests and audits as well. Having procedures in place to respond to apparent compliance violations is also critical, as voluntary self-disclosure is a key factor in determining the maximum CMP that applies.

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