All countries must take proactive measures to protect their finances from criminal actions and sanction specific governments in foreign affairs. The US Department of the Treasury has established an OFAC sanctions list against specific individuals, groups, and entities to control international transactions and contribute to national security. These rules are governed by the Office of Foreign Assets Control (OFAC).
What is OFAC?
OFAC is a government agency within the United States Department of the Treasury. OFAC is a government agency within the United States Department of the Treasury. OFAC stands for Office of Foreign Assets Control, which administers and enforces economic sanctions based on US foreign policy.
The purpose is to enhance national security against selected individuals and entities such as:
- Foreign and sanctioned countries
- international drug traffickers
OFAC's targets include anyone involved in certain activities, such as transnational organized crime, including narcotics trafficking and the proliferation of weapons of mass destruction. OFAC acts under an executive order from the presidential powers in times of war and national emergency to freeze assets under US jurisdiction. OFAC helps enforce financial crimes, such as anti-money laundering (AML) regulations .
The Secretary of the Treasury has delegated to the Office of Foreign Assets Control regulatory responsibility for developing, administering, and managing US sanctions programs. Many of these regulations are based on United Nations and other global mandates and are therefore multilateral in scope. This means that the application of these sanctions implies direct cooperation with allied governments.
Who does OFAC apply to?
All US individuals and businesses must comply with OFAC regulations. That includes:
• US banks
• Bank holdings
• Non-bank affiliates
Federal banking agencies continually evaluate OFAC compliance programs to ensure that all banks under their supervision are in compliance with sanctions.
Unlike the Bank Secrecy Act (BSA), OFAC laws and regulations do not only apply to US persons and domestic agencies. They also apply to foreign branches and subsidiaries abroad. The organization encourages banks to take a risk-based approach when implementing an OFAC compliance program.
List of specially designated nationals
After the events of September 11, 2001, OFAC turned its attention to identifying terrorists. That's when the US government created the Specially Designated Nationals (SDN) List. This list is made up of companies and individuals that are controlled by or act for other target groups or countries, such as terrorists, drug traffickers, and foreign sanctions evaders.
The SDN list was created primarily for financial institutions, but as it has grown, it is increasingly used by insurers and international organizations.
Although the list is available for free download from OFAC's website, there are many problems when searching for a supplier or client on your own. In most SDN searches, only one name appears. The date of birth, address, and even the country may be missing. In addition, the listed name may be a pseudonym or providers may be referred to by multiple names. An employer attempting an OFAC check on their own can easily misidentify a candidate on the list.
What banking transactions are subject to OFAC regulations?
All transactions made by a US financial institution are subject to OFAC laws and regulations. If a bank were to process a transaction from a list of specially designated citizens and blocked persons, it would be considered illegal.
U.S. law requires that all assets and accounts of an OFAC-specified person, entity, or country be frozen when such property is in the U.S., held by persons or entities from the U.S.A. or comes into the possession of U.S. persons or entities.
For example, if an offshore wire transfer is routed through a US bank to an offshore bank and an OFAC-designated party is involved, the transaction should be blocked.
The definition of goods and properties is specifically defined within each sanction program, but includes any direct or indirect, present, future or contingent value. This includes all bank transactions. All banks must block transactions that:
- They are going to or through a blocked person or entity
- Are from or on behalf of a blocked person or entity
- Are related to another transaction in which a blocked person/entity has an interest
If a US bank is directed to make a transfer that falls into one of these categories, it must first execute the payment order and then deposit the funds into an escrow account. Once received, a payment order cannot be canceled or modified without the authorization of OFAC.
In some cases, a transaction may be prohibited, but there is no blockable interest. In other words, the transaction should not be accepted, but there is no OFAC requirement to block the assets. In these cases, the transaction is simply rejected and not processed.
An example would be the Sudan Sanctions Regulations (SSR), which does not support business activities in Sudan. So while a transfer of funds between a US and Sudanese company is not against US sanctions, it is against Sudanese law; although neither party is on the list of Specially Designated Nationals (SDN) or blocked persons.
However, because SSR requires the blocking of transactions with the Sudanese government and exporting services to Sudan is prohibited, the US bank is unable to process the transaction and it is declined.
OFAC has the authority to allow certain transactions that would otherwise be prohibited by its regulations. This is done through a concise licensing process and is determined when a transaction does not undermine US policy objectives. This is also true when a transaction is justified by foreign policy or national security objectives of the United States.
OFAC General License
OFAC offers a general license that authorizes categories of transactions. One example is allowing reasonable service fees on locked accounts without the need for a case-by-case OFAC review. General licenses can be found in the regulations of each sanctions program. Before processing these transactions, the bank will verify that the transaction meets the relevant criteria.
Specific OFAC license
OFAC also issues specific licenses on a case-by-case basis. This is a written document that authorizes a particular transaction (or set of transactions) limited to a specific period of time. To receive a specific license, a person or entity must submit an application to OFAC.
If the transaction complies with US internal licensing policies and foreign policy objectives, a license is generally issued. If a customer claims to have a specific license, the bank must verify that the transaction complies with the terms and conditions of the license. This includes effective dates.
If a transaction is blocked or prohibited, the bank must report it to OFAC within 10 business days. Blocked assets (as of June 30) must also be reported annually by September 30. Once locked, assets must be placed in a separate locked account.
Banks will keep a record of all declined transactions for at least five years. For locked assets, records will be kept for the period they are locked and for five years after that date.
