How to Implement Risk-Based OFAC Monitoring Practices
Five steps to risk assessment; ten practices for monitoring
by Timothy R. White, CAMS
The banking industry has entered a new era in Office of Foreign Assets Control (OFAC)
compliance, recognizing that there is no one right way to monitor for OFAC compliance
when implementing a risk-based approach.
This article provides five steps to structuring risk assessment, and examines10
risk-based OFAC monitoring practices. Most of these practices are used by large money
center banks that have long been accustomed to the risk-based balancing act of staying in
obedience with OFAC and their federal examiners. Community and regional banks can
achieve significant efficiencies by emulating larger institution's practices in light of the new risk-based exam procedures.
OFAC and the Financial Institutions Examination Council (FFIEC) are to be
commended for their foresight in identifying that a risk-based OFAC compliance regime
dovetailed with a risk-based Bank Secrecy Act (BSA)/anti-money laundering (AML)
program provides the most efficient allocation of OFAC compliance resources. In the
2005 BSA/AML Examination Manual (updated in 2006),1 the scope and procedures for OFAC compliance are vastly expanded, and risk-based compliance and transaction monitoring were both introduced. These two concepts were completely absent from the previous OFAC exam procedures introduced in 1996.2
Overall, the banking industry has done a remarkable job of abiding by the many
sanctions programs administered by OFAC in the interest of enforcing U.S. foreign
policy. The relatively small number of civil monetary penalties that OFAC has levied
further demonstrates the industry's solid compliance record. However, many low-risk
community and regional banks are challenged by the adoption of the 2005 standards. A
large number of smaller institutions and a few regulators alike are struggling to apply the
methodology of an enterprise-wide risk-based OFAC program to low-risk environments.
Risk Assessment: The Cornerstone of an Efficient OFAC Program
Many banks have been slow to adopt a risk-based approach because their institutions are
low risk, they already use interdiction software, or they have never had any OFAC issues
and it is very unlikely they ever will. Nonetheless, these institutions have an obligation to assess their risk. Three vital elements for a successful OFAC regulatory exam is for a
bank to understand its risk factors, implement monitoring procedures commensurate with
its risk profile, and effectively communicate this to its examiner. By accurately assessing, identifying, and documenting the bank's overall OFAC risk, the bank can efficiently allocate resources for monitoring. A comprehensive risk assessment will also
communicate to your examiner that you understand what a risk-based approach entails.
Otherwise, a low-risk bank may appear to the examiner as an inexperienced bank.
Without the regulator's confidence in the bank's OFAC risk assessment, the bank will
likely be subject to more intense scrutiny and criticism, and the OFAC portion of the
BSA exam will be off to a problematic start.
OFAC Risk Assessment Due Diligence 5 Steps
Step 1 Know what is on the OFAC List
When conducting a thorough OFAC risk assessment, consider the likelihood of your
institution's encountering a real OFAC hit or match.3 To do this, it is necessary to understand what is on the OFAC lists.
