Ten OFAC Compliance Strategies

For financial institutions and other entities subject to the Office of Foreign Assets Control’s (OFAC) oversight, maintaining compliance needs to be a top priority. OFAC enforces several federal laws and regulations, and non-compliance can present risks for both civil and criminal enforcement.

Like all areas of corporate compliance, there are several aspects to OFAC compliance. However, OFAC compliance is also somewhat unique due to the nature and breadth of the laws and regulations falling within OFAC’s enforcement jurisdiction. While OFAC has provided compliance guidance, this guidance serves as a general roadmap only—and financial institutions and other entities must work with counsel to independently assess their compliance program needs.

Strategies for Managing OFAC Compliance in 2023

What does it take to effectively manage OFAC compliance in 2023? Here are 10 strategies for financial institutions and other entities:

1. Conduct an OFAC Risk Assessment and Review

As noted above, one of the first steps toward effectively managing OFAC compliance is to assess the financial institution’s or entity’s compliance needs. This involves conducting an OFAC risk assessment and review.

To conduct these risk assessments and reviews, financial institutions and other entities can use the OFAC Risk Matrix. This is a regulatory document that appears in the Annex to Appendix A to OFAC’s Economic Sanctions Enforcement Guidelines (31 C.F.R. Part 501). The OFAC Risk Matrix identifies 13 areas of concern that financial institutions and other entities can use to self-assess the efficacy of their current OFAC compliance programs; or, if they do not currently have programs, to begin identifying the risks they will need to address through the compliance program development process.

2. Identify All Pertinent OFAC Sanctions

Along with conducting an OFAC risk assessment and review, financial institutions and other entities should also identify all pertinent OFAC sanctions. OFAC has implemented multiple sanctions programs that restrict U.S.-based banks and businesses from doing business with various foreign entities and individuals. These include country-based sanctions, list-based sanctions (or “smart sanctions”), sector-based sanctions, and secondary sanctions.

When assessing the applicability of individual OFAC sanctions, it is critical to carefully review the applicable sanction program’s regulatory language in detail. Financial institutions and other entities should assess the applicability of any general licenses as well. These general licenses authorize transactions that would otherwise be prohibited under an OFAC sanctions program.

3. Follow OFAC’s Framework for Compliance

Once a financial institution or other entity has assessed its compliance risks and needs, the next step is to apply OFAC’s framework for compliance. This informal guidance from OFAC identifies five key areas of compliance that require careful consideration when developing an OFAC compliance program (or, in OFAC’s terminology, a “sanctions compliance program” or “SCP”). As OFAC explains:

“OFAC strongly encourages organizations subject to U.S. jurisdiction, as well as foreign entities that conduct business in or with the United States, U.S. persons, or using U.S.-origin goods or services, to employ a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program (SCP). While each risk-based SCP will vary depending on a variety of factors—including the company’s size and sophistication, products and services, customers and counterparties, and geographic locations—each program should be predicated on and incorporate at least five essential components of compliance . . . .”

These five essential components of compliance are:

• Management Commitment – OFAC takes the position that management’s commitment to compliance is “essential” to ensuring that an entity devotes the necessary resources to developing an SCP that is “fully integrated into the organization’s daily operations.”
• Risk Assessment – In addition to conducting a preliminary risk assessment, OFAC indicates that entities should also conduct assessments periodically on an ongoing basis.
• Internal Controls – OFAC states that an effective compliance program should “include internal controls . . . in order to identify, interdict, escalate, report (as appropriate), and keep records pertaining to [regulated] activity.”
• Testing and Auditing – Along with conducting periodic risk assessments, entities should also test and audit the strength and efficacy of their compliance programs to identify any risks for compliance failures.
• Training – OFAC indicates that compliance training is essential as well, stating that “[a]n effective training program is an integral component of a successful SCP.”

4. Use the OFAC Risk Matrix

When identifying their compliance program needs, financial institutions and other entities can use the OFAC Risk Matrix to determine what steps they need to take to adequately address their compliance obligations. For each of the 13 areas identified on the Risk Matrix, OFAC provides examples of practices and policies that give rise to “low,” “moderate,” and “high” levels of risk. If a financial institution or other entity is in the “low” category for all 13 areas, not only is it less likely to inadvertently commit compliance violations, but it is less likely to face scrutiny and enforcement action from OFAC as well.

