OFAC and AML: What You Need to Know
The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) is tasked with enforcing U.S. economic sanctions on foreign parties. A key obstacle to achieving this goal is money laundering. If sanctioned parties can launder their money it can become difficult for OFAC to trace it. Because of this, OFAC sanctions law is closely intertwined with anti-money laundering, or AML, law.
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Given the recent swell in the importance of OFAC sanctioning law thanks to recent global conflicts and the drastic increase in the number of foreign individuals and entities that are under U.S. embargo, it is important for domestic companies to review the intersection between OFAC sanctions and AML law.
The OFAC compliance and AML defense lawyers at the national defense firm Oberheiden P.C. think that there are five things that you should know about OFAC and AML enforcement in 2023.
1. Your Current Business Associates Can Get You In Trouble With OFAC
When complying with OFAC’s requirements, most companies focus their efforts on vetting their new foreign clients, customers, or business associates. However, this overlooks the fact that existing clients – those who have already passed the OFAC compliance vetting process – can also expose the company to legal liability for violating American sanctions abroad.
Sanctioned parties, particularly those with any political power, even if it is just on a local level, frequently turn to their network of associates for help evading U.S. sanctions so they can continue to do business as normal. In some cases, they reach past their known network and coerce – sometimes through force or the threat of it – individuals or other companies to work on the sanctioned party’s behalf, even though they are otherwise unaffiliated with each other.
This can lead to problems for your American company if that new intermediary is one of your current clients. You may be doing business for the benefit of a sanctioned party and not know it.
Detecting this setup can be extremely challenging. Monitoring your business associates for changes in their behavior can often be the only way to determine whether they are no longer acting in their own interests, anymore, and have become an intermediary for a sanctioned party.
2. Do Not Trust Cryptocurrency to Hide Your Privacy
On a more anti-money laundering note, companies and individuals who do business with foreign parties should not disregard their due diligence and Know Your Customer (KYC) requirements because they have decided to conduct the transaction in cryptocurrency.
This decision was once a popular one. After all, cryptocurrencies touted their ability to do business in private, claiming to be virtually untraceable. Many individuals and some companies bought into this idea and leaned on it when doing potentially problematic business deals with foreign parties that showed signs of being targeted by American economic sanctions.
If that was ever a good decision, before, it is not a good one, now.
Law enforcement actions against cyber coins and platforms, such as FTX, show that investigators have figured out how to reliably trace the flow of cryptocurrency on the blockchain. Relying on a cryptocurrency to reduce the risk of violating U.S. sanctions by dealing with a sanctioned party is a great way to face scrutiny by OFAC.
3. Keep Up With International Developments
U.S. sanctions generally get imposed on people, organizations, or other entities that threaten American interests abroad or the country’s national security. This can entail nearly anything that disturbs the regional order of things.
It is critical to keep up to date with international developments that signal an escalation in conflicts that might boil over into a situation that calls for economic sanctions against parties that you deal with. By keeping your ear to the ground, you can foresee the imposition of economic sanctions against parties close to your business associates and arrange for alternative ways to get what your business needs before you have to scramble to do so.
A great example of this in action was when companies saw Russia building up its armed forces around Ukraine’s border, but did not wait for the invasion to begin before setting up new business arrangements with non-Russian partners. Numerous companies did this, and those that did were able to fare much better off when the United States imposed broad sanctions against nearly every company and person that was remotely connected to the subsequent invasion of Ukraine.
4. Monitor the SDN Lists Even More Closely
The first thing that companies need to know in order to avoid doing business with a sanctioned party is who is under U.S. economic sanctions. If you do not know this, you cannot take any steps to protect your company from legal liability for violating sanctions, let alone steps that would be deemed by OFAC as reasonable and diligent.
Because the Specially Designated Nationals and Blocked Persons (SDN) list is constantly being updated to reflect changes in circumstances, companies have to make a substantial effort to stay up-to-date.
The good news is that OFAC recognizes how difficult this can be. The agency offers automated updates about newly sanctioned parties through email or RSS feed.
However, it is still up to the company to sift through the newly-sanctioned parties and determine whether they already deal with them. If they do, the company may have to take appropriate action against their now-sanctioned client or customer, up to and including freezing their assets for OFAC’s investigation.
5. Regulators Have Come Out Against Wide De-Risking Policies
Given the difficulties of complying with OFAC’s sanctions, the Anti-Money Laundering Act of 2020, and other regulatory requirements in their particular industry, many financial institutions have erected additional compliance guardrails to further insulate themselves from liability for violating U.S. sanctions and AML laws.
One of the most common and stringent is “de-risking,” where a financial institution terminates a wide swath of accounts, or drastically limits their activities, when signs of money laundering or OFAC violations are detected. Importantly, and problematically, de-risking involves taking action against a group of accounts, even if they show no signs of risk and only bear resemblance to a particular account that has.
De-risking has been a popular tactic for large financial institutions for several years, as it takes immediate and strong action to insulate the institution, even at the expense of its customers.
Recently, though, the U.S. Department of the Treasury has called for an end to the practice, as the toll that it has on innocent customers can be quite significant. Instead, the Treasury Department urged financial institutions to at least try to isolate their efforts on individualized accounts, rather than all of the accounts that are similarly situated to the suspected one.
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Several FAQs About Oberheiden P.C. and OFAC Sanctions and AML Law
Who Does OFAC Have Jurisdiction Over?
While OFAC enforces U.S. economic sanctions on foreign parties, it does not have jurisdiction over them. Instead, it only has jurisdiction, or the power to regulate, U.S. businesses and citizens, as well as foreign parties that have a physical presence in the U.S.
Because of this limitation, OFAC’s enforcement of U.S. sanctions focuses not on the targets of the sanctions, but on the domestic entities that might do business with them, instead. That is why OFAC’s penalties for violating sanctions are imposed on the domestic entity that did business with a sanctioned party, rather than on the sanctioned party, itself.
What are the Penalties for Violating U.S. Economic Sanctions?
The penalties of violating U.S. sanctions will depend on the law authorizing the particular sanction at issue, as well as whether OFAC believes that the violation was willful or not. Willfully violating economic sanctions is a crime that can carry decades in prison. But even accidental violations carry civil penalties of more than a million dollars per transaction. Additionally, there is the reputational hit that people and business will face for getting accused of trading with America’s enemies, particularly if they were dealing with someone who has any notoriety.
What Sets Oberheiden P.C. Apart from Other White Collar Defense Firms?
There are several unique aspects of Oberheiden P.C. that let us provide exceptional legal guidance to our clients.
First, we are a national law firm with offices in nearly every major American city. Wherever you are, there is a good chance that our attorneys are nearby.
More importantly, though, all of our lawyers and investigators are senior-level professionals with extensive experience in the field of white collar crime defense. Many were also prosecutors in some of the same federal agencies that are likely investigating your case before coming to Oberheiden P.C.
You can rest assured that you are getting the experienced legal advice that you need for this difficult time you are facing.
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National AML and OFAC Lawyers at Oberheiden P.C.
Oberheiden P.C. is a national white collar defense and securities litigation firm that legally represents companies and individuals across the United States, including in AML and OFAC situations. They can help your company come into compliance with the law and reduce the odds of a violation, conduct an internal investigation to determine whether your company is at risk of liability, or defend your company in court if it has been accused of violating American sanctions or contributing to money laundering.
Contact us online or call our law offices at (888) 680-1745.
