Who Must Comply With OFAC?
All U.S. persons must comply with the economic sanctions that are enforced by the Office of Foreign Assets Control (OFAC) at the U.S. Department of the Treasury. However, that basic answer only begins to scratch the surface. The group of people and entities that make up “U.S. persons” is broader than many individuals and company stakeholders think it is. Additionally, not all U.S. persons have the same legal obligations to satisfy in order to comply with OFAC.
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Having a firm grasp of this basic element of U.S. economic sanctions law is essential to fully understand the rest of it. The OFAC compliance and sanctions defense lawyers at the national law firm Oberheiden P.C. strive to help domestic companies and their decision-makers appreciate the complexities of OFAC sanctions laws so they can make more informed decisions about how to proceed with their business ventures.
First: OFAC Does Not Have Jurisdiction Over Sanctioned Parties
Before delving into who has to comply with OFAC, it is important to dispel a myth and explain who does not have to comply with OFAC: The targets of the United States’ economic sanctions.
The economic sanctions that OFAC is tasked with enforcing target foreign nationals that endanger American interests abroad or that threaten national security. These foreign nationals can be:
- Countries
- Individual people
- Companies
- Industries within a country or region
- Organizations
Some common examples are:
- Leaders of political movements or countries that pose a threat to the U.S., like North Korea
- Individual terrorists
- Terrorist organizations
- Companies that provide important services that can be used against the U.S., like weapons makers in Russia
The important thing to know about these entities is that they do not operate within the U.S., and that OFAC’s jurisdiction only extends to the borders of the U.S. Therefore, OFAC does not have power to enforce U.S. economic sanctions on the people and entities that are targeted for embargo. Instead, OFAC has to enforce these sanctions indirectly, by demanding compliance from domestic entities and threatening them with an enforcement action if they do not comply.
Also, sanctioned parties often do whatever they can to evade sanctions. Expecting them to comply with OFAC would be naïve.
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Mike Pompeo
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Former U.S. Secretary of State
John W. Sellers
Former Senior DOJ Trial Attorney
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Chris J. Quick
Former Special Agent (FBI & IRS-CI)
Michael S. Koslow
Former Supervisory Special Agent (DOD-OIG)
Ray Yuen
Former Supervisory Special Agent (FBI)
“U.S. Persons” Must Comply With OFAC
Generally speaking, “U.S. persons” must comply with OFAC. While each sanctions program has its own regulation that defines what amounts to a “U.S. person” for that given sanctions program, they are almost universally the same (see, for example, 31 C.F.R. § 551.317 (defining “U.S. person” for the sanctions program against Somalia), and 31 C.F.R. § 560.314 (defining the term for the sanctions program against Iran)).
That generally-used definition of “U.S. person” covers the following types of individuals and entities:
- U.S. citizens
- Permanent resident aliens
- Entities organized under U.S. law
- Foreign branches of U.S.-based entities
- Any person within the United States
Note that a “person” can be an individual or a corporate entity.
It is also important to note that falling within any single one of these categories puts you within OFAC jurisdiction. For example, U.S. citizens and permanent resident aliens who are abroad and are not currently present within the U.S. are still under OFAC jurisdiction. Foreign companies that have U.S. branches that have been organized under state or federal law are also within OFAC’s jurisdiction, as are foreign companies that have a physical presence within the U.S. Meanwhile, any foreign national that is physically in the U.S. is also under OFAC jurisdiction.
In addition to these categories, some sanctions programs reach a bit further, like those against Cuba (31 C.F.R. § 515.330). Generally, these also cover foreign subsidiaries that are owned or controlled by U.S. companies, or foreign persons that have possession of goods that came from the United States.
Not All U.S. Persons Have the Same OFAC Compliance Obligations
Just because you are under OFAC’s jurisdiction, though, does not mean that you will have the same compliance obligations that everyone else has. OFAC recognizes that there are certain types of companies that occupy a more pivotal role in international business transactions than others. In order to utilize the positions that those companies occupy so that it can better enforce U.S. economic sanctions on foreign nationals, OFAC increases the compliance expectations that it has for them.
Nowhere is this more apparent than the heightened OFAC compliance obligations of financial institutions.
