What does Office of Foreign Assets Control (OFAC) mean in Banking?

What does OFAC stand for? 

OFAC stands for ‘Office of Foreign Assets Control’. As stated on their official site, “OFAC of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United​ States.”

OFAC Sanctions – Overview

US banks, bank holding companies, and nonbank subsidiaries, all US persons should comply with OFAC’s regulations. OFAC sanction lists the tools for persuasion used by the US to pressurize countries into conforming to the regulations. The agency, although is expected to cooperate with other allied nations of the UN when formulating and enforcing such sanctions.

OFAC’s Jurisdiction

US persons may be defined as a US citizen, who is a permanent resident, or an entity organized under the laws of the United States. This may include foreign branches or any persons in the United States. The law applies no matter where a US person is located.

Property Interests – Sanctions prohibit a United States person from dealing in property interests that may be of a sanctioned country, individual, or entity. The property may include money, trade, checks, contracts, goods, real property, contingent rights, or obligations.

Extraterritorial Applications – US-controlled foreign subsidiaries and foreign branches are captured under the OFAC sanctions.

Types of OFAC Sanctions

Broad Sanctions are sanctions that target entire countries or industries. For example Iran, Cuba, North Korea, Syria.

Targeted Sanctions are sanctions that target SDNs only. For example freezing assets in the funds of Korea Mining Corp (North Korea).

Sanctions applied to US persons are called Primary Sanctions.

Secondary Sanctions apply to non-US persons.

Specially Designated Nationals (SDNs) List

As part of their enforcement efforts, the OFAC sanction list is published by the name of Specially Designated Nationals List. What is OFAC list? The list is based on individuals and entities owned or controlled by targeted countries. SDN also includes select individuals, and entities, designated under programs that are not country-specific. These collective individuals’ and companies’ assets are blocked and US persons are prohibited from dealing with them.

To see the published OFAC sanction list of SDNs and Other Blocked Persons, visit OFAC’s official site.

Office of Foreign Assets Control – Compliance Program

Banking agencies evaluate OFAC banking compliance programs to make sure that all banks comply with the sanctions. The laws and regulations issued by OFAC, meaning, that which apply to US banks, their domestic branches, agencies, international banking facilities, and to their foreign branches, overseas offices, and subsidiaries. OFAC banking compliance program encourages banks to take a risk-based approach when it comes to designing and implementing the program. The regulations under OFAC banking are:

  • To block the account and other properties of specified entities, countries, or individuals.
  • To prohibit unlicensed trade and financial transactions with specific entities, countries, or individuals.

Banks should establish an effective OFAC compliance program that is correspondent with their risk profile. The profile may be based on products, services, customers, and geographic locations. It should be able to identify high-risk areas, provide internal controls for screening and reporting. It should also be able to establish independent testing for compliance, and most importantly designate a bank employee responsible for OFAC compliance, and create training programs for appropriate personnel to educate about government bodies such as FATF or internal control mechanisms such as account reconciliation.

It is recommended that every bank designate a money laundering reporting officer (MLRO) to be responsible for the day-to-day compliance of the OFAC compliance program. This may include changes and updates to the various sanctions programs, reporting of blocked or rejected transactions, and the oversight of blocked funds. The MLRO should have an appropriate level of knowledge about OFAC meaning, what OFAC stands for, OFAC sanction list, and OFAC banking regulations.

The scope and frequency of the training provided by the bank should be consistent with the bank’s risk profile and should also be appropriate for employee responsibilities.

Internal Controls

Internal controls are required for an effective compliance program to help identify suspect accounts and transactions. As well as report blocked and rejected transactions to OFAC, for which it should include the following elements:

Updating OFAC lists

The compliance program for the bank should include policies for a timely updating on lists of sanctioned countries, entities, and individuals. To be able to disseminate such information throughout the bank’s domestic operations and its offshore offices, branches, and foreign subsidiaries. This means ensuring any manual updates of interdiction software to be completed in a timely manner.

Reporting and Testing

The bank compliance program should include procedures for handling validly blocked or rejected items under the sanctions programs. If there is a query about the validity of an interdiction, banks may also contact OFAC for guidance. Otherwise, it should be reported through the channels within ten days of occurrence.

The procedures should address the management of blocked accounts. Banks no longer need to file SARs based solely on blocked narcotics or terrorism-related transactions, as long as they file the required blocking report with OFAC. Although, if the bank is in possession of additional information not included in the blocking report, a separate SAR should be filed to include that information. If the transaction itself would be considered suspicious in the absence of a valid OFAC match, the bank should in that case file a SAR. Also, it is required that every bank conducts an independent test of its compliance program, performed by the internal audit department, outside auditors, consultants, or other qualified independent parties.

Blocked or Prohibited Transactions

According to US law, the assets and accounts of an OFAC-specific country, entity, or individual should be blocked if the property is located in the US, is held by, or comes into the possession of US individuals or entities. In case, if funds are transferred from offshore and are being routed through a US bank to an offshore bank, while there is an OFAC-designated party to the transaction, it must be blocked. The property would include direct, indirect, present, future, or contingent value including all types of bank transactions. The US banks must block transactions that are by or on behalf of, to, or go through a blocked entity or an individual or in connection with a transaction that a blocked entity has an interest in.

A payment order cannot be cancelled or amended after it is received by a US bank in the absence of authorization from OFAC. There are some cases in which an underlying transaction may be prohibited. In such cases, the transaction is simply rejected or not processed.

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We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...