Of the thousands of records on the various OFAC sanction lists, about 62 percent
are Hispanic surnames, due to the fact that Specially Designated Narcotics Traffickers
(SDNT) is OFAC's largest sanctioned category. Most of the SDNTs and Specially
Designated Narcotics Trafficking Kingpins (SDNTKs) are from Central and South
American Spanish-speaking countries. In addition to narcotics traffickers, the database
contains the embargoed country of Cuba and members of several South and Central
American terrorist organizations. Fewer in number but of the highest national concern are
Specially Designated Global Terrorists (SDGTs), Specially Designated Terrorists (SDTs),
Foreign Terrorist Organizations (FTOs), the Non-Specially Designated Palestinian
Legislative Council (NS-PLC), and the Non-Proliferation of Weapons of Mass
Destruction (NPWMD) lists. Combined, these groups account for roughly 21 percent of
OFAC's identified entities. The remaining 17 percent are affiliated predominately with
U.S. sanctions and embargoes (Balkans, Belarus, Burma, Democratic Republic of the
Congo, Iran, Iraq, Liberian Regime of Charles Taylor, North Korea, Sudan, Syria, and
Zimbabwe). These numbers are as of the June 15, 2007, OFAC update; keep in mind that
the number of Specially Designated Nationals (SDNs), aliases, and sanction programs is
Armed with knowledge of what is on the list, a bank can carry out and document
an OFAC risk assessment. A logical first step is to expand the bank's organization chart
to include an assessment of each department's risk factors:
Step 2 Identify each departments OFAC risk factors
Expand the bank's organization chart to include an assessment of each
department's OFAC risk factors. According to the FFIEC, an effective risk assessment
"should be a composite of multiple factors, and depending on the circumstances, certain
factors may be weighted more heavily than others."4 Factors to identify include the following:
Products and Services
- nonprofit and charitable organizations
- international customers (commercial and retail)
- NRA Non-Resident Aliens
- letters of credits
- foreign exchanges
- SWIFT messages Society for Worldwide Interbank Financial
Types of Transactions
- wire transfers
- cash purchases (large denominations)
Account and Transactions Parties
- large amounts
- high frequency
Locations or Involved Geographies
- originators, intermediaries, beneficiaries
- principals, guarantors, beneficial owners, nominee shareholders, directors,
signatories and POAs Power of Attorney
(See map inserts 2, 3, and 4)
Step 3 Evaluate and rate each risk
- international items
- proximity to Canadian and Mexican borders
- proximity to major cities
- high intensity financial crime areas (HIFCA)
- high intensity drug trafficking areas (HIDTA)
Once the risk factors within each department are identified, evaluate how these risk
factors match up with the examination manual's Appendix M: Quantity of Risk
Matrix OFAC Procedures.6
Step 4 Document
Document the OFAC risk assessment for each and every OFAC exposure using an OFAC
risk decision template (see sidebar). Copies of each completed decision template should
be maintained as part of the written OFAC monitoring program.
Step 5 Summarize
The summary should include an enterprise wide risk assessment as well as specifically
listing high-risk OFAC locations, departments, transactions, and customers. Include
details for monitoring each calculated risk. Establish procedures to communicate this to
department personnel and examiners. These findings will enable the bank to …establish
and maintain an effective, written OFAC program commensurate with their OFAC risk
profile … as defined in the BSA/AML Examination Manual, 2006. Keep in mind, these
findings will also serve as the foundation for the bank's designated OFAC officer to
structure written policies, procedures, and processes; provide on-going training and they
will assist with the required independent testing, as outlined in the BSA/AML
Examination manual, 2006.
OFAC Risk Decision Template
Courtesy of Hank Grant & Associates7
|OFAC issue:|| Screening payees on on-us checks within the normal automated process|
|Decision made:|| Not to screen payees on on-us checks within the normal
|Date:|| September 19, 1999|
|Who was involved in the
decision-making process:|| Mary Miller and Sam Smith|
|Associated risk:|| Low|
|Justification of decision:|| Screening payees on on-us checks is not an effective use
of compliance resources (time and money) because the information is not in an electronic format that is conducive to automating the screening process and the volume of items is prohibitive.|
Drug Transshipment Countries and Regions8
Colombian-Based Drug Organizations9
Major U.S. Drug Centers10
10 Risk-based OFAC Monitoring and Screening Practices
The following baselines and best practices are skewed toward aiding community and
regional banks as opposed to the money center banks. These screening standards should
be viewed in general terms and not as legal advice, because a combination of unique
factors could place an OFAC sanctions monitoring obligation on virtually any element of
your institution's operation.
1. Screen All International Accounts and Transactions
Because of the international nature of sanction programs it is imperative that financial
institutions pay close attention to all accounts and transactions that involve international
entities and destinations. Federal examiners are keenly focused on a financial institution's
ability to monitor for international entities. Unless your institution's OFAC risk
assessment has appropriately eliminated the OFAC risk associated with a particular
international item, this item should be screened. Regulators are likely to view all
international items as high risk. Choosing to disregard OFAC screening on any
international item may raise a red flag with regulators and cause them to question the
accuracy of the bank's risk assessment. OFAC compliance wisdom would suggest erring
on the side of caution and conservatism when dealing with transnational items.
