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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].

Christine Twomey
Christine Twomey
2024-03-21
Just had my Divorce case settled 2 months ago after having a horrible experience with another firm. I couldn’t be happier with Claire Banks and Elizabeth Garvey with their outstanding professionalism in doing so with Spodek Law Group. Any time I needed questions answered they were always prompt in doing so with all my uncertainties after 30 yrs of marriage.I feel from the bottom of my heart you will NOT be disappointed with either one. Thanks a million.
Brendan huisman
Brendan huisman
2024-03-18
Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
Guerline Menard
Guerline Menard
2024-03-18
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
Keisha Parris
Keisha Parris
2024-03-15
Believe every single review here about Alex Z!! From our initial consultation, it was evident that Alex possessed a profound understanding of criminal law and a fierce dedication to his clients rights. Throughout the entirety of my case, Alex exhibited unparalleled professionalism and unwavering commitment. What sets Alex apart is not only his legal expertise but also his genuine compassion for his clients. He took the time to thoroughly explain my case, alleviating any concerns I had along the way. His exact words were “I’m not worried about it”. His unwavering support and guidance were invaluable throughout the entire process. I am immensely grateful for Alex's exceptional legal representation and wholeheartedly recommend his services to anyone in need of a skilled criminal defense attorney. Alex Z is not just a lawyer; he is a beacon of hope for those navigating the complexities of the legal system. If you find yourself in need of a dedicated and competent legal advocate, look no further than Alex Z.
Taïko Beauty
Taïko Beauty
2024-03-15
I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
Anthony Williams
Anthony Williams
2024-03-12
Hey, how you guys doing? Good afternoon my name is Anthony Williams I just want to give a great shout out to the team of. Spodek law group. It is such a honor to use them and to use their assistance through this whole case from start to finish. They did everything that they said they was gonna do and if it ever comes down to it, if I ever have to use them again, hands-down they will be the first law office at the top of my list, thank you guys so much. It was a pleasure having you guys by my side so if you guys ever need them, do not hesitate to pick up the phone and give them a call.
Loveth Okpedo
Loveth Okpedo
2024-03-12
Very professional, very transparent, over all a great experience
Bee L
Bee L
2024-02-28
Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
divesh patel
divesh patel
2024-02-24
I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

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”

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