• OFAC proposes new reporting requirement for rejected transactions
• Agency issues guidance on dealing with Iran
• Additional parties designated under Magnitsky sanctions program
• Careful diligence of international transactions and business partners is essential

On a regular basis over the past several months, the U.S. Treasury Department, Office of Foreign Assets Control (OFAC) has introduced new sanctions requirements, guidance, and restrictions.  OFAC is the U.S. government agency which administers most U.S. sanctions programs.

Many of these measures have been quite targeted.  For instance, on July 29, 2019, OFAC designated Kim Su Il as a Specially Designated National (SDN) of North Korea.  According to the SDN listing, Kim Su Il is a resident of Vietnam.  Thus the designation, while limited to Kim Su Il, demonstrates one of the challenges of U.S. sanctions compliance: many SDNs reside in or are nationals of countries against which the United States does not otherwise maintain sanctions.

Similarly, on July 19, 2019, OFAC designated Salman Raouf as a Specially Designated Global Terrorist for his purported connection with Hizballah.  While Hizballah is generally based in Lebanon and operates other parts of the Middle East, Raouf apparently maintains a Colombian passport – and thus may be a resident of Colombia.

These are the types of routine, day-to-day actions that OFAC takes – and which challenge sanctions compliance professionals.

OFAC has also taken several more substantive steps in the past few months.  A brief description of each is below.

Interim Final Rule Increases Reporting Requirements Related to Rejected Transaction

In a Federal Register notice dated June 21, 2019, OFAC announced changes to its Reporting, Procedures and Penalties Regulations (31 CFR Part 501).  Among the changes was an enhanced reporting requirement for a “rejected transaction,” i.e., a transaction rejected because to proceed with the transaction would violate OFAC sanctions.

Most notably, the definition of “transaction” has been expanded to cover “transactions related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services.”  Until issuance of the interim final rule, the reporting requirement pertained only to “rejected funds transfers.”

With this change, what was largely the provenance of banks and other financial institutions is now a requirement that almost any U.S. person needs to understand if conducting business internationally.  (The requirement also explicitly is extended to persons subject to U.S. jurisdiction, which means that non-U.S. subsidiaries of U.S. companies would have to report the rejection of a transaction that would otherwise violate U.S. sanctions.)

It remains to be seen whether changes will be made to the requirement to report rejected transactions.  Even if no changes are made to the rule, OFAC hopefully will provide guidance about what constitutes a transaction.

There is a spectrum of possible conduct involving an SDN that may or may not constitute a transaction.

For example, if a U.S. manufacturer were to receive an email inquiry from an SDN and, after identifying the inquiring party as an SDN, declined to respond to the inquiry, would that constitute a reportable rejected transaction?  Does it matter if the U.S. manufacturer initiated contact with the SDN?  Keep an eye out for clarification from OFAC.

OFAC Issues Advisory on Sanctions Compliance Challenges Related to Iranian Civil Aviation Industry

On July 23, 2019, OFAC issued a Civil Aviation Industry Advisory related to Iran.  The stated purpose of the advisory is to assist the civil aviation industry in identifying certain “deceptive practices” used by Iran to obtain U.S.-origin goods and services for its civil aviation industry.

Much of the advisory is (not surprisingly) focused on the types of transactions that are prevalent in civil aviation.  But much of the guidance in the advisory is useful across industries in terms of identifying and mitigating sanctions risk related to Iran.  For instance, the advisory states that Iran has been using front companies and other pass-through entities in third countries to obtain U.S.-origin equipment and aircraft.  It is safe to assume that Iranian companies not in the aviation industry, e.g., Iranian companies in the oil and gas, health, and technology industries, are engaged in the same sort of activities.

The advisory also states that Iran has sourced U.S.-origin aircraft and U.S.-origin goods, technology, and services from third countries known to have strong reputations for aircraft maintenance, repair, and overhaul operations, but limited export control or sanctions enforcement capabilities.  It again seems safe to assume that other Iranian companies in other industries are using similar methods to obtain U.S.-origin goods and technology.

OFAC Uses Magnitsky Authority to Sanction Iraqi Nationals

On July 18, 2019, OFAC announced that it has designated four individuals – two former Iraqi governors and two Iraqi militia figures – as SDNs because of each individual’s involvement in human rights abuses.  These designations were made under the auspices of Executive Order 13818, which President Trump announced on December 21, 2017.

Notably, that Executive Order was issued in conjunction with the Global Magnitsky Human Rights Accountability Act.  OFAC has sanctioned over 100 individuals and entities pursuant to the Executive Order, in multiple countries.  Thus, as with the designations discussed above – Kim Su Il (as an SDN of North Korea) and Salman Raouf (as an SDN Terrorist) – the Global Magnitsky Sanctions regime is being used to designate SDNs around the world, including in countries against which the U.S. government does not otherwise maintain sanctions.

Essential to Conduct Thoughtful, Comprehensive Diligence on International Transactions

Each of these recent OFAC actions serves as a reminder that OFAC expects U.S. companies and individuals to do careful diligence when engaging in international transactions.  This includes transactions in or involving countries not otherwise subject to U.S. sanctions.

Screening is an important part of the diligence process.  (Though as we discussed in this December 2018 blog post, screening is not failsafe.)  But there are other components of diligence as well, including that diligence has to be part of an overall compliance process that equips personnel to be vigilant about identifying potential red flags.

OFAC’s “A Framework for OFAC Compliance Commitments,” which the agency published in May 2019, emphasizes that diligence is a key element of an effective compliance program – and highlights that many OFAC enforcement matters have been the result of inadequate diligence.