How Ofac Uses Sanctions To Fight Financial Crimes Around The World
Tad Simons Technology Journalist/Thomson Reuters Institute
17 Oct 2020
Tad Simons Technology Journalist/Thomson Reuters Institute
17 Oct 2020
The Office of Financial Assets Control, which enforces U.S. sanctions around the world, is one of the most powerful U.S. agencies fighting financial crimes.
One of the most powerful agencies in the United States international fight against terrorism, drug trafficking, and money laundering is the U.S. Treasurys Office of Financial Assets Control , the regulatory body that enforces U.S. sanctions around the world.
The main way OFAC exercises its power is by carefully monitoring international business activity and prosecuting or fining financial institutions and companies that it determines are in violation of U.S. policy.
In theory, organizations that find themselves in violation of any U.S. sanctions are encouraged though not explicitly required to report the violation to OFAC. This makes self-reporting to OFAC an organizational judgment call, one complicated by the fact that OFAC is not shy about handing out hefty penalties to violators, especially if they dont self-report. In 2019, for example, OFAC fined UniCredit Bank and Standard Chartered Bank a total of $2.2 billion for violating multiple sanctions and in 2020, OFAC has taken 18 actions totaling more than $18 million.
What Are The Benefits Of Using A Sanctions Screening Tool
There are no legislative requirements for how you must verify sanction lists. However, financial institutions often have the difficulty of finding a way to thoroughly and cost-effectively review the numerous sanctions lists without disturbing daily operations.
Manual checks would be difficult and time-consuming due to the large number of sanctions lists to be verified and can also easily lead to human error. Finding an automated system to complete these mandatory tests makes sense and is the simplest way to reach the compliance standards that regulators like OFAC require.
What Is An Ofac General License
A general license, on the other hand, is a type of blanket exception to sanctions regulations for specific activities. A general license authorizes a particular type of transaction without the need to apply for a specific license. For example, exports of U.S. agricultural products are permitted to Syria, and non-governmental organizations may conduct humanitarian projects in North Korea, both under authorization from general licenses.
OFAC publishes every general license associated with a particular sanctions program on its website, on the sanctions programs details page. If there is no general license for a particular activity, or the activity is not authorized within the text of the regulations, then it is prohibited unless authorized by a specific license.
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Are People Or Entities Notified When They Are Placed On The Sdn List
OFAC Attorney: People that appear on the list are not personally notified before they are added to the list. The publication of the SDN List itself, with the name of a targeted person, serves as notice to that person that they have been targeted for sanctions or have had their property blocked pending the outcome of a federal investigation. Such a course of action is legally permissible because the people that are on the list tend to be foreign persons with limited constitutional rights in the United States. Moreover, the element of surprise in naming a sanctions target favors the United States government. If the U.S. government gave notice to that person, then that person could potentially move their goods or property outside of the United States in order to evade the sanctions. Or they can pull their funds and other property out of the possession of U.S. banks and other U.S. persons. The element of surprise is very important to the federal government because they want to make sure that the sanctions hurt. By making the sanctions hurt, the person who is being targeted for sanctions will ideally change their behavior, thereby benefiting U.S. foreign policy and national security.
What Are Targeted Sanctions
Targeted sanctions programs, in contrast, are aimed at specific activities, such as terrorism, international narcotics trafficking, cyber-crime, or foreign interference in a U.S. election, for example.
Traditionally, sanctions prohibit only the imposing countrys citizens and companies from doing business with a blocked party. However, the U.S. has also imposed extra-territorial sanctions . These are intended to restrict the economic activities of other countries governments, businesses, and individuals to ensure their compliance with U.S. sanctions programs. Many governments consider these extra-territorial sanctions to be a violation of their sovereignty and of international law.
