The Office of Foreign Assets Control (OFAC) regulates cross-border financial transactions involving U.S. parties and intermediaries. In doing so, it administers several sanctions programs that either restrict or prohibit U.S. parties’ involvement in transactions involving specified foreign individuals and entities.
For U.S. parties and intermediaries, violating OFAC sanctions can have severe consequences. OFAC has the administrative authority to impose civil monetary penalties (CMP) in accordance with its Economic Sanctions Enforcement Guidelines (the “Guidelines”). In 2023 alone, OFAC has imposed more than $566 million in CMP due to apparent sanctions violations—with aggregate penalties ranging from $31,000 to $508.6 million.
To avoid OFAC enforcement action, U.S. parties and intermediaries must take a proactive approach to OFAC compliance. Among other things, this means giving due consideration to OFAC clearance. By clearing parties, assets, and transactions before conducting business or facilitating a transfer, U.S. parties and intermediaries can remain in compliance and avoid the risk of facing substantial CMP.
Conducting OFAC Clearance
Once a U.S. party or intermediary violates an OFAC sanction, there is no going back. While transactions can (and often must) be unwound, sanctions violations cannot be undone. As a result, a proactive approach to OFAC clearance is critical.
As with many other aspects of compliance, OFAC clearance is a multi-step process. However, the specific steps that are necessary in any particular case will depend on the parties and assets involved in a proposed transaction—along with various other factors. With this in mind, depending on the details of a proposed transaction, conducting OFAC clearance may involve one or more of the following:
1. Identifying the Parties Involved in the Transaction
The first step in conducting OFAC clearance is typically to identify the parties involved in the transaction. This information can then be used to determine if any of the parties are subject to OFAC sanctions, as discussed in greater detail below. Identifying the parties to a transaction can be necessary for Bank Secrecy Act (BSA) compliance—including “know your customer” or “KYC” compliance—and various other aspects of federal compliance as well.
2. Identifying the Indirect Beneficiaries of the Transaction
Along with identifying the parties to a transaction, it will also be necessary for intermediaries (i.e., banks and other financial institutions) to identify the indirect beneficiaries of a transaction in some cases. In some cases, sanctioned parties may attempt to funnel transactions through subsidiaries, joint ventures, and other parties in order to avoid scrutiny from federal regulators including OFAC. Parties and intermediaries in the United States have a duty to address this risk when conducting OFAC clearance.
3. Identifying the Assets Involved in the Transaction
In addition to dealing with sanctioned parties, U.S. parties and intermediaries can also find themselves dealing with blocked assets in some cases. If OFAC has blocked the assets that are the subject of a proposed transaction, transferring or taking possession of the assets, even briefly, can violate OFAC sanctions and trigger enforcement action. While sanctioned parties’ assets are generally blocked, assets can be blocked in other circumstances as well.
4. Assessing the Applicability of OFAC Sanctions
After identifying the parties, indirect beneficiaries, and assets involved in a proposed transaction, the next step is generally to assess the applicability of OFAC sanctions. OFAC administers several sanctions programs, and it regularly updates its lists of sanctioned individuals, entities, sectors, and nations. While many financial institutions rely on sanctions screening software, this isn’t necessarily enough on its own. OFAC clearance requires a comprehensive approach, and this means going above and beyond automated screening in many cases.
5. Identifying an Applicable OFAC General License
If a party or its assets are blocked, then the next step in the OFAC clearance process is typically to determine whether any of OFAC’s general licenses apply. General licenses allow U.S. parties and intermediaries to conduct transactions that would otherwise be barred under OFAC sanctions. If a proposed transaction is authorized under a general license, then no further clearance action may be necessary.
6. Applying for a Specific License from OFAC
If a party or its assets are blocked and no general licenses apply, then the OFAC clearance process may involve seeking a specific license from OFAC. Specific licenses are transaction-specific and allow proposed transactions under the terms and conditions authorized in the license. Since applying for a specific license is itself a complex and multi-step process, U.S. parties that need to obtain a specific license will want to work with their OFAC clearance counsel to begin the process immediately.
