What is OFAC?
The U.S. Office of Foreign Asset Control (OFAC) is the department of the U.S. Treasury that is responsible for facilitating compliance with the U.S. foreign policy and national security agendas. OFAC works to bring those involved in narcotics, terrorism, and other undesirable activities that threaten U.S. national security into line.
OFAC was created in 1950 in light of the need to sanction China and Korea during the Korean War. OFAC functions within the authority of presidential national emergency powers and related legislation that grants OFAC the ability to establish trade restrictions and block assets as effective means of achieving foreign compliance. For a general overview of OFAC, please refer to our prior article on OFAC, Understanding OFAC Administered Sanctions Programs.
The Treasury Department does not actually maintain an OFAC country list because sanction programs may be geographically- based (e.g., North Korea) or targeted by activity (such as counter-terrorism) and instead focus on individuals or entities. OFAC administers a number of different sanction programs to address both individuals and companies owned or controlled by, or acting on behalf of, targeted countries as well as individuals, groups and entities (including terrorists and drug traffickers) designated under programs that are not typically specific to a particular country. The Treasury Department maintains a “Sanctions Programs and Country Information” page for information on the specific programs.
The OFAC Specially Designated Nationals and Blocked Persons List (“OFAC SDN List”) has approximately 6,300 names connected with sanctions targets. Since individuals and entities often move internationally and end up in locations where they would be least expected, U.S. persons and entities are prohibited from dealing with SDNs regardless of location and all SDN assets are blocked. Entities that an SDN “owns” (defined as a direct or indirect ownership interest of 50% or more) are also blocked, regardless of whether that entity is separately named on the SDN List. Their assets are blocked, and U.S. persons are generally prohibited from doing business or otherwise dealing with them.
Who is on the OFAC SDN list is dynamic and therefore, it is very important to check OFAC’s website regularly. Ensuring that your OFAC list is current and you have complete information regarding the latest relevant program restrictions is both a best practice and a critical part of your due diligence responsibility before you conduct an OFAC sanctions list search. Assessing the accuracy of OFAC name matches when you conduct an OFAC check can be an involved process which fortunately the Treasury Department has addressed in great detail in its most recent FAQ.
An OFAC SDN search can provide a wealth of information: the first and last names of persons (as well as their aliases) the program or sanctions regime under which they are designated, the nationality of designated person or entity, the date and place of birth of designated persons, and the type of identification found on a passport or residency or state ID, including ID number, and the country of issuance, as well as issuance and expiration dates of the ID. Persons on the SDN list may go by an alias which is where proper and comprehensive due diligence comes into play to ensure that the person is not someone on the SDN list. The OFAC search tool uses “fuzzy logic” on its name search field to look for potential matches on the Specially Designated Nationals (SDN) List and on its Consolidated Sanctions List. This free OFAC search tool is available through the Treasury Department.
Recent Increase in Sanction Designations
According to the law firm of Gibson Dunn’s 2020 annual year end sanctions and annual controls update, OFAC sanctions frequency increased significantly in the year 2020 as well as under the prior administration:
“2020 was a uniquely uncertain and perilous year. Within the world of international trade, the steady increase in the use of sanctions and export controls—principally by the United States but also by jurisdictions around the world—proved to be a rare constant. In each of the last four years, our annual year-end Updates have chronicled a sharp rise in the use of sanctions promulgated by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), as well as growing economic tensions between the United States and other major world powers. In the final tally, OFAC during President Donald Trump’s single term sanctioned more entities than it had under two-term President George W. Bush and almost as many as two- term President Barack Obama.”
Given sanction increases, evolving international developments, transition to a new administration, OFAC recent actions, a review of the 50 Percent Rule (50% Rule) and recommended compliance considerations is in order.
Understanding the Fifty Percent Rule
The U.S. Treasury Office of Foreign Asset Control’s (OFAC’s) 50% Rule states that the property and interests in property of entities directly or indirectly owned 50 percent or more in the aggregate by one or more blocked persons are considered blocked. Application of this rule is how OFAC determines whether companies not appearing on the SDN list are considered blocked due to being owned by companies or people who are on the SDN list.
Persons whose property and interest in property are blocked pursuant to an executive order or OFAC regulations are considered to have an interest in all property of any entity they own. This is true whether the ownership is individual or in the aggregate, directly or indirectly, when the ownership share is a fifty percent or greater interest. For example, this means that if Blocked Person A (blocked on the OFAC SDN list) owns 50 percent of Company B, Company B is also blocked even if it is not on the SDN list. These entities that are blocked but not on the actual SDN list are often referred to as “shadow locked” entities since they are technically blocked but do not show up on the SDN list. Even though they are not on the list, they are still considered blocked and US persons and entities are prohibited from doing business with them. This makes OFAC sanctions checking complex and challenging.
