United States: OFAC Cites Violations In Dealings With Specially Designated Nationals

Last Updated: August 11 2016
Article by Louis Rothberg, Margaret M. Gatti and Marynell De Vaughn

Insurance companies and financial institutions are targeted.

On August 2, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) issued a Finding of Violation against two different insurance companies for violations of the Foreign Narcotics Kingpin Sanctions Regulations, 31 C.F.R. Part 598 (FNKSR). OFAC alleged that from 2009 to 2011, these insurance companies facilitated and/or processed payments and maintained health insurance policies in which one or more OFAC Specially Designated Nationals (SDNs) had an interest.

On July 27, 2016, OFAC issued a Finding of Violation to a bank. OFAC found that from 2013 to 2014, this bank maintained accounts in which several Foreign Narcotics Kingpin SDNs had an interest.

Servicing and paying insurance claims is what insurance companies routinely do, and maintaining and servicing bank accounts is what banks customarily do. The problem is, OFAC found that these insurance and financial institutions did their routine or normal business with OFAC SDNs, which is strictly prohibited absent an OFAC-specific license.

It does not matter whether a person or entity is declared an SDN under the Foreign Narcotics Kingpin Sanctions, the Global Terrorism Sanctions, or the Iran Sanctions. Once a person or entity is formally listed as an SDN, the reason why is immaterial. Approximately 6,000 SDNs are on the OFAC SDN list. Dealing with an SDN can incur a maximum civil penalty of $250,000 or twice the value of the underlying transaction to which the violation relates, whichever is greater.

OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. OFAC also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are SDNs. Their assets are blocked, and "US Persons" are prohibited from any and all dealing, whether direct or indirect, with them or their property or interests in property.

A US Person for purposes of these regulations means "any United States citizen or national, permanent resident alien, an entity organized under the laws of the United States (including its foreign branches), or any person within the United States."

For purposes of these regulations, property and property interest include but are not limited to

money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership, or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors' sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements, services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, whether present, future, or contingent.

As you can plainly see, any type of business or enterprise imaginable located in the United States would be captured by the general OFAC definition of "US Person"—no type of business or organizational structure is exempt. Any such business naturally and inherently deals in some way in or with "property" as generally defined by OFAC.

OFAC was critical of these cited companies because they respectively, in their own way, failed to implement controls and measures to ensure that they could identify, block, and report insurance policies, premiums, claims payments, or accounts in which an OFAC-sanctioned person had an interest.

The only way for a US Person to avoid dealings in "property" with any OFAC SDN, regardless of the reason that the SDN was placed on the SDN List, is for the US Person to cautiously screen potential and ongoing clients, customers, employees, account holders, insureds, and contractors. Screening is a process by which a name is run against the SDN List and verified that the specific counterparty is not on the SDN List. This is the most basic type of OFAC compliance and should be followed to mitigate the risk of having business dealings with a prohibited SDN.

Morgan Lewis's international trade and economic sanctions team can assist you with evaluating your OFAC compliance posture.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

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