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Bsa/aml/ofac Supervision And Regulation Letters
BSA/AML/OFAC Supervisory Policy and Guidance TopicsSR letters address significant policy and procedural matters related to the Federal Reserve System’s supervisory responsibilities and outlines expectations and priorities or articulates views regarding appropriate practices for a specific subject.
- SR 21-18Release of New and Updated Sections of the Federal Financial Institutions Examination Council’s Bank Secrecy Act/Anti-Money Laundering Examination Manual
- SR 21-10Interagency Statement on the Issuance of the Anti-Money Laundering/Countering the Financing of Terrorism National Priorities
- SR 21-8Interagency Statement on Model Risk Management for Bank Systems Supporting Bank Secrecy Act/Anti-Money Laundering Compliance
- SR 21-2Answers to Frequently Asked Questions Regarding Suspicious Activity Reporting and Other Anti-Money Laundering Considerations
- SR 19-19Bank Exams Tailored to Risk
Ofac Faqs For Banks And Credit Unions
If you are a vendor manager at a bank or credit union, you may be familiar with checking OFAC, but have you ever paused to ask why? Who exactly is “OFAC?” Is checking vendors a best practice or is it a regulatory requirement? How frequently should you check your vendors?
While you should communicate with your regulator to best understand their OFAC compliance expectations, this article will respond to these questions and hope to unravel some of the mystery surrounding OFAC for vendor managers.
Who is OFAC?
OFAC is the “Office of Foreign Assets Control.” It is an office in the U.S. Department of the Treasury. Their primary goal is to put economic and trade sanctions into effect against malicious actors in the name of national security, foreign policy, and the economy of the United States. For a more detailed description of OFAC, visit the U.S. Department of the Treasury website.
Why should I check OFAC?
OFAC maintains sanctions lists on their website, designed to inform the public of people, organizations, and other entities that are connected to illegal or illicit things like terrorism, drug trafficking, weapons distribution, and more. As a vendor manager, it is important to know your service providers are not using your financial institution’s funds to support these types of activities.
Is checking OFAC a best practice or regulatory requirement?
How can I check the OFAC lists?
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What Is The Office Of Foreign Assets Control
Sanctions have been imposed on those involved in foreign aggression, terrorist activities, and narcotics sales, among other acts.
The OFAC was created in 1950 when China entered the Korean War. President Harry Truman declared the event a national emergency and froze all Chinese and Korean assets that were subject to U.S. jurisdiction. OFAC’s predecessor was the Office of Foreign Funds Control , established in 1940 in response to the Nazi invasion of Norway.
Tools And Resources Needed For Ofac Compliance For Ach Transactions And Payments
Any ACH transaction request could be submitted for OFAC screening. This means that every ACH transaction either needs to go through this process automatically and the time for this screening accounted for, or the bank needs to take into consideration OFAC and EFTA regulations for each client.
Since the risk falls solely on the ODFI and RDFI, then it is up to that bank or financial institution to ensure that compliance is met and that KYC and CDD programs are accurate. It is also important for the ODFI and RDFI to maintain a reliable ACH file of all the transactions issued in case of an OFAC screening.
Many of the resources for following the OFAC guidelines can be found through the OFAC website, the NACHA Operating Rules, or by reviewing the EFTA itself. Other resources can be accessed through the Treasurys website.
When navigating the OFAC regulations, OFAC has provided a single-page dedicated to common FAQs, so be sure to access this if you are unsure of any of the regulations. Know that the bank can receive a general license that authorizes the performance of certain transactions. These are known as prohibitions, and OFAC issues them on a case-by-case basis and under certain conditions. Guidance on how to request a specific license is found below and at 31 C.F.R. 501.801. You can apply for a license here.
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Fulfill Your Requirements For Ofac And Aml Regulations
OFAC sanction list is updated frequently. It is not safe to manually check the OFAC sanction list, and it is a waste of time for companies. Sanction Scanner instantly monitors Specially Designated Nationals List , Consolidated Sanctions List, and other OFAC sanction lists. Organizations can scan their customers in the OFAC sanction lists in seconds using our Sanction & PEP Screening service. You can contact us to ensure your AML and OFAC compliance.
