The Office of Foreign Assets Control (OFAC) is one of multiple federal agencies that share responsibility for enforcing financial institutions’ anti-money laundering (AML) compliance obligations. But, while OFAC sanctions compliance and AML compliance overlap in certain respects (as discussed in detail below), each has unique aspects as well. As a result, neither an OFAC sanctions compliance program nor an AML compliance program will be sufficient on its own.
With this in mind, what do financial institution executives and in-house lawyers need to know about OFAC and AML compliance in 2023? Here are some key considerations:
The Overlap of OFAC Compliance and AML Compliance
Effectively managing OFAC and AML compliance begins with understanding where these key areas of compliance for financial institutions do and don’t overlap. While financial institutions can generally address overlapping compliance obligations simultaneously in an integrated compliance program, they must not ignore the areas of stand-alone risk, and they must be cognizant of the differing compliance obligations that exist even in areas where OFAC compliance and AML compliance appear to be closely related. For example:
1. OFAC Clearance vs. Know-Your-Customer (KYC) Compliance
On their face, OFAC clearance and know-your-customer (KYC) compliance may appear to be closely related—and, in certain respects they are. OFAC clearance and KYC compliance both involve identifying the parties to proposed transactions, and they both require financial institutions to make informed decisions about the customers they serve.
But, the similarities largely end there. While AML compliance focuses on identifying parties and transactions that present high risks for money laundering, OFAC clearance focuses on identifying foreign parties that are subject to OFAC sanctions. These sanctions focus not on preventing money laundering, but on protecting national security and promoting the foreign policy objectives of the United States. Thus, KYC compliance efforts won’t necessarily identify parties that are subject to OFAC sanctions, nor will OFAC clearance identify all parties that present risks from an AML compliance perspective.
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2. Suspicious Activity Reports (SARs) vs. Reporting Blocked Transactions to OFAC
Under the Bank Secrecy Act’s compliance provisions, financial institutions must file suspicious activity reports (SARs) with the Financial Crimes Enforcement Network (FinCEN) when transactions raise AML-related concerns. Timely filing SARs is a key aspect of AML compliance, and financial institutions must have policies and procedures in place that are designed to both: (i) identify suspicious transactions; and, (ii) ensure that SARs are generated and filed as a matter of course.
Financial institutions also have reporting obligations in the area of OFAC compliance. Under OFAC’s regulations, financial institutions must report all blocked and rejected transactions within 10 days. These reports must be filed with OFAC directly. Thus, filing a SAR with FinCEN does not satisfy a financial institution’s OFAC reporting obligations, even if the SAR covers a blocked or rejected transaction. Likewise, financial institutions must still file an SAR with FinCEN even if they have reported a relevant blocked or rejected transaction to OFAC.
3. Heightened Risks for OFAC Sanctions Violations and AML Violations
Due to the fact that OFAC compliance and AML compliance both necessarily involve evaluating third-party transactions, many factors present heightened risks in both areas. For example, all of the following can present additional challenges for financial institutions in the areas of OFAC and AML compliance:
- Transactions Involving Cryptocurrency and Other Digital Assets – The anonymous nature of cryptocurrency and other digital assets presents challenges for financial institutions when it comes to both OFAC and AML compliance. However, this is not an excuse for non-compliance, and financial institutions must take adequate steps to identify their customers—even if this means going above and beyond the steps they take when processing transactions involving fiat currency and other traditional assets.
- Transactions Involving Joint Ventures and Complex Corporate Structures – Parties in the U.S. and abroad use joint ventures and complex corporate structures to shield their identities and avoid scrutiny from federal authorities. When a party’s identity, affiliation, or corporate structure raises red flags, this may require further investigation for both OFAC and AML compliance purposes.
- Transactions Involving Opaque Business Deals, Parties, or Commercial Terms – When parties are less-than-forthcoming about transaction details that financial institutions normally do not have a difficult time collecting, this should raise red flags as well. In this scenario, financial institutions may also have an obligation to dig deeper in order to satisfy their OFAC compliance and AML compliance obligations.
