OFAC Compliance Checklist

Financial institutions and other businesses need to prioritize Office of Foreign Assets Control (OFAC) compliance in 2023. OFAC enforces various economic sanctions programs as well as the Bank Secrecy Act (BSA), International Traffic in Arms Regulations (ITAR), and other sources of statutory and regulatory authority, and non-compliance with any of these can lead to swift and aggressive enforcement action.

So, what does it take to maintain an effective OFAC compliance program in 2023? Here is a checklist that covers financial institutions’ and businesses’ primary compliance obligations:

Checklist: Managing an Effective OFAC Compliance Program in 2023

There are several aspects to OFAC compliance. Financial institutions and businesses must address OFAC compliance in numerous aspects of their operations, and they must implement policies, procedures, and protocols that are designed to detect and prevent prohibited transactions. OFAC has published several compliance resources—including A Framework for OFAC Compliance Commitments (the “Framework”) and the OFAC Risk Matrix—however, while these are intended to be helpful, OFAC makes clear that they do not cover everything that an effective OFAC compliance program needs to address.

1. Management Commitment

OFAC’s Framework identifies “five essential components of compliance.” The first of these five essential components is a top-down commitment to maintaining compliance from the highest levels of an organization’s management. As OFAC explains in the Framework:

“Senior management commitment to supporting an organization’s SCP is a critical factor in determining the success of the SCP. Effective management support includes the provision of adequate resources to the compliance unit(s) and support for compliance personnel’s authority within an organization.”

It is senior management’s duty to ensure not only that a financial institution or business has an effective OFAC compliance program, but also that the organization is devoting adequate resources to effectively manage OFAC compliance on an ongoing basis. If this management commitment isn’t clear—both in documentation and in practice—this will raise major red flags during an OFAC examination.

2. Identification of Applicable OFAC Sanctions

OFAC has implemented several sanctions programs that prohibit transactions with specified governments, private organizations, and individuals. The most well-known of these sanctions programs is the Specially Designated Nationals List (SDN List), but OFAC has implemented country-based sanctions, smart sanctions (targeting specific concerns, such as terrorism and cybercrime), sector-based sanctions, and secondary sanctions (targeting entities affiliated with SDNs) as well.

Identifying all of the OFAC sanctions that apply to a financial institution’s or business’s operations is not an easy process. However, it is essential. Sanctions compliance is a core component of overall OFAC compliance, and violating OFAC sanctions—even inadvertently—can lead to substantial fines and other consequences.

3. Identification of Applicable General Licenses

General licenses authorize transactions that would otherwise be prohibited under OFAC’s sanctions programs. Along with identifying all applicable sanctions programs, financial institutions and businesses should identify any applicable general licenses as well. When general licenses apply, financial institutions and businesses can use these licenses to execute transactions in the ordinary course. However, when relying on general licenses, financial institutions and businesses must have documentation on hand that clearly establishes the relevant licenses’ applicability, and they must ensure that they execute all relevant transactions in strict accordance with the applicable licenses’ restrictions and requirements.

4. OFAC Risk Assessment

In its Framework, OFAC recommends that financial institutions and businesses “take a risk-based approach when designing or updating [a Sanctions Compliance Program].” It further advises that, “One of the central tenets of this approach is for organizations to conduct a routine, and if appropriate, ongoing ‘risk assessment’ for the purposes of identifying potential OFAC issues they are likely to encounter.”

In parallel with identifying all pertinent sanctions programs and general licenses, financial institutions and businesses should conduct risk assessments focused on identifying all areas of their operations in which OFAC compliance is a concern. This includes assessing their management structure, assessing the efficacy and sufficiency of their existing compliance policies and procedures, and identifying transactions that implicate OFAC’s sanctions programs.

5. Internal OFAC Compliance Controls

Internal controls are an essential component of any OFAC compliance program. The Framework advises that financial institutions’ and businesses’ internal controls should be sufficient to “identify, interdict, escalate, report (as appropriate), and keep records pertaining to activity that may be prohibited by the regulations and laws administered by OFAC.”