7. Filing an Interpretive Guidance Request with OFAC
As an alternative to applying for a specific license, U.S. parties can file an interpretive guidance request with OFAC in some cases. This approach may be appropriate if a transaction brushes up against an OFAC sanction but does not definitively appear to be barred. Obtaining interpretive guidance that approves of a transaction serves as a safety net for both the parties involved in a transaction and the intermediary that facilitates it.
Understanding the Risks of Failing to Conduct OFAC Clearance
To understand the importance of conducting effective OFAC clearance, we can take a look at the consequences of violating OFAC sanctions. These consequences fall into two broad categories:
Civil Monetary Penalties (CMP) in OFAC Enforcement Proceedings
As discussed above, OFAC has the administrative authority to impose CMP for sanctions violations. Under the Economic Sanctions Enforcement Guidelines, the CMP imposed for violations depend on several factors, including (but not limited to):
- Whether the violation is considered “egregious” or “non-egregious”
- Whether the violation was an isolated or recurring event
- Whether the party voluntarily self-disclosed the violation to OFAC
- Whether any other mitigating factors apply (as identified in the Guidelines)
- Whether any aggravating factors apply (as also identified in the Guidelines)
Since the civil monetary penalties for failed OFAC clearance apply on a per-violation basis, they can quickly climb into the millions—if not tens of millions or hundreds of millions—of dollars. In many cases, even when parties and intermediaries have settled with OFAC in order to avoid prosecution, they have settled for the full base penalty amount.
Criminal Prosecution for Statutory Offenses
Not only can OFAC clearance failures trigger CMP, but they can also trigger criminal prosecution in some cases. Several applicable federal statutes, including the Bank Secrecy Act, impose criminal penalties for willful and intentional violations. Ignorance of the law or willful ignorance of a party’s sanctioned status is not a defense to criminal culpability—to the contrary, it can be enough to establish “willfulness” for federal criminal prosecutorial purposes. Thus, once again, a proactive approach is key, and both parties and intermediaries must devote adequate resources to OFAC clearance in order to avoid allegations of criminal impropriety.
What if a Transaction Cannot Be Cleared?
Whether through the non-involvement of sanctioned parties, relying on a general license, obtaining a specific license, or other means, it will be possible to clear transactions in many cases. But, what if a transaction cannot be cleared?
In some cases, clearance won’t be possible—at least not right away. A proposed transaction will involve a sanctioned party and blocked assets, and there will be no way of moving the transaction forward without running afoul of an OFAC sanctions program.
When this is the case, clearing a transaction may involve working with the sanctioned party to release its sanctions or obtain the release of blocked assets. There are various grounds for eliminating OFAC sanctions and obtaining the release of blocked assets—with the specific grounds available in any particular case depending on the circumstances involved.
For example, one of OFAC’s most well-known sanctions programs is the Specially Designated Nationals List (the “SDN List”). The grounds for seeking a party’s removal from the SDN List (and the unblocking of its assets) include:
- Insufficient basis for inclusion on the SDN List (including mistaken identity)
- The basis for inclusion no longer applies
- The SDN can take remedial steps to negate the basis for inclusion
- Sale or divestment of the entity or assets subject to sanctions
- Good behavior warranting removal from the list or death of a sanctioned individual warranting an entity’s removal
If it is possible to get a party’s sanctions lifted and/or get a party’s assets unblocked, then this may serve not only immediate OFAC clearance purposes, but it may serve to facilitate future business as well.
What if You Didn’t Conduct Adequate or Effective OFAC Clearance?
Now, what if it’s already too late? What if your company or institution failed to conduct effective OFAC clearance and executed a transaction involving a sanctioned party or blocked assets? In this scenario, an immediate response is required. Not only is it necessary to address the national security and other relevant implications of the transaction, but it may also be necessary to voluntarily self-disclose the violation to OFAC in order to mitigate the risks involved.
Contact the OFAC Clearance Lawyers at The Criminal Defense Firm
If you need to know more about OFAC clearance (or the consequences of failing to conduct OFAC clearance), we encourage you to contact us promptly. Call 866-603-4540 or send us a message online to speak with one of our senior OFAC clearance lawyers in confidence.