OFAC unveils framework for sanctions compliance

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On May 2, 2019, the US Treasury Department’s Office of Foreign Assets Control (OFAC) published guidance on the core elements of what OFAC considers to be an effective sanctions compliance program. According to OFAC, its document—A Framework for OFAC Compliance Commitments (the “Framework”) - is aimed at both US organizations and foreign (i.e., non-US) entities that conduct business in or with the US, US Persons, or using US-origin goods or services.

The Framework outlines five essential components of a compliance program - management commitment, risk assessment, internal controls, testing and auditing, and training -  and lists several root causes of apparent violations of US sanctions resulting from program deficiencies and breakdowns.

OFAC “strongly encourages”1 US organizations and foreign entities that conduct business in or with the US, with US Persons, or using US-origin goods or services to implement and maintain a “risk-based” sanctions compliance program that incorporates these five essential components. OFAC acknowledges that there is no affirmative requirement to do so. However, OFAC also underscores that the lack of a compliance program can be a root cause of sanctions violations and an aggravating factor in OFAC’s evaluation of penalties for sanctions violations—whereas implementing an effective compliance program can mitigate both the risk of sanctionable activity and penalties in the event of sanctions violations.

The Framework is OFAC’s most comprehensive public guidance on best practices in sanctions compliance across sectors. Accordingly, it provides a new benchmark for compliance program development and implementation. While oriented toward entities, the Framework also signals a potentially new enforcement focus by OFAC on individuals, further underscoring the importance of risk-based compliance.

Core components of a sanctions compliance program

The Framework describes five essential components of a risk-based compliance program, along with examples of how companies can implement them.

Management

  1. "Management commitment." The commitment of senior management to supporting a compliance program is a critical factor in determining the success of any compliance program, and the Framework emphasizes that sanctions compliance is no different.  Senior management can demonstrate this commitment by, among other measures, appointing dedicated compliance personnel, providing compliance teams with adequate resources and support, and by promoting a “culture of compliance.”
  2. "Risk assessment." Organizations should conduct periodic risk assessments when designing or updating a compliance program. Counterparty risk should be a central focus for such assessments, as should risk arising from mergers and acquisitions. These assessments should generally “consist of a holistic review of the organization from top-to-bottom to assess its touchpoints to the outside world.”2 This will help in identifying customers, products or geographic locations that could pose a risk and the potential areas in which an organization may engage with US-sanctioned parties or jurisdictions. The results of a risk assessment can be used to inform compliance “policies, procedures, internal controls, and training,”3 and can be important during mergers and acquisitions, especially when they involve non-US companies.
  3. "Internal controls." An effective compliance program should have internal controls, such as written policies and procedures to “identify, interdict, escalate, report (as appropriate), and keep records pertaining to activity”4 that is prohibited by US sanctions. These policies and procedures should be tailored to the organization’s day-to-day operations and activities, and be designed to prevent misconduct. In addition, policies and procedures should also be able to adjust to sanctions developments, such as updates to OFAC’s sanctions lists and changes in sanctions programs—events that occur with some frequency.
  4. "Testing and auditing." Organizations should conduct audits to ensure that they can accurately identify compliance program weaknesses and deficiencies and remediate and improve, as needed.  Such testing and audits can be internal or external, enterprise-wide or specific, but they should reflect a “comprehensive and objective assessment of the organization’s OFAC-related risk assessment and internal controls.”5
  5. "Training." Training should be tailored based on risk—including as to individual employees or functions—and should be relevant to the organization’s business activity, including the products and services that it offers. It should communicate job-specific compliance information to employees as well as individual and corporate sanctions compliance responsibilities, and should provide easily accessible compliance resources and materials. Organizations should also hold employees accountable through assessments, and should take immediate corrective action upon learning of a negative auditing or testing result.

