On May 2, 2019, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”)—the U.S. agency tasked with administering and enforcing the U.S.’s economic and trade sanctions programs—published A Framework for OFAC Compliance Commitments (the “Framework”). It summarizes and amplifies previous interpretative guidance on establishing and implementing an effective sanctions compliance program (“SCP”) for organizations subject to U.S. jurisdiction, as well as foreign entities that conduct business in or with the U.S. or U.S. persons, or that otherwise use U.S.-origin goods or services.
As economic sanctions have been playing a greater role in U.S. regulations of international businesses, and in light of the increasing need from the private sector to seek guidance in a turbulent and perhaps perplexing sanctions environment, OFAC’s Framework is both timely and useful. It probably is not a coincidence that over the last few years other U.S. law enforcement departments and agencies issued similarly important guidance, based upon the U.S. Sentencing Commission’s guidelines for corporate compliance and ethics.
Built on OFAC’s existing Economic Sanctions and Enforcement Guidelines (the “Guidelines”), the Framework establishes OFAC’s expectations for what an effective SCP should look like in a much more granular fashion than set forth in the Guidelines. The Framework highlights the essential components on which a risk-based compliance program should be predicated, including the following five components: (a) management commitment; (b) risk assessment; (c) internal controls; (d) testing and auditing; and (e) training. The Framework also outlines how these components will be factored into OFAC’s evaluation of an SCP upon detection of apparent violations of the U.S. sanctions program. In addition, the Appendix to the Framework helpfully provides ten “root causes” of OFAC sanctions compliance program breakdowns or deficiencies that have resulted in enforcement actions.
This alert highlights the main aspects and key implications of the Framework, and then offers our follow-up observation and recommendations.
FIVE ESSENTIAL COMPONENTS OF COMPLIANCE
The Framework identifies the following components as being necessary for an effective SCP:
ROOT CAUSES OF SCP BREAKDOWNS
The Appendix to the Framework provides a non-exhaustive list of 10 “root causes” of OFAC sanctions compliance program breakdowns that result in enforcement actions. These root causes will factor into OFAC’s enforcement actions, including the determination of the amount of civil monetary penalties.
The 10 root causes are:
Among the 10 root causes, some deserve closer attention.
The first root cause identified by OFAC is a lack of a formal SCP. While the Framework recognizes that OFAC’s regulations do not technically require a formal SCP, as a practical matter organizations subject to U.S. sanctions jurisdiction should adopt a formal SCP. In so doing there are at least two benefits: (a) the existence of a formal SCP will be considered favorably when considering the appropriate resolution of an enforcement investigation by OFAC under the Guidelines; and (b) the existence of a formal SCP will be considered in OFAC’s analysis as an element as to whether an alleged violation is egregious.
OFAC is focused on non-U.S. companies. With respect to a formal SCP, for example, OFAC stated that it “particularly” encourages companies involved in international transactions with clients or counter-parties located outside of the U.S. to adopt a formal SCP. OFAC identified another root cause of enforcement actions as companies violate OFAC’s regulations “by referring business opportunities to, approving or signing off on transactions conducted by, or otherwise facilitating dealings between their organization’s non-U.S. locations and OFAC-sanctioned countries, regions, or persons.” OFAC’s position is amplified by several recent, high-profile sanctions-related enforcement cases against foreign financial institutions.
OFAC advises companies with integrated operations, particularly those involving or requiring participation by their U.S. locations or personnel, that they should “ensure any activities they engage in … are compliant with OFAC’s regulations.” (Among other things, this means understanding and avoiding so-called “facilitation” transactions which employ U.S.-based persons, entities, payment systems or other structures to effect a sanctioned transaction.) The fourth and fifth root causes identified by OFAC also refer to the role and activities of non-U.S. persons, signaling that foreign companies with operations or activities in the U.S. should focus on, and if necessary develop and strengthen, their SCPs.
Finally, OFAC is focused on large and sophisticated organizations, and it is arguable—and probably likely—that OFAC’s expectations are higher for those types of organizations. For example, with respect to OFAC’s enforcement actions in the context of improper exports or re-exports, OFAC focused on companies that were “large or sophisticated,” which either ignored or failed to respond to numerous warning signs. Similarly, with respect to enforcement actions for improper wire transfers, OFAC focused on “willful or reckless conduct” for an extended period, with actual knowledge or involvement by the organization’s management, and where the organizations were “large or sophisticated.”
OBSERVATIONS AND RECOMMENDATIONS
Entities subject to U.S. jurisdiction—regardless of location—should evaluate the effectiveness of their SCPs based on the roadmap and standards provided by OFAC in the Framework. If necessary, they should enhance their SCPs to meet OFAC’s expectations and to avoid preventable enforcement penalties.
When reviewing its SCP, a company should ensure that the SCP adopts all of the five essential components identified in the Framework. At a minimum, this means identifying categories of transactions that potentially impact OFAC sanctions prohibitions.
Finally (and possibly most importantly), fostering a culture of compliance is essential. OFAC makes it clear in the Framework that it expects management “to foster a culture of compliance throughout the organization.” That echoes the expectations of other regulators. In November 2017, for example, the Federal Reserve Bank of New York issued a white paper on Misconduct Risk, Culture and Supervision. Regulators increasingly recognize that regulations cannot cover all situations, so they expect financial institutions to create a culture of compliance that can fill any necessary gaps between regulations and guidance, on the one hand, and employee behavior, on the other hand. All organizations, especially large, sophisticated operations with multiple locations should expect the degree of their compliance culture to be an increasing focus in 2019 and beyond.
Stated another way, being able to demonstrate a commitment to compliance may be the most effective mitigation factor should OFAC initiate an investigation targeted against a U.S. or non-U.S. company for alleged sanctions violations.