Companies Must Vet Business Partners
For companies that wish to do legitimate business with potentially sanctioned countries or corporations, understanding the ins and outs of the U.S. government’s enforcement regime and whether a potential trading partner is under sanction are key.
The Treasury Department’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions against certain countries, their respective governments and a long list of so-called Specially Designated Nationals (SDNs). Most often, sanctions amount to the blocking or freezing of assets and restrictions on trade.
The list of SDNs includes individuals and companies owned, controlled by, or acting for or on behalf of, targeted countries. It also includes non-state actors such as terrorists, criminals engaged in the proliferation of weapons of mass destruction and international narcotics traffickers.
Generally, OFAC regulations bar “U.S. persons” from dealing with SDNs, or parties of which they own more than 50 percent, even if those parties are not identified on the SDN list. The term “U.S. persons” includes U.S. citizens and U.S. lawful permanent residents, wherever located; entities organized under U.S. law and their foreign branches; and any person present in the United States, regardless of nationality.
U.S. persons working with SDNs can be subject to civil or criminal penalties, including imprisonment. OFAC criminal penalties — which require a showing of willfulness — can include fines of $1 million per violation, asset forfeiture and up to 20 years in prison. Depending on the OFAC sanctions program, civil penalties range from $250,000 per violation or twice the amount of transaction, to more than $1 million. In a narrow set of circumstances, dealings with SDNs may be “exempt” from the regulations or can be licensed by OFAC.
OFAC in March released a new screening tool for the public to search for SDNs. This free tool is designed to assist the public in complying with sanctions programs. Using the tool, companies can quickly determine whether an entity or individual with whom they want to conduct business is an SDN and, therefore, off limits.
The tool previously returned results only for exact matches to the search terms used. OFAC’s improvements now provide a broader set of results beyond exact matches using fuzzy search logic. The fuzzy logic only works on the name field, however.
This key feature reduces the risk that SDNs will be missed due to a non-exact search term or other mistakes. For example, using the improved OFAC screening tool, a search for the “Bank of Iran,” will now return several possible matches including “Bank-e Iran Zamin,” “Joint Iranian-Venezuela Bank” and “National Bank of Iran.”
The search tool only screens against OFAC’s list. It does not capture persons or entities listed on other restricted party lists, such as lists maintained by the State and Commerce departments. The State Department maintains multiple lists that include the List of Debarred Parties and the Nonproliferation Sanctions Lists. The Commerce Department also has restricted lists that include the Denied Persons List, the Entity List and the Unverified List. Links to these various lists can be found at www.bis.doc.gov/complianceandenforcement/liststocheck.htm.
Complying with OFAC’s growing list of SDNs, which now includes more than 7,000 entries, challenges companies large and small. For years, financial institutions have used sophisticated screening systems to weed out SDNs in transactions. Large companies have also relied on powerful but expensive commercial software screening programs. These commercial programs make it much easier for large companies to screen against multiple lists with increased comfort that they will uncover all potential matches, allowing for more informed positive match determinations.
Those unable to afford interdiction software can now use the new and improved SDN-search tool for free. Companies not already relying on a commercial software screening solution should build or enhance compliance programs using OFAC’s new tool.
Screening is important, even for transactions that do not involve embargoed countries — Cuba, Iran, Sudan, Syria or North Korea, for instance — or other high-risk jurisdictions. Companies should screen all parties in a transaction, including suppliers, customers, banks and vessels. The list includes parties worldwide, including those based in Western Europe as well as the United States.
And screening alone may not be enough, as it only picks up listed SDNs. A party of which more than half is owned by an SDN is also off limits, even if it is not on the list. For example, if ABC Company owns 50 percent or more of SDN-listed XYZ Company, ABC Company is considered a de facto SDN, and you may not engage in any dealings with ABC Company.
Companies also should consider keeping records of all searches. A record of the screen should be part of the transaction file. Some sophisticated screening software programs allow users to download screen results directly to spreadsheet applications such as Microsoft Excel.
OFAC’s new and improved SDN tool is a valuable addition to the several useful resources available to help companies more reliably meet their obligations and should be added to all comprehensive compliance programs.
It can be found at www.treasury.gov/resource-center/sanctions/SDN-List.
Carol A. Connolly is assistant counsel at Pratt & Whitney. The views expressed are solely those of the author.