5. Follow OFAC’s Industry-Specific Compliance Guidance

Along with the OFAC Risk Matrix and OFAC’s framework for compliance, financial institutions and other entities can (and should) review OFAC’s industry-specific compliance guidance. OFAC has published compliance resources for the following industry groups:

• Instant Payment Systems
• Credit Reporting
• Exporters and Importers
• Financial Sector
• Insurance Industry
• Legal and Compliance Services Sector
• Money Service Businesses
• Non-Governmental Organizations (NGO)/Non-Profit
• Virtual Currency Industry

For financial institutions and other entities operating within these industry sectors, effectively managing industry-specific compliance will be a key component of overall OFAC compliance management. Since OFAC makes this industry-specific guidance publicly available, it expects all covered entities to comply, and it expects them to be able to demonstrate their industry-specific compliance efforts on demand.

6. Develop a Custom-Tailored OFAC Compliance Program

Taking all of these resources into account, financial institutions and other entities must develop custom-tailored OFAC compliance programs that reflect their specific industry sector, customers, transaction types, and general risks and needs. An effective SCP will include written policies and procedures, training programs, incident response protocols, appointment of an OFAC compliance officer (and potentially an OFAC compliance team), and several other core components—all of which are custom-tailored to the entity’s structure and business activities.

7. Implement the OFAC Compliance Program

After developing a comprehensive SCP, the next critical step is implementation. There are several steps in the implementation process, from formally appointing an OFAC compliance officer to disseminating compliance program materials and providing appropriate training to personnel at all levels of the organization. Crucially, however, implementing an SCP is not a one-time event. Financial institutions and other entities must actively manage OFAC compliance on an ongoing basis. While primary responsibility should rest with the entity’s OFAC compliance officer, the compliance officer should also have authorization to engage with outside counsel as necessary.

8. Stress Test the OFAC Compliance Program

As discussed, OFAC considers testing and auditing to be critical components of effective compliance management. Testing and auditing are different from conducting risk assessments utilizing the OFAC Risk Matrix. Financial institutions and other entities must work with their outside counsel to stress test their OFAC compliance programs at least annually, as they must ensure that they are able to identify and effectively address high-risk transactions in the ordinary course of business.

9. Monitor Internally and Externally for Changes Impacting Compliance

Another key aspect of effective OFAC compliance management is acknowledging that an entity’s compliance obligations can (and inevitably will) change over time. The need to update or modify an entity’s SCP can result from either: (i) changes to OFAC’s sanctions programs or the laws and regulations governing cross-border financial transactions; or, (ii) changes to an entity’s customer base, service offerings, or internal operations. When changes necessitate updates or modifications, entities must work with their counsel to proactively address their new compliance duties.

10. Proactively Engage with OFAC as Necessary

Finally, to effectively manage OFAC compliance, financial institutions and other entities must also be able to identify when it is necessary to proactively engage with OFAC. The need to make contact with OFAC can arise in four primary scenarios:

• Seeking Interpretive Guidance – When the risks associated with a particular transaction are unclear, financial institutions and other entities can seek interpretive guidance from OFAC. OFAC’s interpretive guidance serves as a formal opinion regarding the legality of a proposed transaction.
• Applying for Specific Licenses – If a proposed transaction would run afoul of an OFAC sanction and no general licenses apply, it may be possible to obtain a specific license that authorizes the transaction.
• Self-Disclosing Compliance Violations – In certain circumstances, financial institutions and other entities may have an obligation to self-disclose compliance violations. When self-disclosure is necessary, making a timely and effective disclosure can be essential for mitigating an entity’s risk of enforcement action.
• Responding to OFAC Inquiries – When financial institutions and other entities receive inquiries from OFAC, they should respond promptly. When doing so, however, they must be very careful, and they should only disclose information on the advice of counsel.

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Speak with an OFAC Compliance Attorney at Oberheiden P.C.

Do you have questions about what your financial institution or business can (and should) be doing to effectively manage OFAC compliance in 2023? If so, we invite you to get in touch. To speak with an OFAC compliance attorney at Oberheiden P.C. in confidence, please call 888-680-1745 or request a complimentary consultation online today.