Root Causes of OFAC Sanctions Compliance Program Breakdowns or Deficiencies Based on Assessment of Prior OFAC Administrative Actions
Since its publication of the Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, App. A (the “Guidelines”), OFAC has finalized numerous public enforcement actions in which it identified deficiencies or weaknesses within the subject person’s SCP. These items, which are provided in a non-exhaustive list below, are provided to alert persons subject to U.S. jurisdiction, including entities that conduct business in or with the United States, U.S. persons, or U.S.-origin goods or services, about several specific root causes associated with apparent violations of the regulations it administers in order to assist them in designing, updating, and amending their respective SCP.
I. Lack of a Formal OFAC SCP
OFAC regulations do not require a formal SCP; however, OFAC encourages organizations subject to U.S. jurisdiction (including but not limited to those entities that conduct business in, with, or through the United States or involving U.S.-origin goods, services, or technology), and particularly those that engage in international trade or transactions or possess any clients or counter-parties located outside of the United States, to adopt a formal SCP. OFAC has finalized numerous civil monetary penalties since publicizing the Guidelines in which the subject person’s lack of an SCP was one of the root causes of the sanctions violations identified during the course of the investigation. In addition, OFAC frequently identified this element as an aggravating factor in its analysis of the General Factors associated with such administrative actions.
II. Misinterpreting, or Failing to Understand the Applicability of, OFAC’s Regulations
Numerous organizations have committed sanctions violations by misinterpreting OFAC’s regulations, particularly in instances in which the subject person determined the transaction, dealing, or activity at issue was either not prohibited or did not apply to their organization or operations. For example, several organizations have failed to appreciate or consider (or, in some instances, actively disregarded) the fact that OFAC sanctions applied to their organization based on their status as a U.S. person, a U.S.-owned or controlled subsidiary (in the Cuba and Iran programs), or dealings in or with U.S. persons, the U.S. financial system, or U.S.-origin goods and technology.
With respect to this specific root cause, OFAC’s administrative actions have typically identified additional aggravating factors, such as reckless conduct, the presence of numerous warning signs that the activity at issue was likely prohibited, awareness by the organization’s management of the conduct at issue, and the size and sophistication of the subject person.
III. Facilitating Transactions by Non-U.S. Persons (Including Through or By Overseas Subsidiaries or Affiliates)
Multiple organizations subject to U.S. jurisdiction—specifically those with foreign-based operations and subsidiaries located outside of the United States—have engaged in transactions or activity that violated OFAC’s regulations by referring business opportunities to, approving or signing off on transactions conducted by, or otherwise facilitating dealings between their organization’s non-U.S. locations and OFAC-sanctioned countries, regions, or persons. In many instances, the root cause of these violations stems from a misinterpretation or misunderstanding of OFAC’s regulations. Companies and corporations with integrated operations, particularly those involving or requiring participation by their U.S.-based headquarters, locations, or personnel, should ensure any activities they engage in (i.e., approvals, contracts, procurement, etc.) are compliant with OFAC’s regulations.
IV. Exporting or Re-exporting U.S.-origin Goods, Technology, or Services to OFAC- Sanctioned Persons or Countries
Non-U.S. persons have repeatedly purchased U.S.-origin goods with the specific intent of re- exporting, transferring, or selling the items to a person, country, or region subject to OFAC sanctions. In several instances, this activity occurred despite warning signs that U.S. economic sanctions laws prohibited the activity, including contractual language expressly prohibiting any such dealings. OFAC’s public enforcement actions in this area have generally been focused on companies or corporations that are large or sophisticated, engaged in a pattern or practice that lasted multiple years, ignored or failed to respond to numerous warning signs, utilized non- routine business practices, and—in several instances—concealed their activity in a willful or reckless manner.
V. Utilizing the U.S. Financial System, or Processing Payments to or through U.S. Financial Institutions, for Commercial Transactions Involving OFAC-Sanctioned Persons or Countries
Many non-U.S. persons have engaged in violations of OFAC’s regulations by processing financial transactions (almost all of which have been denominated in U.S. Dollars) to or through U.S. financial institutions that pertain to commercial activity involving an OFAC-sanctioned country, region, or person. Although no organizations subject to U.S. jurisdiction may be involved in the underlying transaction—such as the shipment of goods from a third-country to an OFAC-sanctioned country—the inclusion of a U.S. financial institution in any payments associated with these transactions often results in a prohibited activity (e.g., the exportation or re- exportation of services from the United States to a comprehensively sanctioned country, or dealing in blocked property in the United States). OFAC has generally focused its enforcement investigations on persons who have engaged in willful or reckless conduct, attempted to conceal their activity (e.g., by stripping or manipulating payment messages, or making false representations to their non-U.S. or U.S. financial institution), engaged in a pattern or practice of conduct for several months or years, ignored or failed to consider numerous warning signs that the conduct was prohibited, involved actual knowledge or involvement by the organization’s management, caused significant harm to U.S. sanctions program objectives, and were large or sophisticated organizations.