Who Has To Comply With Ofac Sanctions
All individuals, banks, financial services companies and other obligated institutions operating under US jurisdiction must comply with OFAC sanctions. For banks and other financial services firms, this means integrating an OFAC sanctions search into internalAML/CFT programs, and ensuring that new customers and clients are screened against the list before a business relationship begins.
OFAC sanctions violations carry the risk of significant criminal penalties. Fines for sanctions violations can range from several thousand dollars to millions of dollars, while individuals that breach the rules may face up to 30 years in prison. In 2021, OFAC fined Union de Banques Arabes et Francais $8.57 million for sanctions compliance violations. The second largest fine that year was issued against the Bank of China for $2.32 million.
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The Types Of Ofac Sanctions
Sanctions imposed by OFAC are divided into two categories:
- Comprehensive Sanctions: These prohibit any transactions between the United States and a sanctioned nation, such as North Korea, Syria, or Sudan.
- Non-comprehensive Sanctions: These restrict transactions between the US and a specific firm, individual, or industry, such as supporters or funders of an unfavourable political government.
What Are Some Examples Of Past Prohibited Transactions
In 2016, OFAC settled with Barclays, ordering the UK-headquartered financial institution to pay more than $2.4 million for 159 potential violations that occurred between 2008 and 2013. In violation of Zimbabwe Sanctions Regulations, Barclays processed transactions for Barclays Bank of Zimbabwe customers through U.S. branches. These corporate customers were 50 percent directly or indirectly owned by parties on the OFAC Specially Designated Nationals list.
Notably, OFACs own description of Barclays procedures at the time included the fact that the bank attempted to comply with sanctions regulations. However, its internal procedures were ineffective and cumbersome, and a workaround to follow the companys own Know Your Customer program was little used because of its technical challenges.
Since the U.S. Treasury leaves it up to banks to determine how to comply with OFAC, partnering with businesses such as Lyons Commercial Data can help prevent similar issues.
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Overview Of Bsa/aml Ofac Regulations And The Regulatory Bodies
Money laundering is rampant globally. ‘The estimated amount of money laundered globally in one year is 2 – 5% of global GDP, or $800 billion – $2 trillion in current US dollars.’ . The staff of financial institutions, must be aware of their responsibilities in preventing the ‘dirty money’ entering into the system. They must also understand the Anti-money laundering regulations to ensure compliance as individuals and institutions.
Sadly, some corporates and professionals fail to comply with the regulations due to negligence. Others intentionally violate the regulations. The cost of noncompliance is too high.
Corporate penalties for noncompliance include:
- Loss of Licensing
- Fines up to $500,000 or 2x the amount involved in the transaction
- Monetary loss from the asset forfeiture actions, fraud, or charge off
- Loss of company value
Personal penalties for violations include:
- Imprisonment up to 20 years
- Personal fines to employees
- Money loss from asset forfeiture action, fraud, or charge off
- Substantial legal fees
- Reputation risk
- Fired or barred from the financial industry
The bottom line: Directors, Management and Staff of financial institutions, Make sure you full understand your regulations and comply!
This article provides an overview of the pertaining BSA/AML and OFAC regulations to help financial professionals comply. It also discusses the regulatory bodies, their functions in brief and directs you to useful resources for compliance.
Lists Firms Should Check Regularly
- Office of Foreign Assets Control Home Page
- OFAC Alphabetical Listing of Specially Designated Nationals and Blocked Persons
- OFAC Alphabetical Listing of Foreign Sanctions Evader
- OFAC Alphabetical Listing of Sectoral Sanctions Identifications
- OFAC Alphabetical Listing of Palestinian Legislative Council
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What Does Ofac Mean In Relation To Banking And The Ach Network
The ACH Network is an interconnected financial network that is comprised of private banks, credit unions, other financial institutions, the Automated Clearing House, and the Federal Reserve.