2. Screen All Wire Transfers
Wire transfers are the highest risk transactions for many institutions and should be
screened in real time prior to execution. Wires usually involve large dollar amounts and
are immediate and nonretrievable. The electronic formatting of wire transaction
information is easily screened by the receiving or intermediate financial institution's
interdiction software. Consequently, if a wire involves a sanctioned entity and you did
not catch it prior to execution, the receiving institution will most likely report your
violation to OFAC.
3. Monitoring of Real-Time, Face-to-Face Transactions at the Teller Lines
Many institutions and a few regulators alike waste valuable resources by being overprescriptive
with their OFAC monitoring standards in this area. A commonsense, riskbased
approach can greatly benefit community and regional institutions. Money center
banks have long employed sound risk-based monitoring in this environment. Seldom do
they screen payees on low-dollar on-us checks and monetary instrument sales. They have
rated these transactions as low risk, particularly at dollar amounts below the threshold of
requiring a supervisor's approval. Front-line tellers should be charged to use their own
instincts and refer any transaction to a supervisor for an OFAC approval. When the
transaction rises to the supervisory level, the OFAC screening decision is made by the
supervisor, who is the second tier of front-line OFAC risk assessment. This two-tiered
risk-based OFAC procedure enables efficient and effective OFAC controls without being
so prescriptive as to require tellers to screen all payees on every item. A commonsense
approach in this area will almost always support the low-risk designation. SDNTs and
SDGTs are not likely to be cashing low-dollar checks; bad guys tend to deal in cash
because it is anonymous.
4. Screen all new accounts
The FFIEC manual says that new accounts should be reviewed against OFAC lists "prior
to being opened or shortly thereafter (e.g., during nightly processing)."11 This is another
area where monitoring procedures are often too prescriptive. Many small, low-risk
financial institutions conduct OFAC checks in real time amidst the other obligations of
the account opening process. If this type of OFAC procedure poses no challenge there is
no need to change it. However, many institutions have elected to screen their new
accounts in a batch process at the end of the day. A centralized back office screening
environment provides a safer and more efficient OFAC procedure than does a real time
review. Below are six benefits to applying a back-office approach to new account
5. Screen All Existing Accounts Regularly
- Reducing the exposure from a violent reaction: If a prospective customer has a
substantially similar name to an SDN, that person has probably faced OFAC
issues in the past. The bank has a PR exposure if the customer loses
composure in the bank's lobby.
- Minimizing the disruption of workflow: Nightly batch screening will save
time in the account opening process and eliminate front-line time lost
reviewing potential hits.
- Allowing a higher standard of review if done by an OFAC specialist.
- Simplifying and minimizing software fees and implementation issues:
Interdiction software for real-time screening of new accounts often requires
substantial fees for multiple seat licenses or multiple Internet login capabilities.
- Simplifying and minimizing training issues.
- Avoiding the problem of potentially rejecting an account opening that should
be opened and blocked.
The bank's policies and procedures should address how the bank will identify and review
existing accounts for possible OFAC violations. This is one of the few areas where
OFAC compliance has changed very little with a risk-based approach. Since 1996,
examiners have asked compliance officers "Are established accounts regularly compared
to current OFAC listings?"12 The new exam manual implies that low-risk banks can
manually filter for existing accounts. The key consideration that has been added to this
area of OFAC exposure is the concept of available technology. A financial institution that
performs its own core processing or maintains a customer information file data
warehouse can license excellent OFAC interdiction software, including an enhanced data
update service, for a reasonable fee. A bank that has outsourced its core processing to a
service bureau and does not maintain a CIF data warehouse may have to rely on the
OFAC technology being provided by the service bureau. These third-party processing
environments can limit how often they will screen your accounts. The manual states that
banks should check existing customers when there are additions or changes to the OFAC
lists, offering the following example: "banks with a low OFAC risk level may
periodically (e.g., monthly or quarterly) compare the customer base against the OFAC
lists."13 However, the best practice for OFAC concerning existing accounts is to screen against every OFAC update within a 24-hour time frame. If a bank's customer gets
placed on an OFAC list, that customer is likely to know right away and will pull his or
her money from his or her account without delay.
