The Office of Foreign Assets Control (OFAC) is a financial intelligence and enforcement agency in the United States Department of the Treasury.
OFAC’s primary objective is to administer and enforce economic sanctions on countries and individuals involved in illegal activities. This includes terrorists, drug traffickers and entities who stockpile weapons of mass destruction.
OFAC was established in December 1950 during the Korean War. At the time, President Truman froze all Chinese and North Korean assets after the latter had invaded South Korea six months earlier.
However, the origins of OFAC can be traced to earlier efforts in World War II when Treasury imposed economic sanctions on Axis powers by blocking enemy assets and prohibiting foreign trade.
Over the decades, OFAC’s role has expanded to include the enforcement of economic sanctions related to U.S. national security and foreign policy concerns. Sanctions target countries, terrorist organisations, drug traffickers and any other entities that pose a threat to American interests.
OFAC also maintains the Specially Designated Nationals and Blocked Persons (SDN) list. This is a public record that details the individuals and entities with whom U.S. citizens are prohibited from dealing.
Economic sanctions can be divided into two broad types: comprehensive and targeted.
In many instances, comprehensive sanctions are broad measures that prohibit all commercial activity with an entire country. However, these sanctions can also apply to individuals and organisations within the country itself.
While some exceptions are made for humanitarian reasons, comprehensive sanctions present few opportunities for lawful transactions without a specific OFAC exemption.
Targeted sanctions restrict specific individuals, entities, companies and sectors within a country. Invariably, they relate to activities such as cybercrime, foreign interference, international drug trafficking and terrorism.
Targeted sanctions prohibit entities in the United States from doing business with the sanctioned party and aim to minimize collateral damage to the economy and population of the target country.
OFAC imposes sanctions in line with the foreign policy and national security objectives of the U.S. Government.
These are typically authorised by Congressional legislation, but the President can also exercise certain powers in a national emergency via executive orders that outline the target(s) and scope of sanctions.
Additionally, sanctions may be imposed based on United Nations mandates and in cooperation with U.S. allies. In this context, the objective of OFAC sanctions is to dissuade a country or group of individuals from acting in a way seen as detrimental to global society.
To understand how sanctions are imposed and regulated in practice, it is important to consider two categories: primary sanctions and secondary sanctions.
Primary sanctions describe measures imposed by the United States on another country, entity or individual. In other words, they prohibit transactions between entities in the USA and the countries, entities or individuals subject to sanctions.
In many cases, the entity within the United States is an American citizen. But primary sanctions also apply to:
The sanctions themselves can take a few different forms. OFAC may impose import and export bans, investment bans, asset freezes and travel bans for specific individuals.
Secondary sanctions extend beyond the U.S. borders and target third parties that trade with a sanctioned country or entity.
These sanctions – which support primary sanctions – aim to pressure other countries, businesses or individuals to comply with American policies.
Under two separate Acts, secondary sanctions were imposed in 2010 and 2013 on Iran’s oil and gas sector. Foreign entities who transact in this sector risk being sanctioned and prevented from accessing the U.S. financial system.
The Specially Designated Nationals and Blocked Persons list contains the names of around 15,000 companies and individuals whom American citizens are banned from doing business with.
OFAC also maintains various other lists such as the:
Any transaction facilitated by a financial institution in the United States is subject to OFAC regulations. By extension, any transaction involving a sanctioned entity is unlawful.
Here is what happens when a transaction does not adhere to such regulations.
OFAC regulations specify that the assets and bank accounts of sanctioned entities be blocked (frozen) if either property is held within the USA or by U.S. entities or individuals.
Assets and bank accounts must also be frozen if they come into the possession of U.S. entities or individuals.
If funds are moved from a U.S. bank to an off-shore bank in a sanctioned country, for example, the transaction must be blocked.
The precise definition of an asset depends on the sanctions program. Generally speaking, assets are anything with present, future, contingent, direct or indirect value (which includes all bank transactions).
This means banks must block transactions that:
Note that if a bank initiates a transaction that satisfies any of the above conditions, it must execute the payment and transfer the funds to an account that complies with OFAC regulations. This means the funds are segregated from the bank’s other funds and managed separately.
Assets remain frozen until OFAC takes further action. The body may authorise the release of the assets to the rightful owner if relevant sanctions are lifted or modified.
Prohibited transactions are forbidden by law. While blocked transactions require the assets of sanctioned entities to be frozen, prohibited transactions are simply rejected and not processed.
Consider a bank that is placed on the SDN list due to its involvement in activities deemed contrary to U.S. national security. A bank in the United States then receives a payment request to transfer $100,000 to the foreign bank as part of a legitimate business transaction.
However, the transaction is denied because all U.S. persons and entities are prohibited from dealing with entities on the SDN list.
Blocked and prohibited transactions must be reported to OFAC within 10 business days. Reports should detail the amount of the transaction, the parties involved and the reason for the blocking action.
In addition, institutions must file an annual report with OFAC that lists the blocked property they hold as of June 30 each year.
OFAC expects banks to establish a compliance framework that reflects certain types of activities.
These include:
Compliance also considers the products, services, customers and nature of transactions related to the business. Collectively, these factors (and the above activities) contribute to the company’s risk profile.
Though not an exhaustive list, examples of contexts with high OFAC risk include:
For high-risk areas, banks establish screening and reporting controls, train staff on proper procedure, implement robust KYC procedures and test for compliance with internal or external audits.
Large multinational banks may dedicate entire departments to these endeavors.
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