What You Need to Know About FINRA and OFAC Enforcement of U.S. Sanctions
Some of the many laws that broker-dealers and their brokerage houses have to comply with are the ones that authorize the President of the United States to impose economic sanctions on America’s foreign enemies and those who threaten the country’s interests and national security. The Office of Foreign Assets Control (OFAC) at the U.S. Department of the Treasury is in charge with enforcing those sanctions laws, though the Financial Industry Regulatory Authority (FINRA) may also play a role, as well.
Given the increased risks for a violation in 2024 and the steep penalties that come with one, securities professionals need to know at least the basics of OFAC sanctions law and FINRA’s role in it.
Here is what the FINRA defense and OFAC compliance lawyers at the national law firm Oberheiden P.C. think that regulated broker-dealers and firm executives should know about this complex intersection of securities law.
OFAC Investigates Domestic Parties Suspected of Trading with Sanctioned Foreign Nationals
The broad overview of OFAC sanctions law is simple and straightforward: Congress has passed several different laws that authorize the President to impose economic sanctions against foreign individuals and entities in certain circumstances. When economic sanctions are imposed, covered parties are prohibited from doing business with the targets of those sanctions, and will face steep penalties if they do.
The targets of these sanctions are generally:
- Terrorists or terrorist organizations
- Abusers of human rights
- International aggressors and warmongers
- Drug traffickers and cartels
- Other entities associated with these parties or that support them financially
Covered parties are those that fall within OFAC’s jurisdiction. These include:
- U.S. citizens
- U.S. companies
- Foreign companies that have a physical presence in the U.S.
Note that it is the domestic company, rather than the sanctioned entity, that gets penalized for the business transaction. This is because OFAC, as a U.S. law enforcement agency, does not have the power to regulate foreign nationals and organizations. Therefore, it investigates domestic entities for their role in violating sanctions.
Brokerage Firms are Likely Financial Institutions Under OFAC Sanctions Law
U.S. financial institutions occupy an important position in American and global markets: They hold the financial assets that people and organizations use to conduct business with one another. That juncture between payor and recipient makes them a key target for the enforcement of U.S. sanctions against foreign nationals, and OFAC has realized that and acted on it.
However, OFAC’s definition of what it means to be a “financial institution” strikes many people as exceptionally broad. Importantly for securities professionals and brokerage firms, that definition likely covers them, as well.
Under 31 C.F.R. § 561.309, one of the regulations that is used to enforce OFAC sanctions, a “financial institution” includes entities engaged in the business of “purchasing or selling foreign exchange, securities, commodity futures or options.”
Unless your securities practice is exclusively confined within U.S. borders, it is likely a financial institution under OFAC law.
Financial Institutions Have Heightened OFAC Compliance Obligations
Sanctions law does not demand the same compliance obligations from everyone. OFAC places heightened compliance obligations on financial institutions, which likely includes U.S. brokerage firms.
“If your brokerage firm qualifies as a financial institution under OFAC sanctions law, you will have additional compliance expectations to meet. Like everyone else, you are prohibited from doing business with foreign nationals on the Specially Designated Nationals and Blocked Persons List (SDN). Unlike others, though, you have to take prompt action upon learning that one of your current accountholders is subject to economic sanctions. This may involve blocking a pending transaction that passes through your brokerage firm or freezing the assets in an account held by a sanctioned individual or entity. OFAC knows that your company can be used to capture a sanctioned party’s assets and inflict financial pain on them, and they intend to make use of that opportunity. Failing to do your role can lead to serious allegations that you are out of compliance with U.S. sanctions laws.” – Dr. Nick Oberheiden, OFAC defense and compliance attorney at the national securities litigation firm Oberheiden P.C.
Failing to Comply with Economic Sanctions Carries Steep Penalties
Unfortunately, the penalties of a violation that can come from not satisfying these heightened expectations can be significant, and potentially even criminal.
Congress enacted several laws that authorize the President to impose sanctions. Each one carries its own set of penalties. However, they can carry anywhere from tens of thousands of dollars to over a million dollars in civil penalties for each transaction. These civil penalties can be imposed even if you or your brokerage firm only accidentally did business with a sanctioned party and even if it took all necessary compliance efforts.
If there are signs that you or your firm willfully engaged in business with a sanctioned party, though, OFAC will make a criminal referral to the Department of Justice (DOJ). Convictions for willfully violating U.S. economic sanctions carry multiple decades in prison.
FINRA Will Also Penalize Regulated Securities Professionals
In addition to these penalties, FINRA will generally see a violation of U.S. sanctions as conduct worthy of strict disciplinary action. The regulatory agency, after all, puts high behavioral standards on securities professionals, and frequently suspends or bars broker-dealers from the industry for substantial wrongdoing.
While the FINRA enforcement process may seem relatively small when compared to the civil or even criminal actions taken by OFAC or the DOJ, the professional repercussions of a FINRA sanction can ruin your career or securities firm.
OFAC is Upfront About Its Compliance Expectations
While OFAC is upfront about what its expectations are when it comes to compliance, that is a double-edged sword. On the one hand, OFAC’s guidance provides a good foundation for compliance efforts. On the other hand, OFAC expects that its guidance will be read, understood, and followed.
This is a particularly thorny problem for securities firms. While they are considered financial institutions by OFAC law, they are not typical ones like credit unions or banks. Some of the guidance that OFAC provides will seem off-point or strange. However, varying from it can lead to allegations that you are out of compliance, which can increase the penalties of a violation.
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.