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Root Causes Of OFAC Sanctions Violations

The role of the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) is to implement and manage US economic and trade sanctions against specific foreign governments and regimes, terrorists, drug traffickers, and dubious organizations. OFAC aims to encourage and check that people or organizations who trade in US goods and services develop and implement a routinely updated sanctions compliance program (SCP). 

Depending on the company’s size and complexity, geographic location, customer base, products, and services, their SCP will vary. The five essential components of the SCP are: 

  • Management commitment
  • Risk assessment
  • Internal controls
  • Testing and auditing
  • Training

What Are The Four Main OFAC Sanction Programs?

The many OFAC sanction programs are designed to react to specific US security threats, foreign policy, and national security goals. OFAC restricts financial or trade-related activities of a country, region, government, or individual deemed unlawful or harmful. 

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The most comprehensive sanctions programs that OFAC administers typically include are: 

Trade or Embargo-Based Sanctions

Organizations are prohibited from importing or exporting goods or services from sanctioned areas like Cuba, Iran, North Korea, Syria, and Ukraine.

Government or Regime Sanctions

Certain foreign governments or regimes cannot transact or engage with US people or the United States. 

List-Based Sanctions

There are lists of individuals and entities whose property and assets are blocked by OFAC. These individuals and entities cannot trade within the United States. 

Sectoral Sanctions

Specific divisions of certain foreign countries are targeted and prevented from operating within the United States. 

Who Must Comply With OFAC Sanctions?

All US citizens and all lawful US permanent residents, wherever they are located, must comply with OFAC sanction regulations. US financial institutions operating outside the country, goods or services exported from the country, and all non-US persons involved with business activities in the US are all expected to adhere to sanction requirements. 

Additionally, any violation of sanction rules and any US citizen facilitating sanctioned actions on behalf of non-US citizens is prohibited. 

Root Causes of Violating OFAC’s Sanction Regulations

There are ten main reasons organizations and individuals violate OFAC sanction regulations listed below. 

No Sanction Compliance Program (SCP)

Often organizations do not have an SCP, and this violates sanction regulations. Those subject to US administration and controls include goods, services, technology, and international trade companies. Companies that either reside in the US do business with the US or complete activities through the US are subject to OFAC sanction rules. 

No Understanding of OFAC’s Sanction Regulations

Some people do not realize that OFAC prohibits their transaction or activity, others misinterpret the fine print of the regulations, and some actively disregard these rules. Common misrepresentations are when a US-owned or controlled subsidiary is in an unrecognized foreign government or has systems, goods, or technology business networks with people from these foreign governments. Another misunderstanding occurs when individuals are operating a prohibited activity.  

Irregular Dealings In Sanctioned Regions 

Today, multiple organizations operate globally, and many have subsidiary companies outside the US. OFAC monitors any transactions where a business opportunity has been referred and a business transaction has taken place in sanctioned countries or locations outside the US. If these are transactions between non-US citizens or sanctioned countries, they violate OFAC’s sanction regulations.  

International companies and corporations with locations or personnel in the US should ensure that all approval contracts and procurement are compliant with OFAC’s regulations. 

Irregular Trading Of United States Goods and Services 

Irregular trading involves trading goods and services to OFAC’s sanctioned countries, regions, or personnel. It also includes entrepôt trading where US goods are imported into a foreign country with the sole intent to re-export or transfer these items to a person, country, or region on OFAC’s sanctions list. 

Large companies or corporations who have engaged in this type of trading for many years and have ignored or been unresponsive to OFAC’s warnings are violating OFAC’s regulations, which can affect their reputation.

Processing Irregular Financial Transactions 

Financial and commercial transactions in US Dollars to a person or within a sanctioned country contravene OFAC sanctions regulations. When offenders manipulate payment messages or doctor financial representations, OFAC treats these violations as a serious threat to national security and foreign relations. Criminal offenders face monetary fines dependent on the severity of the crime and prior convictions — ranging from $90,000 per violation to several million US Dollars — and prison time up to 30 years. 

Outdated Sanctions Screening Software 

Organizations must update sanctions screening software to their Specially Designated Nationals And Blocked Persons (SDN) list or Sectoral Sanctions Identifications (SSI) list. To comply with OFAC, customers, supply chains, and intermediaries should be screened. All commercial and financial documents and transactions to all parties and locations should be transparent and identified. Organizations should update designated, blocked, or sanctioned financial institutions and be aware of changes in countries’ names or alternative spelling of regions. 

Inadequate Due Diligence

Due diligence is an audit or careful assessment of the costs and risks of a potential investment to confirm that the seller’s information is accurate. Some companies perform improper or incomplete due diligence on customers. A practical OFAC risk assessment involves diligence on where a company operates, who owns the company, and all financial records and transactions. 

Decentralized SCP

Foreign corporations, partnerships, and associations owned or controlled by US individuals or companies have committed decentralized SCP violations. Each organization should design, change, and apply its risk-based SCP on its characteristics. When personnel and decision-makers are placed in various offices, the SCP training, interpretation, and application of OFAC’s sanctions-related policies and procedures become decentralized. 

Using Non-traditional Payment Methods 

Some organizations attempt to conceal or circumvent OFAC sanction-related policies and hide their business using non-traditional payment methods to complete their transactions. Senior staff of US-owned or controlled companies have violated OFAC regulations, even though their company has a lavish SCP in place. These employees conduct dealings or transactions with OFAC-sanctioned regions. 

Employees of the foreign entities obscure and hide their activities from others within the corporate organization. OFAC will consider using its enforcement authority against the violating entities or individuals in these circumstances.

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