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OFAC regulations restrict trade and economic transactions with sanctioned countries and parties. The purpose is to isolate them financially and economically to promote U.S. foreign policy objectives or national security interests. Let’s break down the key aspects of OFAC regulations.

Who Must Comply with OFAC Regulations?

OFAC regulations apply very broadly to “U.S. persons,” which includes^[1]:

• All U.S. citizens and permanent resident aliens, regardless of where they are located
• All individuals and entities within the United States, including banks and companies
• All U.S. incorporated entities and their foreign branches
• In some cases, foreign subsidiaries owned or controlled by U.S. companies

Therefore, both individuals and companies in the U.S. must comply with OFAC rules. U.S. parent companies are also responsible for ensuring their foreign subsidiaries comply.

OFAC Sanction Programs

OFAC administers over 30 active sanction programs. Some target specific countries, like Iran, Syria, North Korea, and Cuba. Others target terrorists, international narcotics traffickers, and weapons proliferators. There are also programs against targeted officials and oligarchs, like Russian and Venezuelan elites.

Some OFAC programs impose broad, comprehensive restrictions. For example, the Cuba embargo restricts most financial transactions, trade, and travel. Other programs only block transactions and freeze assets of specific individuals and entities.

Each OFAC sanctions program is outlined in Executive Orders issued by the President and implemented in OFAC regulations. The restrictions are tailored to foreign policy and national security goals^[2].

Key OFAC Restrictions

OFAC regulations prohibit U.S. persons from conducting unauthorized transactions or dealings with sanctioned individuals, entities, countries, and governments. Some key prohibitions include^[3]:

• Trade transactions like importing, exporting, buying, and selling goods, services, or technology
• Financial transactions like extending loans, making payments, and transferring funds
• Investment transactions like purchasing equity or debt instruments
• Facilitating transactions by third parties that would be prohibited for U.S. persons
• Approving, financing, or guaranteeing transactions by foreign subsidiaries that would be prohibited for U.S. companies

There are some exemptions and authorizations, but all transactions with OFAC targets require careful due diligence. U.S. companies should have OFAC compliance programs to screen customers, vendors, and transactions.

Penalties for OFAC Violations

Civil penalties for violating OFAC regulations can be up to $308,916 per violation. Criminal penalties for willful violations can include up to $1 million in corporate fines and up to 30 years imprisonment for individuals^[4].

To encourage compliance, OFAC offers substantially reduced penalties for voluntary self-disclosure of violations. OFAC may also issue warning letters instead of financial penalties for certain violations^[5].

Real-World Examples of OFAC Issues

It’s important for companies to understand OFAC requirements and risks. Here are some real-world examples of OFAC compliance challenges:

Blocked Payments

A U.S. company attempts an online funds transfer to a customer in a sanctioned country like Iran or Syria. The transaction is identified and blocked by the bank^[6]. The funds are frozen and require an OFAC license to release.

Rejected Transactions

A U.S. company tries to wire payment to a vendor. The vendor’s name matches an individual on OFAC’s Specially Designated Nationals (SDN) list. The bank rejects the payment to comply with OFAC^[6]. Extensive due diligence may be required to resolve.

Facilitation Risk

A non-U.S. subsidiary of a U.S. company engages in transactions with an OFAC sanctioned party. The U.S. parent company may be at risk for “facilitation” if it approved or financed the transactions.

Export Control Violations

A U.S. company exports goods or technology to a customer in a sanctioned country without the required OFAC and Commerce Department authorizations. This can lead to civil and criminal penalties.

Designation on OFAC Blacklists

In some sanctions programs, OFAC publishes lists of individuals, companies, vessels, and aircraft that are “blacklisted” from the U.S. financial system and economy:

• SDN List: Specially Designated Nationals are high-risk entities like terrorists, traffickers, and sanctioned officials.
• Entity List: Companies engaged in activities contrary to U.S. national security and foreign policy interests.
• NS-ISA List: Russian oligarchs and elites complicit in malign Kremlin activities.

Any property or interests of blacklisted parties in the U.S. or that come into the possession of U.S. persons are blocked. Dealing with listed parties can also lead to “secondary sanctions” penalties against the transacting foreign individual or entity.

Practical OFAC Compliance Tips

Here are some best practices for OFAC compliance programs:

• Know your customers (KYC) and business partners through enhanced due diligence
• Screen customers, vendors, and transactions against OFAC lists
• Filter transactions by location and cross-check parties involved
• Train staff regularly on OFAC requirements
• Adopt OFAC compliance policies and procedures
• Conduct periodic audits to identify program gaps
• Implement technology solutions to automate screening

Financial institutions and companies that ignore OFAC regulations face significant legal and regulatory exposure. Investing in an effective sanctions compliance program is essential.

Conclusion

OFAC regulations are complex but fundamentally aim to isolate sanctioned foreign countries, entities, and individuals from trade and finance. U.S. companies and their global operations must understand OFAC restrictions and implement robust compliance procedures.

Staying up-to-date on new OFAC sanctions and requirements is critical. With sound compliance practices, organizations can effectively navigate OFAC rules and avoid penalties.