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Clearing OFAC-Compliant USD Payments

Clearing OFAC-Compliant USD Payments

Introduction

Hey there! When companies send or receive payments in U.S. dollars (USD), we gotta make sure we’re following the rules set by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). OFAC enforces a bunch of economic sanctions against certain foreign countries, companies, and people. If we don’t comply with OFAC’s requirements, we could end up with some hefty penalties. No bueno.In this article, I’ll give an overview of what we need to do to keep our USD payments OFAC-compliant. I’ll cover stuff like screening transactions, dealing with potential matches, getting special licenses, recordkeeping, and more. Whether you’re a bank processing USD wires or a company paying vendors overseas, this guide will help make sure your USD payments clear without issues. Let’s dive in!

OFAC Sanctions Programs

First, a quick primer on OFAC sanctions. OFAC enforces over 30 different economic sanctions programs targeting countries like Iran, North Korea, Syria, and Russia. They also sanction thousands of companies and individuals linked to illegal stuff like terrorism, weapons trafficking, and drug smuggling.U.S. companies are generally prohibited from doing business with these sanctioned parties without authorization from OFAC. Each sanctions program is unique, but many include:

• Freezing assets
• Banning financial transactions
• Limiting trade and imports/exports
• Restricting travel

The key is that OFAC rules apply very widely to any USD transaction processed through the U.S. financial system. It doesn’t matter what currency is used or where the money is coming from/going. Even foreign banks can get into hot water if they process USD payments that violate sanctions.

Conducting OFAC Screening

The most important part of OFAC compliance is screening to detect transactions with sanctioned parties. We need to screen all parties involved in a payment, including the payer, recipient, banks, and counterparties. Data points screened can include names, addresses, dates of birth, government IDs, bank account numbers, etc.OFAC publishes several lists we should check during screening:

• SDN List – Individuals and companies subject to asset blocking/freezing
• SSI List – Entities subject to sectoral sanctions
• FSE List – Sanctions evaders
• Other Restricted Lists – Parties subject to other restrictions

Specialized software compares transactions against these lists to flag potential matches. But false positives are common, so we gotta investigate any alerts carefully.

Handling Potential OFAC Matches

When screening flags a potential OFAC match, here are the next steps:

• Research the alert details and gather more info if needed
• Figure out if it’s a blocked party or subject to other restrictions
• Review all the specifics to confirm if it’s a valid match or false hit
• Check OFAC guidance if we need help interpreting the status
• Document reasons if dismissing as a false positive
• If valid, block/reject the transaction and report to OFAC within 10 days

For valid matches, we have to block or reject the transaction, freeze any assets, and submit a report to OFAC. We may need a special license from OFAC to unblock funds or allow the payment to proceed.

Getting OFAC Licenses

In some cases, OFAC may grant a special license to authorize transactions that would normally be prohibited:

• Paying legal fees or medical costs for someone in a sanctioned country
• Processing payments related to agricultural/medical sales
• Unblocking funds to pay fees or transfer assets
• Official business travel to sanctioned destinations

The application process requires submitting detailed info about the proposed transaction. OFAC reviews each request individually, so decisions can take weeks or longer. Any licenses will include strict reporting rules.

Recordkeeping Requirements

We have to keep lots of records to show OFAC compliance in case of an audit or investigation. Required records include:

• Screening results
• Documentation of potential OFAC matches
• Details of blocked transactions and OFAC reporting
• License requests, communications, and issued licenses
• OFAC compliance policies, procedures, training records, audits

Records must be kept for at least 5 years and provided to regulators upon request. Automated systems help manage all this data efficiently.

OFAC Compliance Program

In addition to screening and recordkeeping, companies need a risk-based OFAC compliance program covering:

• Management commitment and oversight
• Risk assessment of exposure
• Internal controls like policies, training, and testing
• Regular auditing to identify gaps

The program should fit the company’s risk profile and be updated as needed. Senior management support is key.

Penalties for Violations

If we don’t follow OFAC rules, it can lead to huge fines up to $311,562 per violation or twice the transaction value. Criminal penalties like multi-million dollar fines and jail time can also apply for willful violations. Recent enforcements have resulted in fines from the tens of thousands up to over $1 billion. Yikes!In addition to the financial hit, OFAC violations cause serious reputation damage and could limit access to the U.S. financial system. Some foreign banks have paid billions in fines due to OFAC compliance failures. Not cool.

Reducing OFAC Risk

Here are some tips to lower OFAC risk:

• Automate screening integrated with payments and customer data
• Conduct risk-based due diligence on new customers
• Provide regular OFAC compliance training
• Perform frequent audits and testing to find gaps
• Review alerts quickly and investigate thoroughly
• Maintain detailed records of screening, licenses, etc.
• Monitor for OFAC updates and update restrictions promptly
• Check OFAC guidance and submit disclosures as needed

Given the complexity, many companies work with consultants and tech vendors to support their sanctions programs. Experienced advisors can help assess risk, develop policies, provide training, choose screening tools, assist with licenses, conduct audits, and interpret regulations. The right technology is key for screening, reporting, and recordkeeping.

The Bottom Line

Navigating OFAC rules takes knowledge and vigilance, but the risks of non-compliance are too high to ignore. By screening transactions, investigating alerts, keeping records, and seeking help when needed, companies can confidently clear USD payments while avoiding prohibited dealings.While perfect compliance is impossible, following OFAC best practices shows a strong commitment and reduces enforcement risk. With the right focus and expertise, OFAC compliance can become a manageable part of everyday business. Staying on top of new requirements and leveraging the latest technology helps manage the challenges.When compliance breakdowns occur, companies should conduct root cause analysis, assess the impact, report to OFAC promptly, and take corrective actions. Disclosing issues and cooperating with OFAC can significantly reduce penalties.With rising geopolitical tensions, OFAC sanctions will likely continue expanding. But with the right strategies and solutions, the future of OFAC compliance looks manageable.