The Complexity of Ownership Interests
The Treasury Department even urges caution in dealing with entities where ownership interests of sanctioned individuals are below fifty percent and warns that such non-blocked entities may be subject to future sanctioned designations or enforcement activity. Adding to the risk and complexity of this situation is the fact that in recent years the US Treasury Department has increased regulatory enforcement of the Fifty Percent Rule.
Moreover, the Fifty Percent Rule presents complex compliance challenges because some entities that are majority owned by sanctioned individuals or entities are often owned via complex arrangements, shell companies or holding companies. In addition, ownership can cross jurisdiction which makes it difficult to confirm true ownership. Below is an example of how multiple ownership arrangements can evade sanction:
Blocked Person X owns 25% of Entity A and 25% of Entity B. Entities A and B each own 50% of Entity C. Entity C is not considered to be blocked. This is because Blocked Person X’s 25 percent ownership of each of Entity A and Entity B falls short of 50 percent. Also, neither Entity A nor Entity B is blocked and Blocked Person X is not considered to indirectly own any of Entity C through its part ownership of Entities A or B.
Four Suggestions for Enhancing OFAC Sanctions Compliance
Because OFAC sanctions are very broad, difficult to understand, and open to different interpretations, here are four suggestions for effectively managing potential OFAC sanction situations:
1. Understand OFAC’s Sanctions Rules
Visit the U.S. Treasury’s OFAC website and read about noted sanctions, recent actions and the like. Many sanctions are specific to certain persons, countries or businesses. If understanding as many sanctions scenarios as possible seems difficult, then focus on entities most relevant to your organization. Additionally, OFAC publishes a comprehensive Frequently Asked Questions section and links to recent actions.
2. Gather All Relevant Information Before Making Decisions
If an OFAC issue arises, seek additional information, current documentation, and clarification regarding a possible OFAC match. It is important to have strong, current documentation to justify actions taken or not taken. OFAC’s SDN list is updated regularly so a timely search is also critical. Additionally, penalties for failing to abide by an OFAC regulation are significant. Entities should conduct thorough and appropriate research. Also, it will be important to have a comprehensive file of accurate information in order to justify decisions made, especially in the event that decisions are ultimately challenged. Criminal penalties include a fine of up to one million dollars and/or up to 20 years in prison for each violation. Civil penalties may include a fine of up to $55,000 for each violation. Other penalties for violations of OFAC regulations include seizure or forfeiture of goods involved.
3. Take the Time to Make Compliant and Appropriate Assessments and Decisions
Take your time when dealing with a possible OFAC match. Once you engage in a business transaction, your opportunity for due diligence has concluded along with the transaction. Time constraints are always an issue, and this is especially the case during the pandemic, but this is a scenario in which taking time with your documentation and evidence before engaging in the relevant transaction or business activity is of utmost importance. Additionally, OFAC has a good FAQ navigation resource on this topic.
When additional information is needed, wait for the needed documentation, especially If your activities included a query of OFAC. If in doubt, always contact OFAC and explain your situation as thoroughly and clearly as possible.
4. Consult with legal counsel with appropriate experience
If the above three recommendations do not facilitate a clear, actionable answer, or if significant questions remain that are best addressed in attorney client privileged conversations, legal counsel should be retained to help facilitate an appropriate decision. Doing so also protects conversations held pursuant to the attorney client and work product privileges from discovery in later civil or administrative proceedings.
As an employer, checking the list prior to hire is not specifically required, but hiring someone on the list is prohibited. It is good practice to seek guidance from legal counsel with OFAC experience to set parameters for when to check as part of the hiring process. It should be noted that when an employer does find a potential match on the list, it is required to notify OFAC. While OFAC offers some guidance on when a match should be reported (on its website, under Research Center, FAQs and Sanctions), additional time and effort may be required to make this determination, and report it to OFAC/Treasury before making a final hiring decision.
In summary, it is important to understand the OFAC sanctions rules, understand what sanction or Specially Designated National (SDN) you are involved with, make appropriate and compliant assessments and decisions, and consult with legal counsel where appropriate.
Compared to the other federal exclusion lists such as LEIE and SAM.gov, the possibility of a potential contractor or employee appearing on the OFAC sanctions list is less probable unless your firm has regular foreign financial dealings. Nonetheless, failing to check and then contracting with anyone on an OFAC list can lead to consequences that outweigh taking the extra time to screen against the OFAC list. Streamline Verify, a company with years of experience protecting against fraud and bad hiring decisions, is particularly well-situated to serve the insurance and banking industries. Streamline Verify’s cutting edge web application provides foolproof sanction screening of SDNs, to ensure OFAC compliance – and it’s user-friendly too.