6. Domestic ACH Transactions
At first glance, OFAC monitoring of domestic Automated Clearing House (ACH) seems
an impossible task. However, if you replicate the risk-based approach used by large
money center banks, the task turns into a very manageable know your customer (KYC)
exercise. With few exceptions, large ACH originators are not filtering live domestic ACH
transactions files. Their ACH OFAC compliance methodology shifts the monitoring from
the real-time transaction file environment to a program designed to know your ACH
originator. This customer due diligence approach is both sound and cost-effective as it
eliminates the following problematic elements of trying to filter live ACH transaction
To further bolster a customer due diligence approach to ACH OFAC compliance,
it is imperative for the Originating Depository Financial Institution (ODFI) to develop a
systematic approach for regularly disseminating OFAC knowledge to all of its ACHoriginating
customers. Dissemination of OFAC information needs to go beyond requiring
"originators of ACH payments in their contracts with ODFIs to acknowledge that the
ACH system may not be used to conduct transaction that are in violation with …
sanctions laws administered by OFAC…."14 The dissemination of OFAC information
applies to all lines of business, especially those involving transnational activities.
- ACH transactions often contain insufficient information to permit adequate
scrutiny of transactions for OFAC compliance. Many domestic ACH transactions
contain minimal information (amounts, customer numbers, and account numbers),
yet an effective transaction screening program requires detailed information such
as full names and addresses. This detailed information enables compliance
professionals to distinguish real hits from false positives. Without detailed data
every hit becomes inconclusive.
- ACH transaction files have specific formats in that all items in the batch are
totaled at the end as a payment instruction. For example, an ACH file consists of
1,000 transactions totaling $222,123.45. How should a bank process the 10 to 20
hits that are in this file? Should it hold up the entire file or strip off the
transactions that contain the hits and reformat the file for further processing? The
ACH industry would come to halt if banks held up entire files. Reconciling and
reformatting these files also present complex challenges.
Just as the Financial Crimes Enforcement Network (FinCEN) has pushed BSA
compliance beyond the banking industry into other business sectors, OFAC compliance
and enhanced customer due diligence should be pushed beyond banks and into all
business sectors. A concerted effort to keep your customers informed of U.S. sanction
programs can substantially reinforce your institution's frontline defense as your
customers start to contemplate to whom they are providing goods and services (know
your customer's customer).
7. Screen Cross-Border ACH
Contrary to domestic ACH, large ACH originators are filtering cross-border ACH
transaction files. The OFAC risk associated with cross-border ACH is substantial because
one or more of the parties involved in each transaction is not subject to OFAC's
enforcement of U.S. sanction programs. Unlike domestic ACH practices, U.S. banks
cannot rely on non-U.S. ODFIs for the screening of their ACH originators; nor can they
rely on non-U.S. Receiving Depository Financial Institutions (RDFIs) for the screening
of their ACH beneficiaries. Although the current volume of cross-border ACH pales in
comparison to domestic ACH, the screening of files is a daunting task. Screening live
international ACH items presents many of the same challenges as its domestic
counterpart. Of greatest concern: "Treasury believes that cross-border ACH transactions
currently do not contain sufficient mandatory field information to permit an adequate
degree of scrutiny of transactions for OFAC compliance."15 The National Automated Clearing House Association (NACHA) Rules Work Group #22 is in the process of
addressing this issue by adopting new standards and formatting requirements that will
include the name, address, and account number of each originator (and its client if the
transfer is not from the originator's account); the name, address, and account number of
each beneficiary; information sufficient to identify originating, intermediary, and
beneficiary banks; and originator to beneficiary information (OBI) field specs identifying
the purpose of each transaction.16 These new standards are likely to be adopted within the next two years and will go a long way toward creating an effective OFAC screening environment for cross-border ACH transactions.