OFAC expects a business to have its own compliance program if it engages in certain behavior, including:
- High volume of international transactions
- Transactions with a high-risk sanctions violation region
- Transactions with a company with connections to sanctions programs
- Work with a large changing customer base (usually due to a merger)
- Sell goods or services online
- Has a history of interactions with OFAC
how to keepOFACObservance
Don't get caught doing business with someone on the list. There are heavy fines and OFAC penalties. Banks typically establish an effective OFAC compliance program that is consistent with an OFAC risk profile. This is based on a few data sets, including:
- Nature of transactions
- account age
- geographic locations
The bank will examine high-risk areas, provide detection and reporting controls, establish compliance tests, and assign a dedicated officer to oversee OFAC compliance. Initial identification of high-risk customers for OFAC is typically done as part of the bank's CDD and CIP procedures.
Based on a bank's OFAC risk profile for each area, it will establish policies and procedures for reviewing transactions and transaction parties. An effective risk assessment is made up of several factors, which can be weighted differently.
While not a complete list, some examples of OFAC high-risk products, services, customers, and geographic locations include:
- foreign customer accounts
- international funds transfers
- non-resident foreign accounts
- Cross Border ACH Transactions
- International private banking
- transactional electronic bank
- Business letter of credit or other business financing items
- Foreign correspondent bank accounts
- Payable through accounts
- Branches or subsidiaries abroad
- concentration accounts
What accounts payable controls can businesses employ?
Every business must have controls that ensure compliance with OFAC regulations. When dealing with a large volume of accounts payable transactions, there should be some important rules to keep in mind:
It all starts with proper training of employees in the OFAC compliance process. The scope and training must be consistent with your risk profile and appropriate to the responsibilities of each employee.
Each business must designate a Qualified Person who is responsible for OFAC compliance. They must have the appropriate level of knowledge about OFAC regulations, including the sanctions list and blocked persons.
Know your customer
These days, it's hard to meet your vendors face-to-face. Especially if your company is regularly involved in global transactions. That's why KYC (Know your customer) It is important. The onboarding of any partner must involve a background check, including checking OFAC watch list databases for:
- anti-drug trafficking
- international counterterror
- against money laundering
It is also a good idea to consider the bank information that the provider provides for your shipment. It is perfectly acceptable to use this data to investigate the business model and corporate structure of a company.
Additionally, a business should not allow payments until a vendor has submitted their W-9/W-8 tax ID forms. This should be part of your standard onboarding workflow and can be done digitally. Always do everything you can to make sure your supply chain is on the right side of the law.
Screen of all transactions
Even if you have been trading with a supplier for months, all transactions must be monitored and evaluated. Cheating usually happens when there's a lapse and it's usually not the first try. If something suddenly changes drastically with your regular transactions or a contact is added to a blacklist, a company's controls must account for this type of evasion. Each point of contact should be a point to reverify or revalidate a beneficiary.
Take a proactive approach
ManyAP systemsdriven by business intelligence will give companies the option to flag bad actors. This helps a business take a proactive, community-driven approach to enforcing OFAC rules.
Tipalti services transactions for more than 300,000 entities in more than 200 different countries and enables clients to benefit from collaborative identification of fraudsters. As soon as the platform sees a red flag with a beneficiary, an immediate investigation is launched and, if necessary, the authorities are contacted.
Each company must randomly conduct an independent test of its OFAC compliance program. This can be done in a number of different ways, including:
- internal audit department
- external auditor
- qualified independent party
The frequency and extent of independent testing should be based on the perceived business risk. The Responsible Person conducts a comprehensive assessment of OFAC's policies, processes, and procedures.
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What are the OFAC requirements?
OFAC regulations require banks to do the following:
• Block any accounts and/or other properties of specific individuals, entities or countries
• Prohibit or reject unlicensed financial transactions with certain persons, entities, or countries.
What is an OFAC check?
According to their website, an OFAC check is looking for:
“specially designated nationals, terrorists, drug traffickers, blocked persons and vessels, and parties subject to various sanctioned economic programs that are prohibited from doing business in the United States, as well as entities subject to licensing requirements due to their proliferation of firearms.” massive destruction."
OFAC always determines if a person or company is authorized to do business in the United States. An OFAC check also includes economic and trade sanctions based on US foreign policy. The candidate is being monitored for national security objectives against foreign regimes, foreign countries, international drug traffickers, and terrorists.
An OFAC check is also looking for anyone recreating weapons of mass destruction. Anyone working with a vendor or an individual who fails OFAC verification can be criminally charged and fined under federal law. This can include $50,000 to $10 million in fines and up to 30 years in prison.
Target groups in an OFAC control
These are the groups that seek an OFAC verification:
- international drug traffickers
- diamond trade
- Threats to national security, the US economy, or foreign policy
- Those involved in the proliferation of weapons of mass destruction
Destination countries in an OFAC verification
These are the countries with embargoes that an OFAC control is investigating:
- Central African Republic
- Chinese military companies
- Ivory Coast (Ivory Coast)
- Hong Kong
- Little ones
- North Korea
- Sudan, South Sudan and Darfur
Target companies in an OFAC verification
These are the companies that are analyzing an OFAC check:
- export import
- money services
- financial and financial services
the future ofOFAC
So what's next for OFAC? All current OFAC financial sanctions are listed atrecent actionspage. As global events and relationships constantly change, OFAC will continue to monitor and update the sanctions list. However, one thing that will always remain the same is that the United States has some of the highest standards for sending and receiving money internationally.