Summary of OFAC sanctions
Until FACTA comes in force, the Office of Foreign Assets Control (“OFAC“) remains the singularly most important agency in the U.S. in respect of financial crime for multinational and foreign companies and yet surprisingly, the OFAC regime appears to be relatively ignored from a compliance perspective.
OFAC yields enormous power and influence in global financial markets and over the activities of multinational and foreign corporations.
What does OFAC do?
OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, drug traffickers, traffickers of weapons of mass destruction, and other threats to U.S. national security, foreign policy or the economy of the U.S.
It has jurisdiction over financial transactions that flow through the U.S. financial system and exercises that jurisdiction to impose controls on financial and other transactions and freeze assets. Most financial transactions, wherever situated, use the U.S. financial system by virtue of the correspondent banking regime. OFAC’s authority is derived from the exercise of the President’s national emergency powers, as well as by legislation.
By virtue of the nature of international banking, international M&A deals and any form of global finance likely invoke OFAC’s regulations.
In 2013, OFAC collected US$137 million in fines against only 27 entities including several foreign companies in Italy, Switzerland and the U.K.
Does it apply to my entity?
OFAC regulations apply to any person subject to the jurisdiction of the U.S. (a “U.S. Person“) and those persons include:
- U.S. citizens and residents wherever situated
- Anyone physically in the U.S.
- Any corporation, partnership, association or any other organization incorporated in the U.S.
- Any corporation, partnership, association or other organization, regardless of where incorporated or doing business, that is owned or controlled by any of the three classes of U.S. Persons above.
The sanctions programs
There are 20 different sanctions programs administered by OFAC and no two are similar, although they generally involve cutting off sanctions targets’ access to the U.S. financial system by prohibiting transactions in certain property or interests in property within the U.S. or involving U.S. Persons and/or requireing U.S. Persons to block the property of sanctions persons who are list on OFAC’s list of Specially Designated Nations and Blocked Persons List (“SDNL“) and entities that are 50% owned, directly or indirectly by such persons.
The sanctions programs are directed against a number of countries and against thousands of listed persons, companies, charities and entities considered to be enemies of the U.S. or that pose certain threats. There are sanctions programs that are country-specific and involve Belarus, Burma, Cote d’Ivoire, Cuba Congo, Iran, Iraq, Lebanon, Libya, North Korea, Somalia, Sudan, Syria, Yemen and Zimbabwe. Then there are specific sanctions programs aimed at deterring certain types of activities such as the counter-narcotics sanctions, diamond trading sanctions, Sergei Magnitsky sanctions, non-proliferation sanctions and sanctions targeted at organized criminal groups.
The Sergei Magnitsky sanctions are an illustration of a sanctions program that can catch multinational corporations off guard. These sanctions arose as a result of the unlawful detention and murder of Magnitsky (who was a lawyer) in a Russian prison. Magnitsky was counsel for a U.S. hedge fund. He was incarcerated in Russia without a trial for over a year for bringing financial crimes to light in Russia and beaten to death by prison officials. In response to the lawyer’s death, the U.S. government enacted the Magnitsky Act, a sanctions law against targeted Russian officials who are believed to be responsible for the detention, abuse and death of the lawyer. In April of this year, OFAC added several Eastern Europeans to the SDNL under the Magnitsky sanctions program. Pursuant to this particular sanctions program, foreigners on the SDNL may not enter the U.S. or remain there and all steps must be taken to freeze and prohibit the transactions in all property and interests in property of persons on this SDNL in the U.S. within the U.S. or within the possession or control of a U.S. Person.
In December 2013, a complaint was filed with OFAC against Philips over allegations that it sold medical equipment to a company headed by a Russian on the Magnitsky SDNL through a German distributor. One of the issues with respect to the Magnitsky sanctions is that the concepts of possession or control of U.S. person are, as yet, undetermined, although the corporate and/or securities law concepts of control will no doubt apply.
Determining what is required for each sanctions program is a formidable task. There are different regulations for each sanctions program and each has different prohibitions.
Generally, U.S. Persons are prohibited from engaging in any transactions with a sanctioned country, government or SDN and they must review commercial and financial dealings and transactions and block or freeze assets in which the listed person, state or organization has any interest even if that asset or property is controlled or owned by someone else.
Some of the sanctions, particularly those related to Cuba, create problems for financial institutions in other countries including Canada which prohibit compliance with the OFAC sanctions program in respect of that country.
Exposure to liability
Violations of OFAC sanctions may result in substantial civil and criminal penalties including civil fines of up to US$1 million and criminal penalties of up to US$10 million and 30 years in jail.
One of the areas in which OFAC compliance becomes complicated is in respect of beneficial ownership of entities, securities and investments. Robust communication of a financial institution’s or firm’s OFAC obligations to its clients, affiliates, or counterparties to a transaction can mitigate OFAC risk and help protect against sanctions violations.
Companies should consider having appropriate disclaimers in communications between, and requiring agreements from, direct customers or affiliates, to protect it from becoming entangled in prohibited transactions and it may be advisable to obtain agreements at the time a customer relationship is established, seeking affidavits or warranties prior to execution of significant transactions.