In conjunction with NACHA, the Federal Reserve Bank's FedACH, in its role as
United States gateway operator, has agreed to screen incoming cross-border ACH
transactions. NACHA's future adoption of formatting requirements will enhance
screening capabilities and also allow flagging of cross-border ACH transactions that
contain potential OFAC violations.17 The receiving cross-border RDFIs will have to document their findings and the disposition of flagged transactions. Additionally, it is
likely that the RDFIs will be required to report their findings to OFAC as the flagged
transactions will be reported to OFAC by FedACH. Screening of outbound cross-border transactions will still remain the complete responsibility of the ODFIs and their originators.
8. Screening Loans
In general, loans are considered low-risk transactions for OFAC violations. Most loan
approval procedures utilize credit bureaus for the risk scoring process. Credit bureaus and
negative database vendors have incorporated OFAC checks as standard service offerings.
A simple check box on the loan application indicating that an OFAC check was reviewed
on the credit bureau report prior to the loan funding process will suffice. If the loan is a
revolving line of credit, regular OFAC screening is recommended periodically similar to
any other existing account relationship. Again, the best practice for OFAC concerning
existing accounts is to screen against every OFAC update within 24 hours. Lastly, logic
would hold that an SDN would likely stop making payments upon discovering he or she
was on an OFAC list.
9. Examine E-Banking Risk
OFAC monitoring for the e-banking environment, like all transactional applications,
should be based on a detailed risk assessment that focuses on the beneficiaries of the
transactions. In most cases banks rely on their e-banking service providers for OFAC
screening. Service providers are certainly in the best position to understand the scope of
risk within the bank's e-banking network. Even though most banks rely on their service
providers for OFAC screening, the bank is ultimately responsible, as there are no reliance
provisions specific to e-banking.
Because the scope of the e-banking environment is very broad and will continue
to evolve, it is necessary to understand the factors that can substantially change risk
exposure in this area. Currently, the e-banking environment is predominantly domestic
bill payment and relatively low risk. However, the scope of this business channel has
huge potential to expand, and therefore the OFAC/AML risk could greatly increase.
Following are key elements to evaluate when assessing OFAC risk for e-banking
It is vital for the OFAC compliance officer to stay up-to-date with the dynamics
of this fast-changing service offering. At a minimum, banks should request
documentation from their service providers regarding the scope of the services they have
subscribed to, and records should be maintained regarding the service providers'
interdiction capabilities and testing of those systems.
- How extensive is your bank's e-banking network or service offering?
- Are transactions limited to a set group of established businesses or can payments
be sent to anyone?
- Is the payment network domestic or global?
- Can you tell whether the local account holder's computer is physically in the
United States or in Iraq?
10. Monitor Stored-Value Cards
Stored-value cards, like all payment products, pose varying degrees of OFAC risk
depending on the nature of the products. For example:
OFAC monitoring for stored-value cards at the bank level has predominantly
focused on screening card purchasers. This is especially important when providing this
service to noncustomers. However, OFAC compliance for stored-value cards should go
beyond just screening the purchaser or account holder and factor in a risk assessment of
the card's potential use. Some stored-value cards can be used to facilitate anonymous
transactions. These types of cards hold the greatest risk. Here are the key elements to consider when risk-assessing any stored-value card
- A customer-only, low-value, non-renewable, domestic product poses very
minimal OFAC risk.
- A noncustomer, open-loop, high-value product that is reloadable via a third party,
includes duplicate cards, and has international access poses substantial risk.
Stored-value cards, like e-banking, have the potential to change quickly, so it is
essential that OFAC compliance officers stay up-to-date with the dynamics of these
products. Banks should obtain information regarding the interdiction capabilities of their
service providers as well as reports for card transactions, OFAC filtering, and the testing
of these systems.
- Is it a payroll card?
- What is the monthly dollar limit?
- Are the cards reloadable? How many times in a month?
- Can the card be reloaded by a third party outside of the bank?
- Can the card be used outside the country?
- Does the bank have access to transaction reports from its service provider?
- Can the card be converted to cash or is it only for purchases?
This new era of OFAC compliance will be as ever-changing as U.S. foreign policy and
regulatory enforcement. The banking industry will continue to be pressed ever harder to
screen transactions and customer lists for the likes of terrorists and drug traffickers.
