Five Essential Elements of an Effective OFAC Compliance Program

What Is OFAC & Why Is It Important?

According to their website, the Office of Foreign Assets Control (“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” (Home | Office of Foreign Assets Control (treasury.gov).

If you’re new to trade compliance or new to understanding OFAC’s role, simply put, OFAC administers and enforces economic sanctions and plays a leading role in implementing trade restrictions and sanctions programs.

Those programs can be comprehensive or selective by blocking assets and implementing trade restrictions to accomplish foreign policy and national security goals.

OFAC contributes to national security goals by enforcing sanctions against narcotics traffickers, weapons of mass destruction proliferators, and foreign countries.

Comprehending the significance of OFAC is crucial for businesses involved in international trade and financial transactions. Understanding its role is also essential for complying with international sanctions and trade regulations.

Do OFAC Regulations Apply to My Company?

Most companies that ship goods internationally have an Export Compliance Program in place.  This includes having policies, procedures, and work instructions to support their processes and ensure compliance with U.S. export regulations.

It is also essential for those same companies to have an OFAC Compliance Program in place. Does this mean OFAC applies to your company and industry?

The quick answer is YES!

All US Persons (reminder:  US person under the export regulations apply to those that are US citizens, lawful permanent residents such as green card holders, protected individuals per 8 U.S.C. 1324(b)(3) as well as entities and organizations including corporations, government entities, any entity/organization/group incorporated to do business in the US), regardless of industry are responsible for compliance with all export regulations, including OFAC.

You may be thinking, well, we have a foreign subsidiary, so we do not have to adhere to OFAC regulations.

Believe it or not, OFAC’s authority extends beyond just U.S. borders. This means that OFAC regs apply to US persons and foreign entities that engage in transactions involving US persons, US goods/services, or the US financial system.

This means that foreign subsidiaries of US companies are held accountable to adhere to the OFAC regs.

So where does that leave foreign entities not owned or controlled by US companies?

Another great question!  This is where things get tricky.  Below are some examples of where OFAC sanctions apply; note that this list is incomplete.

• USD is involved
• US banking/financial institutions involved
• US companies are part of the transaction
• US companies/employees are facilitating a sale
• US companies are involved in warranty, services
• Software exporting through or from the US
• Foreign companies doing business in the US

If you are reading this and it is apparent that OFAC applies to your company, the next step is to develop an effective OFAC compliance program.

Recently, OFAC published recommendations for a risk-based approach to sanctions compliance for companies developing and implementing the Sanctions Compliance Program (SCP). It also included routinely updating their program when affected by sanction changes.

It is important for companies to remember that the applicable SCP depends on many factors: company size, products/technology/services, customers (not to mention intermediaries, resellers, distributors, representatives, end users, etc.), and which countries they are in and do business in.

Why Is An OFAC Compliance Program Important For Your Business?

Sanctions violations are considered strict liability offenses, meaning that ignorance of the law or lack of intent to violate it does not exempt a company from responsibility.

This starkly contrasts with other regulations and federal laws where intent plays a significant role.

Companies must proactively mitigate risks, mainly when operating in or near sanctioned areas. Often, individuals aiming to bypass sanctions operate globally, increasing the complexity of compliance.

Employees must receive thorough training on screening procedures and understanding how sanctions impact various transactions.

This knowledge empowers them to avoid prohibited activities and comply with legal requirements to block property and accounts of sanctioned entities, ensuring the company’s protection against potential violations.

What are the 5 Essential Elements of an Effective OFAC Compliance Program?

Companies should utilize this framework when creating their sanction compliance program. Compliance always starts at the top, and solid executive support, risk assessments, internal controls development and implementation, and periodic reviews and updates to the program are all pillars of a successful compliance and sanctions program, too.

1. Management Commitment

Management commitment is crucial for an OFAC compliance program’s success in international trade, ensuring adequate resources, authority for the part of the OFAC compliance programs’ team, designation of a compliance officer, and fostering a culture of compliance.

1. Commitment from Senior Management (senior leadership, executives, and/or board of directors) is an important factor in determining the program’s success.
2. This includes providing adequate resources to the compliance team and supporting the compliance team’s authority within the organization.
3. Designating a compliance officer is a leading role in the OFAC compliance program.
4. Promote a “culture of compliance.”