Determining what internal controls are necessary for any particular financial institution or business requires an in-depth understanding of the organization’s operations. Policies and procedures, documentation requirements, customer due diligence, and logical safeguards may all be necessary—among other types of internal controls. In many respects, internal controls are the backbone of an effective OFAC compliance program, and being able to demonstrate that a financial institution or business has implemented effective internal controls can be essential for avoiding sanctions violations and other OFAC compliance failures.

6. Industry-Specific OFAC Compliance

Businesses in many industries are subject to industry-specific OFAC compliance obligations. For those that are subject to these obligations, implementing appropriate internal controls and other safeguards is essential for managing OFAC compliance in 2023. OFAC has published industry-specific compliance guidance for entities engaged (and financial institutions that serve entities engaged in) in the following types of business:

• Credit reporting
• Exporting and importing
• Financial services
• Instant payment systems
• Insurance
• Legal and compliance
• Money services
• Non-governmental organizations and non-profits
• Virtual currency

7. Policies and Procedures for Seeking Interpretive Guidance and Applying for Specific Licenses

In various circumstances, financial institutions and businesses may need to seek interpretive guidance from OFAC. Obtaining interpretive guidance serves as a safeguard for entities that have concerns about the potential sanctions-related implications of engaging in certain transactions.

Applying for a specific license is an option as well. Specific licenses provide express approval for transactions that would otherwise violate an OFAC sanction. Financial institutions and businesses should have policies and procedures in place to ensure that they seek interpretive guidance and apply for specific licenses when necessary.

8. Procedures and Safeguards for Identifying High-Risk Customers and Transactions

Inadequate customer due diligence and facilitating transactions between blocked entities and individuals are among the most common compliance violations according to OFAC’s framework. With this in mind, financial institutions and businesses should have procedures and safeguards in place to proactively identify high-risk customers and transactions. Along with internal OFAC compliance controls, these procedures and safeguards may include tools such as customer identification forms, sanctions screening software, and step-by-step guidance for personnel who are involved in approving customers and transactions.

9. OFAC Compliance Testing and Auditing

In addition to conducting OFAC risk assessments, financial institutions and businesses should also conduct periodic compliance testing and auditing. Organizations should have policies and procedures in place to regularly stress-test their compliance programs, systems, and software, and they should audit their compliance programs at least annually. Testing and auditing are among OFAC’s “five essential components of compliance” as well, and it is clear that OFAC expects organizations to proactively ensure that their compliance programs are working as intended.

10. OFAC Compliance Training

Training is another essential component of OFAC compliance management. Financial institutions and businesses that are subject to OFAC’s oversight should include training in their onboarding procedures, and they should conduct refresher training programs as well. As with organizations’ compliance policies and procedures, their OFAC compliance training programs should be custom-tailored to their specific needs, and organizations should fully document their training efforts so that they can demonstrate these efforts to OFAC if necessary.

11. OFAC Compliance Documentation (Initial and Ongoing)

Along with documenting their training efforts, financial institutions and businesses that are subject to OFAC’s oversight should implement policies and procedures that are designed to ensure documentation of their other compliance efforts on an ongoing basis. When facing scrutiny from OFAC, having this documentation on hand can be key. Not only does OFAC expect financial institutions and businesses to maintain compliance, but it expects them to be able to demonstrate their compliance as well. If they can’t, this will also generally be viewed as a red flag, and OFAC will err on the side of assuming non-compliance.

12. Protocols for Voluntary Self-Disclosure and OFAC Examination Defense

When financial institutions and businesses inadvertently commit OFAC compliance violations, voluntary self-disclosure may be necessary. Additionally, regardless of whether an organization is compliant, facilitating or engaging in transactions that implicate OFAC sanctions has the potential to trigger an OFAC examination. To ensure that they are prepared when the time comes, financial institutions and businesses should adopt protocols that specify what to do in the event that voluntary self-disclosure or OFAC examination defense becomes necessary.

Similar to OFAC’s compliance resources, while this OFAC Compliance Checklist for 2023 is intended to serve as a practical resource, it is not a substitute for legal representation. Financial institutions and businesses that are subject to OFAC’s oversight need to develop and implement custom-tailored OFAC compliance programs with the assistance and oversight of experienced counsel.

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Do you have questions about what your financial institution or business can (and should) be doing to manage OFAC compliance in 2023? If so, we invite you to get in touch. Call 888-680-1745 or contact us online to schedule an appointment today.