Financial institutions are defined in each sanctions program regulation. However, they are generally defined as any U.S. entity that is engaged in the business of:
- Accepting deposits
- Handling loans or credits
- Transacting in securities, foreign exchange, or commodity futures or options
(See 31 C.F.R. § 561.309).
This definition is far broader than many U.S. business owners would anticipate, and is not confined to companies like banks and credit unions. It is not uncommon for corporate stakeholders at brokerage firms or even car dealerships to be shocked when they discover that they are considered a “financial institution” under OFAC law.
Companies that fall under the “financial institution” label have additional OFAC compliance requirements that they have to uphold. Most importantly, they need to take reasonable efforts to know whether their customer or accountholder is a party listed on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN). If they find that they are dealing with a sanctioned party, financial institutions have a legal obligation to freeze that party’s account and sequester any assets that they have in their possession into another account. If the financial institution is facilitating a transfer of assets to a sanctioned party, it has to block the transaction or risk an allegation of noncompliance by OFAC and an investigation or enforcement action by the agency.
Finally, financial institutions have reporting requirements, as well. This includes promptly notifying OFAC of blocked or rejected transactions, and annually updating the agency of any blocks or rejections that happened during the year.
These compliance obligations can stack up, and the costs of satisfying them can end up being quite substantial.
3 FAQs About Oberheiden P.C. and OFAC Sanctions Law
1. What are the Penalties for Violating OFAC-Enforced Sanctions?
The penalties depend on the Congressional statute that authorized the particular sanctions program that was allegedly violated. Additionally, OFAC has the discretion to impose a wide variety of civil monetary penalties depending on its enforcement guidelines. As a result, OFAC penalties for a violation can vary widely.
For example, in 2023, the statutory maximum civil monetary fine for a violation of the Clean Diamond Trade Act is $16,108 per violation, while the statutory maximum for violations of the Foreign Narcotics Kingpin Designation Act is $1,771,754 per violation.
OFAC, however, does not always pursue the maximum civil monetary penalty. It will often only pursue the maximum if there are aggravating factors in the case, such as willfulness or recklessness in violating sanctions or if the transactions involved dangerous materials, like weapons. The presence of mitigating factors, such as a relatively small amount of money involved in the transaction and remedial actions taken by the company after learning of the violation, can drastically reduce the civil monetary penalty that OFAC pursues.
OFAC can also pursue types of enforcement actions other than a civil monetary penalty. For seemingly serious and willful violations of U.S. economic sanctions, OFAC can make a criminal referral to the U.S. Department of Justice. For relatively minor violations, OFAC may issue a cease and desist letter or a Finding of Violation that does not carry a civil monetary penalty, at all.
Regardless, though, the publicity of even just an allegation of a sanctions violation can hurt the company and its business brand. Avoiding that publicity is often very much in the company’s best interests.
There are several things that set Oberheiden P.C. apart from similar OFAC compliance firms.
Perhaps the most important, though, is that Oberheiden P.C. only employs senior-level lawyers, investigators, and compliance professionals. Many of them only came to Oberheiden P.C. after long and successful careers within some of the same federal agencies that get involved in OFAC-related issues, like the DOJ and the Federal Bureau of Investigation (FBI). That experience lets our team predict how your case is likely to go and gives them insight into how strong a compliance system would work after it has been implemented.
Furthermore, Oberheiden P.C. only employs those senior-level professionals. That way, you can rest assured that all of the work is being done by someone with numerous years of experience handling cases similar to your own, rather than by a junior associate or inexperienced compliance professional.
3. Why Doesn’t Oberheiden P.C. Call Itself the Best OFAC Compliance and Defense Firm?
While we think that our track record of successes and unmatched experience make us the ideal candidate for your company’s OFAC compliance or defense needs, we still prefer to let our prior clients make these kinds of statements and judgments about our work. You can read their testimonials here.
Oberheiden P.C.: OFAC Compliance and Defense Lawyers
If you are worried or even just unsure about your OFAC compliance obligations, you should strongly consider getting legal help and guidance. The costs of violating U.S. economic sanctions are severe. Only through a strong compliance protocol can you reduce the odds of such a violation.
Call the national OFAC compliance and defense lawyers at Oberheiden P.C. at (888) 680-1745 or contact them online.