While risk assessment and risk-based monitoring practices are crucial to these efforts,
they are not standalone compliance practices. Risk assessment and monitoring must be
interactive and managed in conjunction with sound OFAC compliance policies, ongoing
training, and independent testing. Most importantly, each of these program elements must
remain dynamic and be able to adjust to the ever-changing factors that influence OFAC
program decisions-foreign policy, regulatory examinations, customers, product
offerings, and filtering technologies, to name a few.
About the Author
Timothy R. White, CAMS, is the national risk specialist for Banker's Toolbox, Inc., a leading BSA/AML solution provider for financial institutions. He is considered an expert
on OFAC and has addressed OFAC and BSA issues at conferences throughout the United
States. White is currently a member of a working group formed by the United Nation's
Al-Qaida Taliban Sanctions monitoring team pursuant UNSCR 1735. In June 2006, at the
request of the U.S. Department of State, he addressed an EU-US Workshop on Financial
Sanctions and Terrorist Financing in Vienna, Austria. In 2005, he provided training for
the Federal Reserve Bank's BSA/AML specialists on OFAC compliance technologies. In
2004, he was a member of the ABA's BSA-OFAC Working Group on OFAC
Examination Procedures. In 2003, he addressed BSA and OFAC as a faculty member of
NACHA's Payments Institute. In 2002, White consulted the FBI on interdict software
capabilities within the financial institution marketplace. In 2001, while working for
Thomson Financial Media, and in conjunction with First Data Western Union, he wrote
the original product requirements for the first international interdiction database called
Global Regulatory File, (now Accuity's Global WatchList™); the first commercially
marketed international sanctions database. White is a member of the West Coast AML
Forum Committee and is an active certified member of ACAMS first graduating class.
After earning a Bachelors of Business Administration Degree (BBA) from the University
of Iowa, he attended Xerox's International Management Center in Leesburg, Va. Reach
him by telephone at (303) 757-1120 or via e-mail at firstname.lastname@example.org.
1FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual (July 28, 2006).
2Bank Secrecy Act Examination Manual, January 1996, BSA Work Program 103 Financial Record Keeping
and Reporting Regulations, Anti-money Laundering Examination Work Program Advisory # 17, Division
of Bank Supervision Board of Governors of the Federal Reserve System, Contained only the following five
basic questions on OFAC Compliance:
3U.S. Treasury procedures release for examining OFAC compliance (js2620.htm) (June 30, 2005).
Does the institution have policies and procedures in place for complying with OFAC laws and regulations?|
Does the bank maintain a current listing of prohibited countries, entities and individuals?
Is the information disseminated to foreign country offices?
Are new accounts compared to the OFAC listings prior to opening?
Are established accounts regularly compared to current OFAC listings?
4FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual (July 28, 2006), Appendix K.
5FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual (July 28, 2006), Page 138.
6FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual (July 28, 2006), Appendix M and Matrix B published in 31 CFR Part 501 Federal Register (January12, 2006). Partial withdrawal of proposed rule 68 Fed. Reg. 4422-4429 (2003) Economic Sanctions Enforcement Procedures for Banking Institutions.
7Sidebar: Hank Grant & Associates.
8Department of Justice, National Drug Intelligence Agency, National Drug Threat Assessment 2006, Appendix A.
9Department of Justice, National Drug Intelligence Agency, National Drug Threat Assessment 2007, Appendix A.
10Department of Justice, National Drug Intelligence Agency, National Drug Threat Assessment 2007, Appendix A.
11FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual (July 28, 2006), Page 140.
12Bank Secrecy Act Examination Manual, January 1996, BSA work program 103 Financial Record Keeping and Reporting Regulations Anti-Money Laundering Examination Work Program Advisory # 17.
13FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual (July 28, 2006), Page 140.
14Department of the Treasury FAC Ref: GEN 155913, March 20, 1997.
15Department of the Treasury GEN 235613, November 9, 2004.
16Department of Treasury GEN 235613, November 9, 2004.
17Department of Treasury GEN 235613, November 9, 2004.
Copyright, Bankers Online. First published on BankersOnline.com 5/18/09