Root causes of compliance program breakdowns or deficiencies

In addition to the five “essential components,” OFAC lists several specific root causes associated with apparent sanctions violations. These are:

  1. “Lack of a formal OFAC sanctions compliance program.” While a sanctions compliance program is not legally required, the absence of such a program is a common root cause of violations and OFAC considers it an aggravating factor in enforcement actions.
  2. “Misinterpreting, or failing to understand the applicability of, OFAC regulations.” As examples, organizations have mistakenly determined that a transaction or activity was either not prohibited or that US sanctions did not apply to their operations.  The Framework suggests that a misinterpretation or mistake of law alone may not be sufficient to warrant enforcement, but reckless conduct, the presence of red flags, extent of management awareness of the conduct, and the organization’s size and sophistication are aggravating factors that can result in enforcement action.
  3. “Facilitating transactions by non-US Persons (including through or by overseas subsidiaries or affiliates).”  Persons subject to US sanctions jurisdiction must not approve or “facilitate” transactions by non-US persons where they themselves could not engage in such transactions—for instance, because they involve OFAC-sanctioned persons, countries or regions. Such prohibited facilitation has also occurred where a US organization has referred business in which it could not participate to its non-US affiliates.
  4. “Exporting or re-exporting US-origin goods, technology or services to OFAC-sanctioned persons or countries.” US sanctions prohibit or restrict the export and re-export of US-origin items to sanctioned jurisdictions or persons. Enforcement actions arising from such prohibited exports or re-exports historically involve large or sophisticated organizations, willful or reckless acts of concealment, disregard of red flags or a long-term pattern or practice of unlawful activity.
  5. “Utilizing the US financial system, or processing payments to or through US financial institutions, for commercial transactions involving OFAC-sanctioned persons or countries.” Non-US Persons must not “cause” a US Person to violate US sanctions, even where the underlying transaction is not prohibited for non-US Persons.  In several cases, non-US Persons have processed payments associated with prohibited activity through US financial institutions, causing the US financial institution to violate US sanctions.  OFAC has focused such enforcement actions on large and sophisticated organizations that have, among other aggravating factors, acted willfully or recklessly, tried to conceal their activity (e.g., by removing or altering payment messages, or making false representations to a US or non-US financial institution) or engaged in deceptive practices over a long duration.
  6. “Sanctions screening software or filter faults.” The results of a sanctions screen are only as good as the data they are based on. Failing to use current sanctions screening software or lists, failing to use proper identifying information or failing to account for alternative spellings—a common issue when dealing with names expressed in different languages—can result in missed search hits, which in turn can result in violations.
  7. “Improper due diligence on customers/clients (e.g., ownership, business dealings, etc.).” Organizations have been penalized for violations that arose from a failure to identify available information bearing on sanctions compliance, such as a customer or other counterparty’s business activity or beneficial ownership.
  8. “De-centralized compliance functions and inconsistent application of a sanctions compliance program.” De-centralized compliance structures—such as those involving personnel scattered across different offices or business units—can lead to miscommunications or compartmentalization of information and responsibilities, which in turn has led to sanctions violations.
  9. “Utilizing non-standard payment or commercial practices.” Such practices are recognized as red flags for sanctions evasion or circumvention. The framework urges organizations subject to US jurisdiction to assess payment or commercial practices in the context of industry norms in order to evaluate their compliance risk, though there is nothing inherently and automatically sanctionable about non-standard terms.
  10. “Individual liability.” In cases where individual employees play an integral role in causing or facilitating sanctions violations, the Framework makes clear that OFAC will use its enforcement authority to target the individual employees as well as the entity.

This list is not exhaustive but illustrative, and is intended to help companies design, update or amend their compliance programs.

Looking ahead

OFAC regulations do not currently require that US organizations or foreign companies conducting business with the US implement or maintain a sanctions compliance program. However, an effective sanctions compliance program can help mitigate civil monetary penalties for sanctions violations, while the lack of one is an aggravating factor. Further, the Framework underscores the importance OFAC places on implementing a compliance program for individuals and entities who may be required to comply with US sanctions, and emphasizes that individuals, and not just the organizations for which they work, also face the risk of sanctions enforcement. Accordingly, all individuals and organizations engaging in activity with a US nexus would be well-advised to use the Framework as a baseline guide to create and update their own “risk-based” compliance program.

  1. A Framework for OFAC Compliance Commitments, US DEPARTMENT OF THE TREASURY, available at https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf
  2. Id.
  3. Id.
  4. Id.
  5. Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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