Learn|||Compliance

What is OFAC?

The (OFAC) is a financial intelligence and enforcement agency under the jurisdiction of the US Treasury Department. Its job is to enforce economic and trade sanctions in alignment with US foreign policy and national security goals.

This regulatory authority ensures that US organizations are not conducting business with a sanctioned or embargoed country, or someone located in one.

The agency is also responsible for administering economic sanctions and embargoes that target specific geographic regions and governments. Sanctions can be applied comprehensively to an entire country or government, or selectively to individuals, groups, and entities, including terrorists or narcotics traffickers.

OFAC regulations play a significant role in mitigating payments sent to individuals or organizations that threaten US national interests—an issue that is paramount to security and foreign policy.

What are the origins of OFAC?

OFAC originated during World War II. The agency was the successor to the Office of Foreign Funds Control (FFC), which was established following the German invasion of Norway in 1940. Overseen by the Secretary of the Treasury during the war, the FFC initially sought to prevent Nazi use of foreign exchange and securities holdings in countries occupied by the Axis powers. ​​These sanctions cut off Nazi Germany and the Axis powers from repatriation of funds.

After the United States formally entered World War II, the FFC played a leading role in economic warfare against the Axis powers by blocking enemy assets and prohibiting foreign trade and financial transactions in the US.

The FFC formally became the OFAC in December 1950, after China entered the Korean War. President Truman declared a national emergency, blocking Chinese and North Korean assets under US jurisdiction. Today, the OFAC serves the same purpose: to protect the US economy, enforce national security, and uphold foreign policy goals.

What are OFAC regulations?

The OFAC outlines which countries, individuals, and entities are off limits for trading. Termed prohibited transactions, these are trade or financial transactions that are prohibited for US individuals and businesses—unless authorized by the OFAC.

Sanctions regulation falls into two categories: primary and secondary. Primary sanctions refer to economic restrictions that apply to American citizens, permanent residents, persons of any nationality located in the US, entities organized or incorporated in the US (along with any foreign branches), any transactions processed via the US financial system, or transacted in US dollars.

Primary sanctions typically include the following restrictions:

  • Import and export bans on goods, services, and technologies
  • Investment bans
  • Asset freezes for target countries, organizations, and individuals
  • Travel bans for individual targets

Secondary sanctions are designed to prevent third parties from trading with countries that are subject to sanctions issued by another country. Secondary sanctions are an extra precaution to enhance primary sanctions and protect the national security of the issuing country. In the US, OFAC secondary sanctions support primary sanctions programs against countries like North Korea and Iran, for example.

In some situations, the OFAC may grant individuals or businesses a license to engage in a transaction that would otherwise be prohibited. This extensive process requires filing a license request specific to the sanctions program. Application guidelines and requirements must be strictly followed, but may ultimately be overruled by federal laws.

What are OFAC’s violation penalties?

If a US individual or business fails to comply with regulations, they risk sending payments to individuals, groups, or entities deemed a threat to the US. Individuals and organizations may be unaware of existing sanctions and unintentionally send money to a bad actor. These funds may be held by the OFAC as a result.

Regardless of intent, violating sanctions results in steep fees and severe penalties. While civil penalties vary by sanctions program, many can be as high as $20 million, with prison sentences as long as 30 years.

These penalties extend to federal laws, too. If an individual or business violates the Trading with the Enemy Act, they could be penalized with a $65,000 fine per sanctions violation. For violations of the International Emergency Economic Powers Act, the fine increases to $250,000 per sanctions violation.

How do businesses remain compliant with OFAC?

Businesses in the US are responsible for monitoring potential links to sanctioned businesses and individuals. While most businesses do not knowingly conduct prohibited transactions, in a digital economy where vendors are sourced globally and many goods come from abroad there’s greater potential for sanctions violations. Even some businesses based in the U.S are considered foreign entities, complicating matters further.

Businesses can screen for potential conflicts by reviewing the OFAC’s Specially Designated Nationals () List or the Consolidated Sanctions List. They can also find information about each particular embargo or sanctions program online under the Sanctions Programs and Country Information area and in the Guidance and Information for Industry Groups area on OFAC's website.

Even when a business dissolves a relationship with a sanctioned entity, it can still have implications for the business. If a supplier is sanctioned, for example, it may impact an  organization’s entire supply chain. If funds are being held because of sanctions violations, it can complicate cash flow and reconciliation.

Businesses that work with large amounts of transactions on an international level should consider managing and limiting exposure to sanctions liability. To ensure safety and efficient operations, adhering to OFAC regulations begins with a thorough compliance process.

Compliance

Compliance refers to the regulations, laws, and guidelines governing businesses and financial institutions.

  1. 1What is OFAC?
  2. 2What is the Bank Secrecy Act (BSA)?
  3. 3What is AML Compliance?
  4. 4What is Know Your Customer (KYC)?