Blocking or Rejecting Prohibited OFAC Money Transfers

Blocking or Rejecting Prohibited OFAC Money Transfers

Dealing with prohibited money transfers can be tricky business for banks and financial institutions. The Office of Foreign Assets Control (OFAC) oversees U.S. economic and trade sanctions programs, and violating their rules can lead to serious penalties

When a bank or financial institution identifies a potential OFAC violation, they need to act quickly to block or reject the transaction. But what does this actually entail, and what are the implications?

What is OFAC?

OFAC is part of the U.S. Department of the Treasury and enforces economic and trade sanctions based on U.S. foreign policy and national security goals[1]. Their mission is to prevent sanctioned countries, entities, and individuals from accessing the U.S. financial system.

OFAC maintains a list of Specially Designated Nationals (SDNs), who are individuals and companies owned or controlled by targeted countries. They also maintain sanctions lists for various programs targeting countries like Iran, North Korea, Syria, and Russia[2].

U.S. persons and companies are prohibited from dealing with SDNs or blocked entities. This means no trade, financial transactions, or other dealings[3].

What is a Blocked Transaction?

When a transaction involves an SDN or blocked party, OFAC regulations require it to be “blocked”[4]. This means:

• The funds are frozen and placed into a blocked account
• No transfers or dealings can occur with the funds
• The account holder cannot access the funds

Blocking imposes an immediate prohibition on the transaction[5]. The purpose is to isolate the funds and prevent them from moving through the U.S. financial system.

When to Block Transactions

Financial institutions are required to block transactions when[6]:

• The sender, recipient, or other party is an SDN
• The transaction involves a blocked country like Iran or Syria
• The transaction violates a specific OFAC sanctions program

Screening software will usually flag potential OFAC matches. But it’s up to the financial institution to verify valid matches through due diligence[5].

If the match is valid, the funds must be blocked immediately to comply with OFAC rules. The account holder is also notified about why the funds were blocked.

Blocking Mechanics

To block a transaction, the financial institution typically[6]:

• Freezes the funds and prevents further transfers
• Places the funds into a blocked, interest-bearing account
• Notifies relevant parties of the blocked transaction

The blocked funds cannot be debited or transferred without authorization from OFAC. However, banks can charge normal service fees provided they follow OFAC guidance[1].

When to Reject Transactions

Financial institutions can also choose to reject or refuse prohibited transactions. This may occur when[4]:

• The institution identifies a potential OFAC match before processing
• The funds have not yet entered the U.S. financial system
• The institution wishes to avoid the blocking process

For example, a bank may screen an incoming wire and identify an OFAC match against the originator. Instead of blocking the funds, the bank simply rejects and returns the wire.

Rejecting avoids the need to block, freeze, and account for the funds. But the risk is that rejection may tip off sanctioned parties and prevent identification.

Penalties for Non-Compliance

Financial institutions face serious penalties if they fail to block or reject prohibited OFAC transactions:

• Civil monetary penalties up to $295,141 per violation
• Criminal fines up to $1 million and 20 years imprisonment
• Reputational damage and loss of investor confidence

Recent major cases include:

• Standard Chartered paid $967 million for sanctions violations
• BNP Paribas paid $8.9 billion for transactions with Sudan, Iran, and Cuba

Given these severe penalties, financial institutions must have effective compliance programs and procedures for identifying and handling prohibited transactions.

Unblocking Authorized Transactions

In some cases, blocked transactions may eventually be authorized by OFAC:

• Mistaken identity cases where the match was invalid[4]
• Transactions exempt under OFAC regulations
• General licenses issued by OFAC for certain categories

If OFAC authorizes the release of blocked funds, financial institutions follow specified procedures for unblocking. This may include releasing funds to the original account holder or following alternate payment instructions[4].

Managing Risks

Blocking or rejecting prohibited transactions is a complex process. Financial institutions can manage the risks by:

• Implementing robust compliance programs
• Screening customers and transactions against OFAC lists
• Providing OFAC training to employees
• Following defined procedures for escalating matches
• Documenting the blocking process and due diligence
• Seeking guidance from OFAC on questionable matches

Proactive measures like these can help institutions avoid penalties and reputational damage when prohibited transactions inevitably arise.

The Bottom Line

Blocking and rejecting prohibited OFAC transactions is mandatory for financial institutions. Implementing strong compliance programs, screening processes, and employee training can help manage the complexities and risks.

While blocking has serious implications for account holders, the penalties for non-compliance are severe. Financial institutions must be vigilant to protect the integrity of the U.S. financial system.

References

[1] https://ofac.treasury.gov/faqs/topic/1601
[2] https://ofac.treasury.gov/faqs/topic/1501
[3] https://ofac.treasury.gov/faqs/9
[4] https://ofac.treasury.gov/faqs/all-faqs
[5] https://ofac.treasury.gov/faqs
[6] https://ofac.treasury.gov/faqs/32
https://www.jdsupra.com/legalnews/ofac-announces-two-enforcement-actions-87552/
https://www.reuters.com/article/us-standardchartered-settlement/standard-chartered-reaches-967-million-u-s-settlement-over-iran-sanctions-idUSKCN0VP29B
https://www.justice.gov/opa/pr/bnp-paribas-agrees-plead-guilty-and-pay-89-billion-illegally-processing-financial
https://ofac.treasury.gov/resource-center/sanctions-lists-and-licenses/licenses

Beyond licenses, financial institutions can also seek guidance directly from OFAC on handling prohibited transactions. OFAC offers a hotline and email for submitting specific case inquiries[1].

Some common questions OFAC can help clarify include[2]:

• Whether a potential match is a valid SDN or blocked party
• What evidence is required for due diligence
• If a transaction qualifies under an exemption
• What additional details are needed for an OFAC license application

Seeking OFAC guidance can help institutions make informed decisions and avoid missteps. However, it does not replace the need for strong internal controls.

Financial institutions are still responsible for having effective compliance programs. Relying solely on OFAC for case-by-case guidance is considered an unacceptable risk.

In terms of process, OFAC aims to provide substantive responses to inquiries within 2 weeks. But complex cases can take 45 days or longer[2].

Before reaching out to OFAC, institutions should conduct thorough internal reviews first. The more due diligence provided upfront, the quicker OFAC can assess and provide useful guidance.

Training Employees on OFAC Requirements

Another critical part of managing OFAC risk is training employees. At a minimum, training should cover[3]:

• OFAC regulations and prohibited transactions
• Red flags for identifying potential OFAC issues
• The institution’s internal policies and procedures
• How to escalate potential OFAC matches
• Consequences of non-compliance

Employees should receive training at onboarding. Refresher courses are also recommended annually. More frequent training may be warranted for higher risk groups.

Training is crucial for frontline staff in areas like wire transfers, trade finance, and customer onboarding. But OFAC compliance is an institution-wide responsibility.

Having robust training protocols strengthens an institution’s risk posture and OFAC defenses.

References

[1] https://ofac.treasury.gov/contact
[2] https://ofac.treasury.gov/faqs/all-faqs
[3] https://ofac.treasury.gov/compliance