The Office of Foreign Assets Control (OFAC) has played an increasingly important role in the federal government’s national security efforts in recent years. As transactions funding terrorist activities, criminal enterprises, and other threats crisscross the globe at lightning pace, OFAC’s efforts to identify, track, and block these transactions are vitally important to the government’s mission of protecting U.S. citizens both at home and abroad.
These efforts are also becoming increasingly complicated.
With digital currencies and other new technologies providing new means for foreign actors to evade detection, OFAC is facing unprecedented challenges in its enforcement efforts. To keep pace, OFAC is relying not only on its economic sanctions enforcement guidelines, economic sanctions programs and licensing authority, but also its authority to investigate and use appropriate enforcement response to penalize bad actors (or suspected bad actors) under its Economic Sanctions Enforcement Guidelines (the “Enforcement Guidelines”).
“OFAC has broad investigative authority, including the authority to issue administrative subpoenas (which are subject to judicial enforcement). Due to the significant risks involved, individuals and entities targeted in OFAC enforcement cases need to be very careful, and they need to work with experienced counsel to execute a strategic defense.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
Due to OFAC’s enhanced enforcement efforts, financial institutions, businesses, and individuals that engage in transactions subject to OFAC’s sanctioning and licensing authority need to prioritize OFAC compliance. Those that don’t will be at greater risk for enforcement action—and the potential for administrative, civil penalties, or criminal penalties.
With this in mind, what do financial institutions, businesses, individuals, and their counsel need to know about OFAC’s Enforcement Guidelines in 2023? Here are some of the highlights:
OFAC’s Economic Sanctions Enforcement Guidelines: Means of Enforcement and Potential Outcomes
OFAC’s economic sanctions Enforcement Guidelines specify the potential outcomes of the agency’s enforcement efforts. These include various means of enforcement as well as the possibility of achieving an informal resolution of an apparent violation without further action. For 2023, the most significant change to the potential outcomes of OFAC enforcement proceedings is the increase in the civil monetary penalty (CMP) amount for “non-egregious” statutory violations:
- No Action – If an OFAC investigation does not uncover sufficient evidence of a violation to justify enforcement action, OFAC will resolve the matter without further consequence. In this situation, the appropriate enforcement response is if “OFAC is aware that the [target] has knowledge of OFAC's investigation, OFAC generally will issue a letter to the Subject Person indicating that the investigation is being closed.”
- Settlement – The Enforcement Guidelines outline an appropriate enforcement response of a settlement process through which targets can resolve cases without formal action, and they make clear that “[a] settlement does not constitute a final agency determination that a violation has occurred.” If it is not possible to resolve an OFAC investigation with a no-action letter, then pursuing a settlement may be the best approach.
- Request for Additional Information – If OFAC needs additional information to make a determination as to whether a violation has occurred, it can issue an administrative subpoena pursuant to 31 C.F.R. Section 501.602. Like administrative subpoenas from other federal agencies, OFAC administrative subpoenas are subject to judicial enforcement.
- Cautionary Letter – A cautionary letter indicates that OFAC has not found sufficient evidence to substantiate a violation or has determined that penalties are not warranted under the circumstances. The issuance of a cautionary letter “represents a final enforcement response to the apparent violation, unless OFAC later learns of additional related violations or other relevant facts.”
- Finding of Violation – A finding of violation does not result in the imposition of an appropriate enforcement response; however, it can increase the target’s risk of facing administrative, civil penalties, or criminal penalties in the future. OFAC will issue a finding of violation if it determines “that a violation has occurred and considers it important to document the occurrence of a violation . . . but that a civil penalty is not the most appropriate response.”
- Administrative Action – Administrative actions fall between findings of violations and civil penalties. In appropriate cases, OFAC can issue cease-and-desist letters and/or take action against the target’s license or license application—including denial, suspension, modification, or revocation.
- Civil Monetary Penalty – Civil monetary penalties are the most substantial penalties that OFAC can impose directly as a result of its enforcement efforts. When calculating civil monetary penalties, OFAC focuses on two main factors: (i) whether the violation was “egregious” or “non-egregious,”(willful or reckless conduct) and (ii) whether the target self-disclosed the violation. While the CMP for “egregious” violations are determined by statute, the CMP for “non-egregious” violations are set forth in in the civil penalty provisions of the Enforcement Guidelines (in most cases). For 2023, the standard penalties are up to $178,290 per violation for self-disclosed “non-egregious” violations, and up to $356,579 for non-self-disclosed “non-egregious” violations.
