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Understanding U.S. Sanctions

The world of economic sanctions is complex, highly regulated and above all, fluid. The Office of Foreign Assets Control, the enforcement body, manages an ever-changing list of affected jurisdictions with selective or comprehensive restrictions.

Failure to adhere to these regulations, even by accident, can result in million-dollar fines.
Failure to adhere to these regulations, even by accident, can result in million-dollar fines.

The world of economic sanctions is complex, highly regulated and above all, fluid. The Office of Foreign Assets Control, the enforcement body, manages an ever-changing list of affected jurisdictions with selective or comprehensive restrictions. Some jurisdictions maintain a long-standing position on the list while others change more rapidly due to evolving political and social issues. Pursuing an infringement suit may also necessitate dealings with a sanctioned region.

In a general sense, sanctions are meant to limit or cease trade and financial transactions with the named country or individual, largely for national security reasons. Failure to adhere to these regulations, even by accident, can result in million-dollar fines.

Three Misconceptions about OFAC

  1. In addition to American companies, other parties must also comply with sanctions including foreign entities who conduct business in or through the US.
  2. OFAC does not require an organization to have a compliance department but violations are punishable regardless of the party’s level of knowledge.
  3. The OFAC does allow exceptions through a licensing process, pending certain criteria. Intellectual property is one of the few areas that are generally granted general licenses that allow for transactions involving a sanctioned jurisdiction to be processed on a case by case basis (pending compliance with certain conditions)

Severe Fines for Non-Compliance

The fines for breaching these regulations are severe. In April 2019 a German-based bank was fined over $1 billion for violating a number of sanctions. Although the company was located outside the U.S., payments were sent through American banks and in some cases operated USD accounts for other parties without accurate disclosure.  Though OFAC found that the business intentionally acted against the sanctions on numerous occasions, steep fines can be issued regardless of the offender’s level of knowledge. In fact, the treasury has already collected several million-dollar penalties in the first half of 2019.

Obtaining a License

The process for obtaining a specific OFAC license is subject to a lengthy approval process.  Specific licenses, granted on a case by case basis, authorize activity involving a sanctioned jurisdiction and/or party that is otherwise prohibited.

Regardless of a specific license being issued by OFAC, some institutions will still not facilitate payments involving sanctioned jurisdictions due to internal compliance policies or otherwise due to excessive risks. Western Union Business Solutions for instance, will not process payments to the following areas, as a matter of internal policy:

  1. North Korea
  2. Iran
  3. Cuba
  4. Crimea Region (Ukraine/ Russia)

Specially Designated Nationals (SDNs)

Aside from geographic locations, there is also a list of individuals and groups called Specially Designated Nationals or more commonly, SDNs. Financial transactions are blocked with these parties and business in general is prohibited. Parties include terrorists and drug traffickers.

Frequently Asked Questions

The dynamic nature of sanctions means that the rules are always shifting and transactions that have been released in the past aren’t guaranteed for the future. Aside from the official U.S. sanctions list, there are other global watchlists published by the United Nations, European Union and other authorities which are all frequently updated, sometimes on a daily basis. Even if a payment has been regularly processed for a lengthy period of time, there’s no guarantee that the rules won’t suddenly change.

Additionally, local regulations and those of other financial institutions can also cause delays. Each bank has its own level of risk and some may not be willing to conduct business with selected countries or parties, regardless of the policy of their competitors. Alternatively, they might ask the customer for additional pieces of data in order to verify the payment request. It’s also important to note that OFAC applies to U.S. citizens and residents regardless of where they’re located.

The process for complying with economic sanctions is complicated, but its purpose is vital and a failure to comply, even unintentionally, can potentially result in significant reputational and regulatory consequences for an institution.

For more information on the OFAC, visit their website