But, here too, the overlap of OFAC and AML compliance is not absolute. Certain transactions involving domestic parties can present heightened risks in the area of AML compliance—while these transactions may not trigger any concerns from an OFAC compliance perspective. Conversely, proposed transactions involving foreign sanctioned parties can present significant OFAC compliance risks without implicating financial institutions’ AML compliance duties.
4. Blocking and Rejecting Transactions That Present OFAC and/or AML Risks
Under both OFAC and AML compliance duties, financial institutions must be prepared to block or reject transactions that they cannot clear and/or that present risks for money laundering. Even if a transaction is safe to execute from one perspective (i.e., if it does not involve any parties that are subject to OFAC sanctions), a financial institution must still block or reject the transaction if it presents concerns from another (i.e., if a domestic party presents AML compliance risks).
This means that an integrated approach to OFAC and AML compliance is key. If a financial institution’s AML department clears a transaction, the transaction must still go through OFAC clearance as well. If these two functions are siloed, this presents a significant risk that transactions will not receive the full scrutiny that is required.
5. Proactively Managing OFAC & AML Risks On an Ongoing Basis
One thing that OFAC and AML compliance completely share in common is that they require proactive management on an ongoing basis. Simply having OFAC and AML compliance programs isn’t enough. Financial institutions must work with their counsel to implement, assess, and reassess the efficacy of their OFAC and AML compliance programs, and they must be prepared to update their compliance programs as sanctions, regulations, and business needs change over time.
In this vein, voluntary self-disclosure is an ongoing concern as well. Apparent OFAC sanction violations and AML violations may both trigger the need for voluntary self-disclosure. Knowing when voluntary self-disclosure is required requires effective monitoring by individuals who understand when transactions present OFAC or AML compliance concerns.
OFAC & AML Violations: Facing Multiple Risks for Civil or Criminal Enforcement
Regarding both OFAC compliance and AML compliance, violations present multiple risks for civil or criminal enforcement. OFAC and FinCEN are just two of multiple federal agencies that have oversight of the banking and financial services industries. Depending on the circumstances involved, suspect transactions may trigger scrutiny from the U.S. Commodity Futures Trading Commission (CFTC), U.S. Securities and Exchange Commission (SEC), U.S. Department of Justice (DOJ), Internal Revenue Service Criminal Investigation (IRS CI), and various other federal agencies as well.
This scrutiny can lead to civil or criminal enforcement action under the BSA and multiple other federal statutes. While financial institutions can face civil or criminal fines, executives and other individuals can potentially face both fines and prison time. The DOJ has shown a willingness to prosecute individuals in cases involving suspicious transactions when warranted, particularly when an investigation uncovers evidence that individuals knowingly attempted to circumvent OFAC clearance or KYC requirements.
Avoiding OFAC & AML Violations in 2023: What Executives and In-House Lawyers Need to Know
Given the challenges involved in maintaining compliance—and the substantial risks of failing to maintain compliance—what do financial executives and in-house lawyers need to know in 2023? Here are some key insights:
- OFAC Compliance and AML Compliance Require Equal Focus – Financial institutions cannot sacrifice OFAC compliance for AML compliance, or vice versa. They require equal focus, attention, and resources.
- OFAC Compliance and AML Compliance Don’t Always Overlap – While OFAC compliance and AML compliance overlap in certain respects, there are more differences than there are similarities.
- A Systematic and Coordinated Approach to Compliance is Critical – Given the differences between OFAC compliance and AML compliance, a systematic and coordinated approach is critical for avoiding violations in one or both areas.
- Managing OFAC and AML Compliance is an Ongoing Process – Managing OFAC and AML compliance doesn’t end with developing a robust compliance program. Effective compliance management requires a proactive and informed approach on an ongoing basis.
- Managing OFAC and AML Compliance Requires a Skilled Team – Effective compliance management also requires a skilled team. To avoid compliance failures, financial institutions need both knowledgeable and highly-trained internal personnel as well as experienced outside OFAC and AML compliance counsel.
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Do you need to know more about what it takes to effectively manage OFAC and AML compliance in 2023 (or beyond)? If so, we invite you to get in touch. To speak with a senior OFAC and AML lawyer at The Criminal Defense Firm in confidence, please call 866-603-4540 or tell us how we can help online today.