Navigating Restrictions on Transactions Involving OFAC Blocked Assets

The U.S. Treasury Department's Office of Foreign Assets Control (OFAC) administers and enforces economic sanctions programs against targeted foreign countries, regimes, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under the legal authority of presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under U.S. jurisdiction. OFAC publishes a list known as the Specially Designated Nationals (SDN) list, which includes individuals, groups, and entities subject to OFAC sanctions programs. Their assets are considered blocked, and U.S. persons are generally prohibited from dealing with them, absent authorization from OFAC. Comprehensive sanctions programs involve blocking targets’ assets and restricting trade, while more limited programs focus on import bans and other restrictions.

Key Restrictions and Prohibitions

Transactions involving OFAC blocked assets are subject to the following key prohibitions and restrictions:

• Blocked assets: OFAC regulations block all property and interests in property in which an SDN has an interest. This prohibits transfers or dealings of any kind with regard to the blocked property.
• Transactions with SDNs: U.S. persons are generally prohibited from conducting transactions that involve an SDN, either directly or indirectly, absent authorization from OFAC.
• Facilitation: U.S. persons may not approve, finance, facilitate, or guarantee any transaction by a foreign person where the transaction would be prohibited if performed by a U.S. person or within the United States.
• Information/services: The provision of funds, goods, or services to or for the benefit an SDN is prohibited without authorization.

Violations may result in civil penalties of over $300,000 per violation, criminal fines up to $1 million, and imprisonment up to 20 years.

Ownership and Control Considerations

OFAC’s 50 Percent Rule provides that entities owned 50 percent or more in the aggregate, directly or indirectly, by one or more blocked persons are considered blocked. However, OFAC cautions that its sanctions may still apply in other ownership situations:

• Minority ownership: OFAC urges caution when blocked persons have significant minority ownership interests in an entity or exert control through means other than majority ownership. Such entities could become subject to future OFAC designations or enforcement actions.
• Control without ownership: OFAC prohibitions can apply even if a blocked person controls but does not own 50 percent or more of an entity. U.S. persons should avoid transactions where a blocked person represents or acts on behalf of a non-blocked entity.

Conducting Due Diligence

Before determining an OFAC match is valid and blocking a transaction, OFAC recommends taking the following due diligence steps:

1. Verify the match is against OFAC's SDN list or other sanctions lists, not a similar name.
2. Check for any available OFAC guidance or FAQs regarding the potential match.
3. Contact OFAC with details to confirm if it is a valid match.

Unless there is an exact match or other clear indication the party is an SDN, transactions should not be blocked without discussing with OFAC first. This helps avoid false positives and unintended impacts on innocent parties.

Licenses and Exemptions

OFAC may issue general or specific licenses authorizing transactions with SDNs in certain scenarios. Common examples include:

• Legal services: Payments for certain approved legal services involving SDNs may be authorized under an OFAC general license.
• Personal communications: OFAC authorizes donative remittances to close relatives who are SDNs under certain conditions.
• Official business: Transactions involving SDNs may be allowed if only on behalf of the U.S. government.

In addition, OFAC sanctions contain exemptions, such as for transactions incident to internet communications or mail. U.S. persons should carefully review the OFAC sanctions programs most relevant to their business to understand applicable exemptions and general or specific licenses.

Actions when Transactions Involve Blocked Assets

If transactions involve blocked assets, U.S. persons should take the following steps:

1. 1. Immediately block or reject the transaction to comply with OFAC’s prohibitions.
   2. Freeze the funds and place them into an interest-bearing account. The blocked funds can only have OFAC-authorized debits made from the account.
   3. Report the blocking to OFAC within 10 business days, as required under OFAC regulations.
   4. Retain records of the blocked transaction for at least 5 years.
   5. Consult with OFAC on next steps regarding the disposition of the blocked funds.

For transactions that would be prohibited but do not contain blockable assets, the transaction should simply be rejected and not processed. However, OFAC now requires the rejection of such transactions to also be reported within 10 business days. Careful screening and due diligence is necessary to avoid false positives that could unintentionally impact innocent parties. OFAC reporting and recordkeeping supports compliance efforts and provides information to obtain licenses or other authorizations from OFAC when warranted.