2. Risk Assessment

Risk assessment is essential in OFAC compliance for international trade, guiding organizations to develop tailored, effective strategies. Regular evaluations of OFAC risk assessment identify potential issues crucial for informed decision-making, especially in mergers and acquisitions involving international entities.

1. OFAC recommends organizations take a risk-based approach when designing, implanting, and updating the SCP.​
2. Conduct a routine or even on-going risk assessment of the OFAC website to identify potential OFAC issues that could be encountered.​
3. ​There is no “one-size-fits-all” risk assessment – Tailor it to fit your organization’s needs​.
4. ​Risk assessments and sanctions-related due diligence is essential in mergers and acquisitions – especially if non-U.S. companies or corporations are involved.

3. Internal Controls

Effective internal controls are the cornerstone of a robust OFAC compliance program in international trade. They ensure tailored procedures align with daily operations and enable companies to detect, manage, and document potentially prohibited activities while swiftly adapting to OFAC’s evolving regulations and lists.

1. Policies, procedures, work instructions, processes, etc. that outline the SCP tailored to the company’s daily operations
2. Include how to identify, prevent, escalate, report, and keep records on activity that OFAC may prohibit.​
3. Adjust to OFAC changes​ (ex, updates to the SDN and SSI lists, new, amended or updated sanctions programs​ , and Issuance of General Licenses)

4. Testing and auditing

Testing and auditing are essential in an OFAC compliance program to evaluate the effectiveness of processes, identify weaknesses, and enhance the overall strength of your company’s compliance strategy.

1. Audits test the effectiveness of current processes and check for inconsistencies​.
2. Identify areas of weakness and deficiencies​
3. It gives companies a way to improve the overall SCP.

 5. Ongoing Training

Ongoing training is essential for maintaining an effective OFAC compliance program, ensuring employees stay informed on identifying, reporting, and avoiding prohibited transactions, fulfilling specific job responsibilities, and adhering to mandatory record-keeping and sanctions compliance programs, reinforced by regular assessments for accountability.

1. Practical training is essential to the success of an SCP and is crucial to maintaining an effective SCP.
2. Training should be provided periodically to all appropriate employees (at a minimum annually) and include, at a minimum, identifying and reporting prohibited transactions, ensuring proper record keeping, job-specific knowledge, sanctions compliance responsibilities​ , and, most importantly, having a process to hold employees accountable for compliance training through assessments.

What is Meant by Implementing “Risk-Based Controls?”

Risk-based controls help identify and prioritize OFAC compliance risks. According to OFAC, they identify inherent risks “to identify risk-based decisions and controls.”

This means that risk-based compliance must be tailored to a company’s business model. A risk assessment is an exercise that maps key compliance risks and provides the blueprint from which to build or review an SCP.

This is key to OFAC risk and compliance because sanctions are not static and fluctuate frequently due to changes in OFAC sanction programs.

As your company grows, enters new markets and distribution territories, and is involved in mergers/acquisitions, those changes may apply to OFAC regulations.

Overall, performing diligence on a company from top to bottom and providing a holistic overview of current operational sanctions risks and blind spots must be part of the assessment.

When conducting risk assessments, it is important to identify new risks that may not have been present before, especially as businesses change in ways that could elevate or shift sanctions risks.

Who Should be the Sanctions Compliance Officer?

The Management Commitment described above requires the designation of an OFAC Compliance Officer to oversee and manage compliance activities.

Having a designated employee that is qualified moves the company forward in the right direction for sanctions compliance.

Responsibilities include having a comprehensive knowledge of relevant laws, regulations, and requirements and having the authority to enforce compliance within the company.

This role ensures sufficient controls are in place to support the SCP, including controls related to technology, software, and internal systems.

Conclusion

Adhering to OFAC regulations is not optional, and establishing an SPC is critical to adhering to the law.

OFAC sets forth minimum expectations in the five core areas of: management commitment, risk assessment, internal controls, testing and auditing, and training.

Are you navigating the complexities of OFAC compliance? Don’t go it alone!

Reach out to our team of dedicated compliance consultants, who stand ready to guide you through every facet of OFAC regulations. Whether you’re deciphering sanctions lists, conducting due diligence, or ensuring your business operations align with OFAC standards, our experts are here to provide the support and expertise you need.

Let us manage your OFAC compliance activities so you can focus on growing your business with peace of mind. Contact Export Solutions, Inc. today for all your OFAC questions and needs.