Understanding OFAC

by Mary Beth Guard

Blocked versus Rejected Accounts
To properly comply with the sanctions administered by the Office of Foreign Assets Control ("OFAC"), you must understand when you are required to block an account and when you are instead required to reject a transaction.

A blocked account is one that has been frozen in compliance with the OFAC regulations. Once blocked, no payments, transfers, withdrawals or other dealings may be made involving the account unless OFAC "licenses" the transaction (which is their term for providing special dispensation to allow the transaction), or unless the transaction is otherwise authorized by the Treasury Department.

Any credits (such as deposits) to a blocked account must be accepted by the bank and then immediately frozen.

To determine which individuals and entities are subject to blocking, you must consult the OFAC list, which tells you the sanctions applicable to each group. Currently, all individuals, entities, and governmental entities appearing on the list of Specially Designated Nationals are subject to blocking. In addition, citizens of certain countries (such as Cuba and North Korea) are subject to blocking.

There are two types of licenses OFAC issues which allow a bank to perform certain transactions that would otherwise be prohibited under OFAC regulations: General Licenses and Specific Licenses. General Licenses provide blanket authority for certain types of transactions. Specific Licenses, on the other hand, are issued to a specific individual or company to allow a specific transaction or activity. General License information may be found on the OFAC site. For example, there is currently a General License pertaining to travel to Cuba for professional research.

If an individual or representative of an entity subject to OFAC's blocking seeks to open an account or deposit additional funds into a currently blocked account, you must accept the transaction, then immediately freeze the funds.

In other instances, where the OFAC regulations require business associated with certain countries or individuals in those countries to be rejected, the bank must refuse the transaction. This would include, for example, direct or indirect transfers of funds to any person in Iraq (although there is a limited exception for transfers to what is referred to as a 986 Escrow Account used in connection with purchases of Iraqui oil.)

Check out the new OFAC Sanctions Matrix. It is organized by country (or entity) and summarizes the sanctions that apply. There's even a 'Special Notes' section offering additional insights.

Originally appeared in the Oklahoma Bankers Association Compliance Informer.

First published on BankersOnline.com 7/23/01