Financial institutions and companies that are subject to oversight from the Office of Foreign Assets Control (OFAC) need to prioritize compliance. OFAC has become increasingly active in recent years, and it is devoting substantial government resources to identifying illicit activity and pursuing enforcement action against institutions and companies that engage in (or facilitate) prohibited financial transactions, working to protect national security and foreign policy interests.
So, what does it take to maintain OFAC compliance in 2023? Effectively managing OFAC compliance requires a strategic and multi-faceted approach. There are numerous aspects to Office of Foreign Assets Control compliance; and, while OFAC has published several compliance resources, it has also made clear that these resources are intended to be instructive rather than exclusive. As a result, financial institutions and companies must independently assess their compliance obligations in light of their customer base, transactions, corporate structure, operations, and all other pertinent considerations, and they must implement custom-tailored compliance programs that focus specifically on their unique risks and needs regarding OFAC regulations.
“As the global economy continues to expand and new technologies make it easier to execute cross-border transactions, financial institutions and companies in the U.S. are increasingly facing new and complex compliance challenges. This is particularly true in the area of OFAC compliance, where institutions and companies must carefully address a wide range of statutory and regulatory obligations in a landscape that is shifting constantly.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
For both financial institutions and companies, the risks of non-compliance can be substantial. OFAC regulations compliance failures can lead to OFAC blocking transactions and assets, and they can lead to civil or criminal enforcement action in some cases.
5 Keys to OFAC Compliance in 2023
Among all areas of statutory and regulatory compliance, OFAC compliance is one of the most unique. Financial institutions and companies that are subject to OFAC’s oversight face unique compliance obligations, and they must often address these obligations in unique circumstances. With this in mind, here are seven keys to developing and implementing an effective OFAC compliance program in 2023:
1. Leveraging OFAC’s Compliance Resources
As noted above, the Office of Foreign Assets Control has published several compliance resources for U.S. financial institutions and companies. As also noted above, while these resources are intended to be instructive, they are not intended as substitutes for engaging compliance counsel to evaluate and address an institution’s or company’s specific compliance needs. Thus, while institutions and companies must thoroughly address OFAC’s guidance, they must be equally careful not to rely on this guidance exclusively:
a. A Framework for OFAC Compliance Commitments
The Office of Foreign Assets Control published A Framework for OFAC Compliance Commitments (the “Framework”) as a resource for financial institutions and companies to utilize when assessing their compliance obligations and structuring their OFAC compliance programs (or “sanctions compliance programs”). The Framework begins by identifying “five essential components of compliance,” which OFAC also quickly makes clear are not the only essential components of a sanctions compliance program.
The Framework then goes on to provide additional insight into OFAC’s expectations with respect to each of the identified essential components. Here are illustrative examples for each component:
- Management Commitment – “Effective management support includes the provision of adequate resources to the compliance unit(s) and support for compliance personnel’s authority within an organization.”
- Risk Assessment – “While there is no “one-size-fits all” risk assessment, the exercise should generally consist of a holistic review of the organization from top-to-bottom and assess its touchpoints to the outside world.”
- Internal Controls – “An effective SCP should include internal controls, including policies and procedures, in order to identify, interdict, escalate, report (as appropriate), and keep records pertaining to activity that may be prohibited by the regulations and laws administered by OFAC.”
- Testing and Auditing – “A comprehensive and objective testing or audit function within an SCP ensures that an organization identifies program weaknesses and deficiencies, and it is the organization’s responsibility to enhance its program, including all program-related software, systems, and other technology, to remediate any identified compliance gaps.”
- Training – “An effective training program is an integral component of a successful SCP. The training program should be provided to all appropriate employees and personnel on a periodic basis . . . [and]accomplish the following: (i) provide job-specific knowledge based on need; (ii) communicate the sanctions compliance responsibilities for each employee; and (iii) hold employees accountable for sanctions compliance training through assessments.”
b. Economic Sanctions Enforcement Guidelines
OFAC’s Economic Sanctions Enforcement Guidelines (the “Guidelines”) appear in 31 C.F.R. Part 501. The Guidelines provide additional insight into various aspects of OFAC regulations compliance and OFAC sanctions programs, from the definition of an “apparent violation” to the conditions under which self-disclosure may be required. The Guidelines also provide information about the factors that influence OFAC’s administrative enforcement actions and the penalties and economic and trade sanctions that OFAC can impose for statutory and regulatory violations.
c. OFAC Risk Matrix
Appended to the Guidelines is the OFAC Risk Matrix. This is another regulatory compliance document that provides important insights for financial institutions and companies. The Risk Matrix identifies 13 key areas that institutions and companies should address when conducting their risk assessments—and that they should take into consideration when formulating their compliance programs.
