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OFAC administers three dozen different embargo and sanctions programs. Each program has its own specific requirements outlined in its regulations.
For those programs that have blocking provisions, OFAC regulations block all property in which an SDN has a "present" or "future" interest. Each year, financial institutions must report information on these blocked assets.
OFAC regulations generally require that a financial institution block accounts and property as well as reject foreign trade and financial transactions of certain countries, entities and individuals. These rules are often referred to as blocking programs.
OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) includes all persons or entities blocked under these programs. The SDN List is regularly updated to reflect new sanctions programs and additions to existing ones.
A financial institution is obligated to screen its entire customer database after each SDN List update to identify all property in which a sanctioned party has an interest. This includes any present, future or contingent interest in the property.
OFAC also imposes rules that limit how much of an entity can be owned by one or more SDNs. This is known as the 50% Rule. For example, if David owns 30% of an entity and Vladimir owns 40%, the entity is not considered to be blocked because their ownership interests total less than 50%.
OFAC regulations are a broad area of compliance that credit unions need to take into consideration. Millions of dollars are spent every year on specialized OFAC screening software to comply with the foreign economic and trade sanctions programs set forth by the government.
OFAC’s rules require that property destined for sanctioned countries, individuals, or entities be blocked when it is identified. Generally, this means the funds must be deposited into an interest-bearing account and cannot be used until OFAC determines the disposition of the blocked assets.
As many credit unions know, OFAC regulations can be difficult to interpret. For example, when it comes to reporting rejected transactions, there are some questions about whether a specific transaction must be reported when aggregate SDN ownership reaches 50 percent. NAFCU consulted with OFAC and was informed that the regulation only requires reporting rejected transactions when the aggregate ownership interest reaches 50 percent of a company’s total ownership. NAFCU recommends consulting with your legal counsel for further clarification on this issue.
As we discussed in a previous blog, credit unions are required to block assets and reject unlicensed trade and financial transactions with Specially Designated Nationals and Blocked Persons and certain countries, entities, and individuals designated under the various sanctions programs administered by Treasury. Failing to comply with these regulations can result in substantial civil and criminal penalties.
NAFCU regularly works with credit unions that are blocked by OFAC and must seek to have their funds released. This process is a lengthy one and requires attorneys to thoroughly examine the relevant documentation.
While OFAC prohibits most transactions involving the target of its sanctions programs, some of these restrictions do not require assets to be blocked. For example, while transactions with Iranian businesses are generally prohibited, the bank does not need to block those wire transfers if the business is not an SDN. However, a credit union must report rejected transactions in compliance with the reporting requirements described in the FFIEC BSA/AML Examination Manual.
Our OFAC attorney at Saavedra Goodwin represents lenders, mortgage companies, and other creditors in actions to recover property that has been blocked by the Department of the Treasury’s Office of Foreign Assets Control (OFAC). Banks are obligated to perform due diligence and ensure that individuals or businesses to whom they provide credit do not appear on OFAC’s lists of Specially Designated Nationals or members or supporters of targeted regimes.
For some programs, however, property must be rejected rather than blocked. This occurs when the prohibited activity does not involve an SDN or a member or supporter of a targeted regime and when the sanctions program regulations allow for it.
In these cases, a specific license application must be submitted to OFAC. These applications are processed in the order received and often take months to complete, especially if OFAC decides to review them for reconsideration. If the application is denied, our lawyer may recommend filing an administrative appeal with OFAC.