OFAC Requirements

The Office of Foreign Assets Control (OFAC) imposes several requirements for financial institutions and companies that do business with foreign governments, organizations, and individuals. Compliance with these requirements is essential, as non-compliance can lead to fines, blocked transactions, asset freezes, and even criminal enforcement action in some cases.

10 OFAC Requirements for Financial Institutions and Businesses in 2023

So, what are OFAC’s requirements in 2023? Here are some of the key requirements that financial institutions and businesses need to meet in order to effectively manage OFAC compliance:

1. Country-Based Sanctions Compliance

OFAC has adopted country-based sanctions that restrict or prohibit transactions with governmental organizations and other entities in 18 nations. Financial institutions and businesses seeking to do business with entities in these nations must ensure compliance with these sanctions—whether by avoiding prohibited transactions, relying on a general license, or obtaining a specific license. The nations that are subject to OFAC country-based sanctions in 2023 are:

• Afghanistan
• Belarus
• Burma
• China
• Cuba
• Darfur
• Ethiopia
• Hong Kong
• Iran
• Nicaragua
• North Korea
• Russia
• Somalia
• South Sudan
• Sudan
• Syria
• Ukraine
• Venezuela

2. Sector-Based Sanctions Compliance

OFAC’s sector-based sanctions restrict transactions involving certain trade sectors within designated countries. Along with OFAC’s country-based sanctions, financial institutions and businesses must also ensure compliance with OFAC’s sector-based sanctions when doing business overseas. Here, too, general licenses may apply, and specific licenses may be available in appropriate circumstances.

3. Smart Sanctions Compliance (SDN List Compliance)

OFAC’s smart sanctions (also known as list-based sanctions) target specific types of threats rather than targeting business involving entities in particular countries. For 2023, OFAC’s smart sanctions cover five broad areas of concern:

• Cybercrime
• Genocide and human rights abuses
• Terrorism
• Transnational organized crime
• Weapons proliferation

Entities and individuals identified as high-risk in these areas of concern are labeled as Specially Designated Nationals or Blocked Persons (SDNs). Under OFAC’s smart sanctions, SDNs’ assets are generally blocked, and U.S. entities and individuals are generally prohibited from dealing with SDNs. As a result, financial institutions and businesses must monitor OFAC’s SDN List, and they must have policies and procedures in place to identify SDNs and avoid engaging in prohibited transactions.

4. Secondary Sanctions Compliance

OFAC’s secondary sanctions apply to entities that are affiliated, directly or indirectly, with SDNs. While OFAC’s secondary sanctions program is relatively new, this is not an excuse for non-compliance. Thus, in 2023, financial institutions and businesses must have screening tools and procedures that are effective to identify both SDNs and entities and individuals that are subject to secondary sanctions.

5. General License Compliance

In many circumstances, financial institutions and businesses can facilitate and execute transactions that fall within the scope of an OFAC sanctions program by relying on a general license. As OFAC explains, “[p]ersons engaging in transactions pursuant to general or specific licenses must make sure that all conditions of the licenses are strictly observed.” OFAC publishes a “selected” list of general licenses online, and financial institutions and businesses can work with their OFAC compliance counsel to determine the applicability of these and other general licenses when seeking to conduct transactions that are subject to OFAC sanctions.

6. Industry-Specific OFAC Compliance

OFAC has published specific compliance guidance for several industry groups. Financial institutions and businesses in these groups must address this guidance when developing and managing their OFAC compliance programs. For 2023, OFAC has provided industry-specific guidance for:

• 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. Customer Due Diligence (“Know Your Customer” or “KYC”) Compliance

Customer due diligence is a key aspect of OFAC compliance. Under the Bank Secrecy Act (BSA) and other pertinent laws and regulations, financial institutions have an obligation to satisfy “know your customer” or “KYC” requirements in order to avoid dealing with SDNs and other high-risk parties. According to OFAC, inadequate customer due diligence is among the most common root causes of sanction violations, and it is a root cause that financial institutions can—and should—avoid.

8. Anti-Money Laundering (AML) Compliance

Anti-money laundering (AML) compliance is a key aspect of OFAC compliance as well. OFAC is one of multiple federal agencies that enforce financial institutions’ and businesses’ AML compliance obligations. Customer due diligence is one important aspect of AML compliance, but it is ultimately just one of many. A robust AML compliance program is essential for avoiding OFAC sanctions violations and mitigating organizations’ risk of facing scrutiny from OFAC and other federal authorities.