Rather than identifying specific areas of compliance, the OFAC Risk Matrix provides examples of “low,” “moderate,” and “high” risk in each of the 13 key areas. Working with their counsel, financial institutions and companies should determine their risk level in each area and then structure their compliance efforts accordingly.
d. OFAC Information for Industry Groups
Along with its general compliance resources, OFAC has published additional compliance information for certain industry groups. Industry-specific guidance documents, fact sheets, and FAQs are available for entities in the following industries:
- Instant payment systems
- Credit reporting
- Exporting and importing
- Financial services
- Legal and compliance services
- Money services
- Non-governmental organizations and non-profits
- Virtual currency
e. OFAC FAQs
OFAC has also published extensive FAQs addressing numerous aspects of compliance. There are currently more than 1,100 FAQs in OFAC’s database, which is available (and searchable) on OFAC’s website.
2. Developing a Custom-Tailored OFAC Compliance Program
When developing OFAC compliance programs, financial institutions and companies need to take a custom-tailored approach. There is no “standard” SCP, and there is no one-size-fits-all approach to OFAC compliance management. Utilizing OFAC’s resources, institutions and companies must thoroughly assess their compliance risks and needs, and then they must work with their counsel to develop policies, procedures, and other necessary forms of documentation that they can use to effectively manage all aspects of OFAC compliance on an ongoing basis.
However, as discussed, while reviewing OFAC’s resources is a necessary aspect of compliance management, it is not sufficient on its own. Financial institutions and companies must also be able to rely on their counsel to interpret all governing laws and regulations and apply these sources of authority in light of their specific customer basis, transaction types, and other pertinent characteristics. While OFAC expects to see that institutions’ and companies’ compliance programs follow its guidance, it also expects to see that institutions and companies are taking the additional steps necessary to independently identify and address their compliance obligations.
3. Testing, Auditing, and Documenting Compliance
Developing an effective compliance program is just the start of the process. Once a financial institution or company has an SCP in place, it must assess and monitor the efficacy of its SCP on an ongoing basis.
This is where many financial institutions and companies get into trouble. They go through the exercise of developing an SCP, but then they do not keep up with their compliance obligations. They don’t monitor, test, or audit; and, as a result, they don’t discover issues that put them at risk.
Another area where many financial institutions and companies fall short is documenting their ongoing compliance efforts. When it comes to OFAC compliance documentation, policies and procedures are just the start. Institutions and companies must document their training, testing, and auditing efforts as well—all with the purpose of being able to affirmatively demonstrate compliance to OFAC when necessary.
4. Engaging with OFAC as Necessary
In addition to responding to OFAC inquiries and investigations, there are also various circumstances in which financial institutions and companies may need to proactively engage with OFAC. Knowing when (and how) to engage with OFAC is a key aspect of effective compliance management as well. There are three primary circumstances in which proactively engaging with OFAC may be necessary:
- When a financial institution or company needs interpretive guidance regarding an OFAC sanctions program or general license;
- When a financial institution or company needs to apply for a specific license to execute a transaction or secure the release of blocked assets;
- When a financial institution or company needs to self-disclose an apparent violation in order to mitigate its consequences.
5. Monitoring for Additional Compliance Program Needs
Finally, financial institutions’ and companies’ OFAC compliance obligations can—and do—change. They change as a result of new sanctions and regulations, and they change as a result of new customers, services, and other internal developments. To maintain compliance on an ongoing basis, institutions and companies must be able to rely on their counsel to determine when changes impact their compliance needs, and then they must work with their counsel to promptly implement SCP updates before compliance failures lead to undesirable consequences.