- Criminal Referral – When warranted, OFAC can refer cases to the U.S. Department of Justice (DOJ) for criminal prosecution. Criminal violations falling within OFAC’s enforcement jurisdiction carry substantial fines and terms of imprisonment.
OFAC’s Economic Sanctions Enforcement Guidelines: The “General Factors” for Enforcement Decision-Makings
To determine which type of enforcement action to pursue (if any), OFAC relies on a set of “General Factors” outlined in the Enforcement Guidelines. As the Enforcement Guidelines explain, “[a]s a general matter, OFAC will consider some or all of the . . . General Factors in determining the appropriate administrative action in response to an apparent violation of U.S. sanctions by a [target], and, where a civil monetary penalty is imposed, in determining the appropriate amount of any such penalty.” As of 2023, the General Factors outlined in OFAC’s Enforcement Guidelines are:
A. Willful or Reckless Violation of Law
OFAC considers several factors in determining whether a violation was willful or reckless, with findings of willfulness and recklessness generally leading to more significant penalties. These factors include (among others) whether the target knew its action would constitute a violation, whether the target demonstrated reckless disregard for U.S. sanctions requirements and whether the target attempted to conceal the violation.
B. Awareness of Conduct at Issue
If a target has actual or constructive knowledge of the issue underlying OFAC’s investigation, this will also generally lead to greater penalties. In cases involving corporate targets, the awareness analysis “focus[es] on supervisory or managerial level staff in the business unit at issue, as well as other senior officers and managers.”
C. Harm to Sanctions Program Objectives
OFAC considers several factors when determining whether a violation poses harm to any of its sanctions programs’ objectives. These include (among others) any economic benefit to the sanctioned entity or individual, implications for U.S. policy, and whether the conduct at issue would have been eligible for a specific license.
D. Individual Characteristics
In cases involving both individual and corporate targets, OFAC considers the target’s “individual characteristics” when determining what type of enforcement action is warranted. The Enforcement Guidelines list the following individual characteristics as being pertinent to OFAC’s decision-making: commercial sophistication, size of operations and financial condition, volume of transactions, and subject person's sanctions history (if any).
E. Compliance Program
If a corporate target has an OFAC compliance program, this can help to facilitate a favorable outcome—provided that the subject person's compliance program was adequate and functioning as it should. Conversely, if a corporate target lacks a compliance program, or if its compliance program was deficient in any respect, this can enhance the risks of facing OFAC enforcement action.
F. Remedial Response
If the target undertook a remedial response, this will help to mitigate the consequences of a violation in most cases. However, inadequate and misguided remedial responses can potentially raise more questions than answers—and raise OFAC’s level of scrutiny and concern as a result.
G. Cooperation with OFAC
When facing OFAC enforcement action, cooperation is often (though not always) the best policy. If structured appropriately with adequate protections in place, cooperating with OFAC can not only mitigate the consequences of a past violation, but also help to build a good working relationship with OFAC going forward.
H. Timing of Apparent Violation in Relation to Imposition of Sanctions
As explained in the Enforcement Guidelines, “the timing of the apparent violation in relation to the adoption of the applicable prohibitions, particularly if the apparent violation took place immediately after relevant changes in the sanctions program regulations or the addition of a new name to OFAC's List of Specially Designated Nationals and Blocked Persons (SDN List),” can also weigh heavily in OFAC’s decision-making. However, for this factor to weigh against CMP or a criminal referral, the relevant change must typically be extremely recent in relation to the conduct at issue.
I. Other Enforcement Action
If a target is facing enforcement action by other federal, state, or local authorities, this can weigh against OFAC enforcement in some cases. Among other relevant circumstances, OFAC considers “whether the settlement of alleged violations of OFAC regulations is part of a comprehensive settlement with other federal, state, or local agencies.”
J. Future Compliance/Deterrence Effect
OFAC also weighs the need for enforcement action as a driver for promoting future compliance or as a deterrent to future violations by other entities or individuals. With regard to the latter, OFAC focuses primarily on others “in the same industry sector.”
K. Other Relevant Factors on a Case-By-Case Basis
Finally, OFAC will also consider such other factors as it “deems relevant on a case-by-case basis.” Ultimately, OFAC will consider “the totality of the circumstances to ensure that its enforcement response is proportionate to the nature of the violation.”
For financial institutions, businesses, and individuals subject to OFAC’s oversight, maintaining strict compliance with OFAC’s sanctions programs and avoiding transactions with persons on the SDN List are key. When facing enforcement action, targeted individuals and entities should carefully weigh the pertinent General Factors, and they should focus on pursuing a specific outcome from the list above that is reasonable in light of the circumstances at hand.