9. OFAC Compliance Policies and Procedures

When it comes to meeting their OFAC requirements in 2023, financial institutions and businesses must begin by developing custom-tailored compliance policies and procedures. While OFAC does not strictly require that financial institutions and businesses implement written policies and procedures, it “strongly encourages” organizations subject to its jurisdiction to “employ a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program.”

Additionally, as a practical matter, written OFAC compliance policies and procedures are essential. There are numerous aspects to OFAC compliance, and the risks of non-compliance are far too great to ignore. Financial institutions and businesses need to take a formalized and structured approach to OFAC compliance, and they must have adequate documentation on hand to affirmatively demonstrate their compliance efforts to OFAC when necessary.

10. OFAC Risk Assessments

Similarly, while not strictly required, OFAC considers periodic risk assessments to be one of the “five essential components of compliance.” As a practical matter, risk assessments are critical to effective OFAC compliance management as well. To implement effective policies and procedures, financial institutions and businesses need to know which sanctions programs, laws, rules, and regulations apply—and they need to know whether their compliance efforts are sufficient to meet all pertinent requirements.

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Meeting OFAC’s Requirements in 2023

Given the extensive requirements that apply to financial institutions and businesses that are subject to OFAC’s oversight, what does it take to effectively manage OFAC compliance? Here are five keys (among many others) to meeting OFAC’s requirements in 2023:

• Identifying All Applicable OFAC Requirements – Not all of OFAC’s requirements apply to all financial institutions and businesses in all cases. To ensure that they are addressing all pertinent requirements without unnecessarily devoting time and resources to others, organizations should begin their compliance efforts by identifying the specific requirements that apply to their business.
• Developing Custom-Tailored OFAC Compliance Policies and Procedures – To serve their intended purpose, OFAC compliance policies and procedures must be custom-tailored to a financial institution’s or business’s specific risks and needs. Once an organization identifies all applicable OFAC requirements, it can then shift its focus to addressing these requirements in written policies and procedures that reflect all of the various unique aspects of its business operations.
• Implementing Sanctions Screening Software and Other Tools – In today’s world, financial institutions and businesses that process a high volume of transactions and do business with customers around the world need to rely on technology to help them meet OFAC’s requirements. While OFAC recognizes that organizations will use sanctions screening software and other similar types of tools, it also warns that technological shortcomings are not an excuse for non-compliance. In particular, OFAC notes that failure to update software, failure to account for alternative spellings, and other similar types of issues are also among the leading root causes of sanctions non-compliance.
• Conducting Internal OFAC Compliance Training – Internal OFAC compliance training is another of OFAC’s “five essential components of compliance.” All personnel should receive training that is suited to their position, experience, skill level, and job responsibilities. While human error can serve as a defense (or at least a partial defense) to violations of OFAC requirements in some cases, organizations cannot point the finger at individual employees when they have failed to provide adequate training.
• Monitoring, Auditing, and Re-Evaluating Compliance with OFAC’s Requirements – Addressing OFAC’s requirements is not a one-time event. Once financial institutions and businesses implement OFAC compliance programs, they must continue to monitor and audit their compliance efforts on an ongoing basis. Organizations must regularly re-evaluate their compliance needs as well, as new business lines can implicate additional requirements, and as OFAC adopts new sanctions (and other rules and requirements) from time to time.

Again, these are just examples. Meeting OFAC’s requirements in 2023 is a challenging and complex process that requires an in-depth understanding of OFAC’s sanctions programs, the available general licenses and specific license application requirements, the other governing laws and regulations, and OFAC’s examination priorities and procedures. For financial institutions and businesses that are subject to OFAC’s oversight, the first step toward managing compliance effectively is engaging a team of experienced lawyers and consultants who can confidently guide you forward.

Schedule an OFAC Compliance Consultation at Oberheiden P.C.

If you need to know more about the OFAC requirements that apply to your financial institution or business in 2023, we encourage you to arrange a complimentary initial consultation at Oberheiden P.C. To speak with a senior OFAC compliance lawyer or consultant in confidence, please call 888-680-1745 or tell us how we can contact you online today.