OFAC's Economic Sanctions Compliance Framework Signals Focus on Risk-Based Compliance
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) released a comprehensive framework on five essential components of an economic sanctions compliance program. A Framework for OFAC Compliance Commitments (the Framework) aims to clarify effective compliance efforts both for companies subject to U.S. jurisdiction and for foreign companies that do business in or with U.S. persons, or that use U.S.-origin goods or services. The Framework also signals how compliance program components are likely to play into OFAC’s evaluation and resolution of apparent violations, and where the agency believes the stress points are. The Framework follows the publication of updated Department of Justice compliance guidance, signaling a coordinated move by enforcement agencies towards more transparency in how they evaluate companies under investigation. Andrea M. Gacki, Director of OFAC, explained that the Framework “underlines [OFAC’s] commitment to engage with the private sector to further promote understanding of, and compliance with sanctions requirements.”
What It Means for You
Much of the Framework should not be surprising to companies that have focused on compliance. OFAC “strongly encourages” companies to employ a “risk-based” approach to sanctions compliance, focusing on five key components: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training. In recent years, Administrations have used a variety of different sanctions approaches, targeting specific industries in certain countries and employing a myriad of General Licenses to allow certain limited activities with blocked entities. In many ways, these targeted sanctions systems add complexity and require refinements to a company’s policies, procedures and practices — oftentimes, with very little notice. While a given company’s specific compliance program depends on a variety of factors, failing to meaningfully incorporate each Framework component into a compliance program and corporate culture exposes a company and employees to risk of sanctions violations, which could result in monetary penalties, criminal referral, or other administrative action.
Highlights of the Framework include:
- Enforcement and Penalty Assessment. OFAC makes plain that in settling apparent violations, it will look at an organization’s sanctions compliance program and require measures to address infirmities in the program in accordance with the five essential components. The state of an organization’s compliance program is also a factor in the assessment of any civil monetary penalty. Under the Economic Sanctions Enforcement Guidelines (the Guidelines), the existence and quality of a sanctions compliance program can mitigate any resulting civil monetary penalty under more than one of the Guidelines’ factors, including the compliance program and remedial response factors. It can also be a factor in OFAC’s analysis as to whether an apparent violation is deemed egregious. Under the Guidelines, penalties for apparent violations are maximized where OFAC determines the case to be egregious and where the company did not voluntarily self-disclose the apparent violation, while non-egregious cases that were voluntarily self-disclosed are subject to the minimum base penalty.
- Risk Assessment. Any company subject to U.S. jurisdiction should conduct a top-to-bottom critical risk assessment of its business model to identify where sanctions risks lie, with appropriate attention to third parties with which it interacts, products and services it offers, and geographic locations of the company and third parties. Of particular interest companies should note the Framework’s commentary about mergers and acquisitions. OFAC acknowledges that this area has shown “numerous challenges” in recent years. While OFAC does not comment on where in the M&A process organizations should conduct due diligence, it is clear that OFAC believes that organizations are not performing adequate diligence for sanctions issues in their deals, and that the consolidated entity is oftentimes too slow to identify sanctions-related issues post-closing. Recent enforcement actions also suggest that OFAC is looking at M&A transactions with increased scrutiny. Companies and private equity firms can get ahead of potential issues by implementing a robust sanctions-related review as part of their due diligence process. Of course, addressing any potential violation or compliance weaknesses identified during diligence often brings additional complications into a transaction.
- Internal Controls. Internal controls, including written policies and procedures, employment of experienced compliance personnel, and recordkeeping, have always been a cornerstone of effective sanctions compliance programs. Of critical importance is employees’ ability to report and escalate potential or suspected violations to appropriate personnel who can then take action to determine and remediate the root cause of the potential violation. Companies can identify and tackle many issues early on by having an effective and well-publicized hotline. Just as other agencies that administer trade-related regulations, OFAC will infer knowledge from a conscious disregard or willful avoidance of facts. A deficient compliance program is not an excuse for a violation, and likely will be considered an aggravating factor when OFAC calculates penalties.
The Framework complements the existing regulatory Guidelines in an effort to make them more accessible to companies. Sigal P. Mandelker, the Under Secretary for Terrorism and Financial Intelligence, stated that “ensuring that the private sector implements strong and effective compliance programs that protect U.S. financial system from abuse” is a key part of the agency’s strategy to enhance the United States’ sanctions programs.
The Framework provides insight on what each of the five elements of an effective compliance program may look like in practice, as well as criteria by which the effectiveness of a company’s efforts may be measured.
The Framework also includes a summary of root causes associated with recent enforcements of apparent violations of OFAC’s sanctions regulations. The non-exhaustive list highlights the following shortcomings:
- Absence of a formal OFAC sanctions compliance program, especially if the organization engages in international business;
- Misinterpreting, failing to understand, or ignoring sanctions prohibitions, including the fact that OFAC sanctions were applied to the organization based on its status as a U.S. person or subsidiary or its U.S.-related dealings;
- Misunderstanding OFAC’s prohibition on facilitation;
- Exporting or reexporting U.S.-origin items in violation of sanctions, particularly by non-U.S. persons that are large and sophisticated, engage in repeated violations, fail to respond to numerous warning signs, use non-routine business practices, and/or willfully or recklessly conceal their activities;
- Use by non-U.S. persons of U.S. financial institutions in transactions with OFAC-sanctioned persons or countries, particularly involving large and sophisticated companies, willful or reckless conduct, attempts to conceal prohibited activities, a pattern or practice of conduct, ignored warning signs, knowledge or involvement of management, and/or significant harm to U.S. sanctions program objectives;
- Sanctions screening mistakes, such as failure to update software, screen for pertinent identifiers, or account for alternative spellings;
- Improper or incomplete due diligence on customers;
- Decentralization of the sanctions compliance function, which can lead to improper interpretation of OFAC’s regulations, the lack of a formal escalation process, inefficient oversight and audit function, and/or miscommunications regarding compliance policies and procedures;
- Use of non-traditional payment or commercial practices; and
- Supervisory, managerial, or executive-level employees’ involvement in causing or facilitating sanctions violations, which can lead to enforcement against individuals in addition to the company.
The agency’s administrative actions have typically identified as aggravating factors reckless conduct, such as ignoring numerous red flags indicating that activities were likely prohibited, and awareness on the part of an organization’s management.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.