Criminal Defense Lawyers

Holding or Rejecting Blocked Funds Transfers

When a bank or financial institution receives instructions to transfer funds that would violate U.S. sanctions laws, they have two options – block or reject the transaction. Both options have important legal implications that banks must consider carefully.

Blocking Funds Transfers

If a bank decides to block a funds transfer, they must freeze the funds and place them into a blocked account. For example, if a U.S. bank receives instructions to transfer funds to an entity sanctioned by the Office of Foreign Assets Control (OFAC), they must execute the payment order and place the funds into a blocked account^[1].

A blocked account is a segregated, interest-bearing account that holds the customer’s property until the sanctions target is removed from the blocked list, the sanctions program is lifted, or the customer obtains a license from OFAC authorizing release of the property^[3].

Funds may be blocked even if only one party to the transaction is subject to OFAC sanctions. For example, a bank may have to block a transfer between two non-sanctioned parties if the transaction involves an export to an OFAC sanctioned entity^[1].

Banks have flexibility in how they structure blocked accounts. Some open separate accounts for each blocked transaction, while others use omnibus accounts titled “Blocked [Country] Funds.” Either method is acceptable as long as there is an audit trail to unblock specific funds in the future^[1].

Banks must pay a commercially reasonable interest rate on blocked funds. OFAC does not mandate a specific rate but expects banks to treat blocked accounts similar to other interest-bearing accounts^[1].

Banks must keep detailed records of all blocked transactions for at least 5 years. When the blocking period ends, banks must be able to identify the owner and amount of funds in each blocked account^[3].

Reporting Requirements

Banks must file reports with OFAC within 10 business days of blocking any funds^[2]. Reports should include:

• A copy of the original transfer instructions
• The date and amount of the transaction
• Information about the parties involved
• The bank’s basis for blocking the funds

OFAC does not require annual reporting on blocked property. However, banks must be prepared to provide information about blocked accounts if requested^[2].

Unblocking Funds

Funds can only be unblocked and released with authorization from OFAC, typically through a specific or general license^[4]. When unblocking funds, banks should:

• Notify OFAC and request a release letter for the specific transaction
• Update their records to reflect the unblocked funds
• Release the principal and all accumulated interest to the owner

If sanctions are lifted against a country, OFAC may issue a general license authorizing banks to unblock funds from that jurisdiction. However, banks should always check for conditions or limitations attached to the general license^[4].

Rejecting Funds Transfers

If a bank decides to reject rather than block a transaction prohibited by sanctions, they must refuse to execute the payment order and notify the customer. For example, a bank may reject a funds transfer to an entity on OFAC’s Specially Designated Nationals (SDN) list^[5].

Rejecting a transaction does not require freezing or holding funds. The bank simply does not carry out the prohibited transfer. However, rejecting a transaction still triggers reporting obligations to OFAC^[2].

Reporting Requirements

As of July 2019, U.S. banks must report rejected funds transfers to OFAC within 10 business days^[4]. Prior to this, only blocked transactions had to be reported. Reports on rejected transactions should include:

• A copy of the original transfer instructions
• The date and amount of the proposed transaction
• Information about the parties involved
• The bank’s basis for rejecting the funds transfer

Banks must keep records of all rejected transactions for at least 5 years^[3]. These records should document how the bank determined the transaction would violate sanctions laws.

Liability Protection

Banks that block or reject transactions in good faith are protected from liability under the sanctions laws^[6]. However, banks may still face claims from customers related to rejected transfers. Careful recordkeeping can help demonstrate the bank acted reasonably under the regulations.

In some cases, a bank may obtain a letter from OFAC confirming that rejection was appropriate. While not required, an OFAC letter provides added legal protection for the bank.

Key Considerations

When faced with a prohibited transaction, banks must weigh several factors to choose between blocking or rejecting:

• Risk – Blocking may reduce legal risk, but requires holding funds indefinitely
• Cost – Managing blocked accounts creates compliance burdens
• Customer relations – Rejecting transfers may harm customer goodwill
• Timing – Blocking “locks in” the transaction until sanctions change

In general, blocking is safer from a legal perspective but operationally more complex. Rejecting transactions avoids holding funds but may increase liability risk. Banks should develop clear policies and procedures to guide these decisions.

Training frontline staff is also critical. Employees who handle wire transfers need to quickly identify transactions that implicate OFAC rules. Specialized software tools can also help screen transactions for sanctions issues.

Mitigating Risk

While blocking or rejecting funds transfers can prevent sanctions violations, it also introduces risk into banking operations. Banks can take several steps to mitigate risk:

• Conduct sanctions training for all relevant employees
• Implement AML monitoring systems attuned to OFAC issues
• Perform periodic audits of blocking/rejection decisions
• Develop detailed recordkeeping and reporting procedures
• Consult OFAC hotline with questions about specific transactions
• Issue clear policies and procedures for handling prohibited transfers

Banks should also inform customers upfront about their sanctions compliance program. Account agreements can specify that the bank may block or reject transfers to comply with OFAC rules. This helps set expectations for customers.

If a transaction is blocked or rejected, the bank should explain the specific reason to affected customers. Transparency helps maintain trust and goodwill, even when the bank cannot execute a transfer.

Looking Ahead

Economic sanctions are a powerful foreign policy tool, but also create complex compliance challenges for banks. Blocking and rejecting transactions can lead to unintended consequences if not handled appropriately.

As sanctions programs expand in scope, regulators are increasingly focused on enforcement. Banks must ensure their policies and procedures align with OFAC’s expectations.

New technologies like artificial intelligence and blockchain may help banks screen transactions and identify sanctions risks. However, human oversight is still critical to make nuanced blocking and rejection decisions.

By combining skilled personnel, robust processes, and smart technology, banks can effectively navigate the tricky terrain of sanctions compliance.

References

[1] Office of Foreign Assets Control, “Blocking and Rejecting Transactions”

[2] Office of Foreign Assets Control, “Filing Reports with OFAC”

[3] Federal Financial Institutions Examination Council, “BSA/AML Manual: Office of Foreign Assets Control”

[4] Arnold & Porter, “OFAC Now Requires U.S. Persons to Report Any Transaction They Reject Due to Sanctions”

[5] Electronic Code of Federal Regulations, “31 CFR Part 560: Iranian Transactions and Sanctions Regulations”

[6] Federal Trade Commission, “Sample Letter for Disputing Credit and Debit Card Charges”