Banks and financial institutions within this network must be approved to operate within this network. Once approved, you are known as an ACH Operator. And, usually, banks are approved as an Originating Depository Financial Institution or ODFI and a Receiving Depository Financial Institution .
In order to ensure that the transaction is compliant against a broad number of regulations, there are stationed checks throughout the money transfer process. The Automated Clearing House itself is processing the transaction and checking for erroneous or fraudulent activity. As well, each ODFI and RDFI that comes in contact with the money also has checks in place.
The OFAC is one of these checks. The biggest difference with the OFAC is that it is not always checking every single money transfer. This is because it usually takes longer for that type of check to be processed, and this would further delay an ACH payment.
Instead, banks rely on their risk mitigation and risk assessment policies in order to weed out those accounts that would be more or less susceptible to violating an OFAC regulatory requirement.
Ofac Now Requires Us Persons To Report Any Transaction They Reject Due To Sanctions
In a surprising move, the Office of Foreign Assets Control has imposed a new reporting requirement on U.S. persons that is far more expansive than at first it may appear.
OFAC’s Reporting, Procedures and Penalties Regulations require U.S. persons, including financial institutions, to file reports when a transaction is “blocked” and when a transaction is “rejected.” On Friday, June 21, 2019, OFAC announced a variety of amendments to these Regulations. The most significant change is a revision of 31 C.F.R. § 501.604, which broadens the scope of the 10-day reporting requirement for “rejected” transactions. This reporting requirement has been expanded in two key ways. First, the amendment clarifies that the reporting requirement applies not only to “rejected funds transfers,” but also to any transaction rejected because it would violate sanctions, including transactions “related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services.” Second, whereas § 501.604 used to apply only to U.S. financial institutions, the amendment now expands the reporting requirement to “any U.S. person”not only U.S. financial institutionsbut any U.S. citizen, green card holder, protected individual, or entity incorporated or registered in the U.S. .
This constitutes a major change for any US businesses outside of the financial sector and may require many, many, more reports to OFAC than were previously required.
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Deep Dive: Ofac Licenses
Economic sanctions generally prohibit all dealings with a targeted party, faction, government or country. However, the U.S. encourages activities such as humanitarian assistance and desires to avoid detrimental impacts on significant sectors of its own economy. U.S. industries that rely heavily on exports of goods and services are often the most negatively impacted by economic sanctions. For example, the U.S. exports approximately 25% of its agricultural production each year, and for certain commodities, exports are as high as 75%. OFAC licenses are a means to mitigate sanctions negative impacts.
A license is an authorization from OFAC to engage in a transaction that otherwise would be prohibited, such as agricultural exports. OFAC licenses are categorized as specific or general.
Why Should Banks Be Ofac
The Department of Treasury, in no uncertain terms, requires all persons and entities within the United States to comply with OFAC regulations. The cost of not complying with OFAC rules, even if inadvertently, can be huge, with criminal and civil penalties running up to several million dollars . Theres also negative publicity to contend with because OFAC publishes the names of those that have been penalized.
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What Are Comprehensive Sanctions
Comprehensive sanctions typically prohibit all commercial activity with an entire country such as North Korea or Cuba. However, it is often only specific individuals and organizations within a countrys government not the entire country that are the sanctions targets. Nevertheless, OFAC sanctions programs are typically named based on the country involved even though the sanctions are not all-encompassing.
Countries Subject to Comprehensive U.S. Sanctions
Currently, the most comprehensive sanctions target Cuba, North Korea, Iran, and Syria. Although restrictions on Cuba were loosened somewhat during the Obama administration, they reverted to their original state under Trump. North Korea and Syria sanctions are extremely comprehensive. Irans complex sanctions primarily focus on the countrys government, its financial sector, and its aviation and petroleum industries.