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OFAC and how it affects US Financial Institutions

The Office of the Foreign Assets Control (OFAC) operates as an agency under the US Department of Treasury. Its main purpose is to carry out administration activities and enforcement of trade and economic sanctions against nations, organizations and individuals in accordance with the US foreign policy and national security goals of the US.

Working under mandates from the United Nations, OFAC’s role is to make lives of rogues nations / entities difficult by imposing economic and financial sanctions so as to safeguard the interest of the United States.

OFAC was established in 1950 officially by President Truman when China entered into a war with Korea. It was then under the Office of the Foreign Assets Control (OFAC) that all Chinese and Korean assets under US jurisdiction were frozen.

How OFAC Affects Financial Institutions

Financial institutions are required to abide by the regulations set by the OFAC. They are also required to monitor all transactions executed by or via them to identify those that involve any entity or person in accordance with OFAC regulations.

This may involve blocking (freezing) funds so that they cannot be withdrawn. Further they need to adhere to OFAC regulations while accepting funds as well. Financial institutions are also mandated to block certain transactions as required by OFAC in special cases.

OFAC regulations apply to all institutions that operate in and with the US. The OFAC has an updated list of individuals and organizations that are involved in anti-state activities and terrorism. Businesses are required to run this list against their customer databases as and when required.

Customer Verification by Businesses

Businesses are required to run a full check of their customers against the OFAC list including every new customer. This has to be done every time the OFAC updates its list. Also, each transaction that is not by a current customer should also be matched against the OFAC list. If there is no match the transaction can go forward.

Additional checks and due diligence must be applied in case there is a potential match to confirm whether it is positive or negative. In case it is found positive, the account of such an entity is frozen and all associated transactions are also blocked. The customer’s name, the account and transaction details must be submitted in a report to the company officer who then apprises the OFAC.

Dealing with OFAC violations

Companies that are found have OFAC violations may be subject to heavy penalties and / or litigation. If any business believes that it may have violated OFAC regulations, contact must be made with the local OFAC counsel / officer. OFAC will consider whether penalties need to be imposed on the particular financial institution based on past history of OFAC compliance, the level of adherence and the systems that it uses for compliance.

Compliance with OFAC Regulations

OFAC compliance encompasses all types of financial transactions. These include -

  • Savings and Checking accounts
  • Loan payments
  • Letters of credit
  • Currency exchanges
  • Safety deposit boxes
  • Depositing or cashing checks
  • Trust accounts
  • Guarantors and collateral owners
  • Money orders or cashier’s checks
  • Loans
  • Credit Cards
  • Wire transfers
  • ACH transfers
  • Lines of credit

All individuals and entities involved in a particular transaction are bound to be verified against the OFAC list. These include -

  • Receiving Parties
  • Sending Parties
  • Beneficiaries
  • Collateral Owners
  • Guarantors

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