Consequences of Being an OFAC Specially Designated National

Consequences of Being an OFAC Specially Designated National

Being designated as a Specially Designated National (SDN) by the Office of Foreign Assets Control (OFAC) can have severe consequences for both individuals and organizations. An SDN designation essentially cuts off the target from the U.S. financial system and freezes any assets under U.S. jurisdiction.

According to OFAC, “U.S. persons are generally prohibited from dealing with [SDNs]” [1]. This means that all U.S. citizens, permanent residents, companies, and entities are legally prohibited from conducting any business or transactions with SDNs. Failure to comply can result in hefty civil and criminal penalties.

Freezing of Assets

One of the most immediate effects of being named an SDN is that any assets held in the U.S., such as bank accounts, real estate, shares in U.S. companies, etc., will be frozen. This means the SDN will no longer have access to or be able to use those assets. According to OFAC, upon designation, an SDN’s assets are “blocked” [2].

In addition, U.S. persons, including financial institutions, are legally required to block or freeze any assets they hold that belong to an SDN. Failure to do so can result in civil penalties of up to $295,141 per violation [5]. Willful violations can lead to criminal fines of up to $1 million and imprisonment of up to 20 years [5].

For SDNs, having assets frozen indefinitely can have devastating personal and professional consequences. They lose access to potentially significant funds and equity that may be crucial for daily living or business operations.

Prohibitions on Transactions

In addition to freezing assets, being named an SDN also prohibits U.S. persons and companies from engaging in any transactions or dealings with an SDN. This includes:

• Trade deals
• Sales or purchases of goods, services, or technology
• Financial transactions
• Brokering services
• In-kind donations

U.S. companies must screen their vendors, partners, and customers against the SDN list to avoid inadvertent violations. If an SDN is identified, the U.S. company must immediately cease business with them.

For SDNs who rely on trade with U.S. companies or access to U.S. financial systems, being cut off can be catastrophic. It essentially locks them out of the world’s largest economy and financial hub.

Reputational Damage

Being named to OFAC’s SDN list also carries a huge reputational risk. The SDN designation signals that the U.S. government considers the individual or entity to be a threat to national security or involved in illegal activities like terrorism or human rights abuses.

This stigma can discourage other companies, even non-U.S. ones, from doing business with the SDN. Banks may refuse to handle funds connected to SDNs to avoid any potential risk. An SDN designation can essentially make someone a pariah in the global financial community.

Removal from the SDN List

Getting off the SDN list is challenging but not impossible. According to OFAC, “Persons may seek to be removed from the Specially Designated Nationals and Blocked Persons List” [3] by submitting a request for reconsideration.

The SDN must provide evidence countering OFAC’s basis for designation and demonstrate they no longer meet the criteria for being named an SDN. This may require proving that the SDN has cut ties with sanctioned governments, entities, or individuals, or ending engagement in activities like human rights abuses, corruption, or terrorism.

OFAC states that removal decisions take into account “U.S. foreign policy and national security concerns” [5]. So even if an SDN demonstrates changed behavior, geopolitical factors may still weigh against removal.

Navigating the removal process often requires extensive legal assistance from professionals well-versed in OFAC regulations. One option is retaining an OFAC SDN removal lawyer [4] who can petition for delisting and negotiate on the SDN’s behalf.

Practical Steps upon Designation

If designated as an SDN, quick action is required to mitigate the consequences:

• Consult legal counsel immediately about petitioning for removal and protecting assets.
• Inform all financial institutions, vendors, and partners of the designation. Ensure no further transactions occur.
• Notify company leadership and stakeholders about the designation.
• Halt any planned U.S. travel or activity subject to OFAC jurisdiction.
• Cooperate fully with OFAC to resolve any allegations and seek removal.

Checking the SDN List

The SDN list is frequently updated, so regular screening is essential. According to OFAC, “All individuals and entities that fall under U.S. jurisdiction should use OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List)” [5].

In addition to the main SDN list, OFAC maintains other sanctions lists that may have different prohibitions. For example, the Denied Persons List from the Department of Commerce [3].

Various free online tools like SanctionScanner [6] allow searching and screening against the SDN list. Using such tools to regularly screen customers, suppliers, partners, and transactions can help identify any SDN matches early.

Conclusion

Being designated an SDN by OFAC is no trivial matter. It essentially cuts off the target from the U.S. financial system and freezes assets. Doing business with U.S companies or individuals becomes illegal. Removal from the list is challenging and may require extensive legal help. Regular screening against the SDN list is essential to avoid inadvertent violations. If designated an SDN, immediate action is required to mitigate the consequences.

Being designated as an SDN has widespread implications beyond just freezing assets and cutting off transactions. Here are some additional consequences:

• Difficulty accessing global banking services – Many foreign banks, even non-US ones, may refuse to open accounts or process payments for SDNs to minimize regulatory risk. This can make routine banking and finance activities challenging.
• Travel restrictions – SDNs may be denied visas or entry to the US and even some allied countries who want to cooperate with US sanctions. This can severely limit business and personal travel.
• Reputational harm – The SDN label can harm personal and corporate brands and lead to loss of partners, customers, and contracts. Many companies and individuals may not want public association with SDNs.
• Legal costs – Petitioning for removal from the SDN list often requires extensive attorney fees and litigation costs that may total hundreds of thousands of dollars.
• Diversion of resources – Significant executive time and company resources may be consumed with managing the fallout from the designation rather than core business activities.
• Unwinding of deals – Existing deals, partnerships, and ventures with US companies or individuals may need to be unwound, often at significant expense.

While OFAC does not outright ban doing business with US entities, the prohibition on US persons transacting with SDNs makes it effectively impossible[1]. US contractors, partners, suppliers, vendors, customers, and investors must all cease engagement, disrupting business[2].

In addition, foreign entities that continue knowingly doing business with SDNs can face “secondary sanctions” from the US. This includes cutting off access to the US financial system, travel restrictions, and asset freezes[3][4].

While using cryptocurrencies like Bitcoin could potentially circumvent the banking system, transacting with SDNs still carries legal jeopardy and sanctions risk[5][6]. Overall, SDN designation is a modern form of economic warfare intended to isolate the target from the worldwide economy.

Given the gravity of the consequences, SDNs must take proactive steps to challenge the designation and seek removal. In addition to petitioning OFAC directly, filing lawsuits to be delisted may be an option, albeit costly and uncertain. Some argue the SDN process lacks sufficient due process protections for designees.

Financial institutions also carry a heavy compliance burden to frequently screen customers and transactions against the SDN list. Penalties for facilitating prohibited transactions can be severe. Advanced monitoring tools and restricted party screening is essential to avoid missteps.

The SDN list gives the US Treasury’s Office of Foreign Assets Control powerful global reach to advance national security and foreign policy goals. But designees argue it is prone to overreach, unfair targeting, and unintended harm to innocent parties.

References

1
https://ofac.treasury.gov/faqs/402
2
https://quizlet.com/546972636/ofac-flash-cards/
3
https://quizlet.com/321546715/office-of-foreign-assets-control-ofac-flash-cards/
4
https://www.jdsupra.com/legalnews/u-s-sanctions-laws-dangers-ahead-for-18252/
5
https://news.ycombinator.com/item?id=32386189[6] https://news.ycombinator.com/item?id=32585606 https://www.law360.com/articles/1351678/ofac-designations-come-under-fire-for-lack-of-due-process https://www.acamstoday.org/ofac-regulations-require-ongoing-monitoring/
https://www.dowjones.com/risk/products/ofac-name-screening/