United States: OFAC Issues First Formal Guidance Framework On Sanctions Compliance Programs

On May 2, 2019, the US Department of the Treasury's Office of Foreign Assets Control ("OFAC") published A Framework for OFAC Compliance Commitments ("Framework").1 This is the first official guidance issued by OFAC on how it evaluates sanctions compliance programs ("SCPs"). The major components of the guidance mirror the "hallmarks of an effective sanctions program" previewed by Under Secretary of the Treasury for Terrorism and Financial Intelligence Sigal Mandelker in her official remarks at the 2018 ABA/ABA Financial Crimes Enforcement Conference.2 In the announcement of the Framework, OFAC Director Andrea Gacki noted that the issuance of the guidance "underlines our commitment to engage with the private sector to further promote understanding of, and compliance with, sanctions requirements."3

SCPs are not required by law. Indeed, OFAC cannot even require adoption of an SCP as a remedy in an enforcement action. Recently, OFAC has gotten around its limited enforcement mandate—which provides for nothing more than the imposition of civil monetary penalties ("CMPs") in the event of a violation—by conditioning settlement of enforcement actions on companies agreeing to adopt SCPs. Prior to the issuance of the Framework, the only guidance available to organizations on what OFAC considered to be an adequate SCP was found in those public settlement agreements.

An effective SCP can help prevent OFAC violations or reduce CMPs in the event of a violation. If, after conducting an investigation, OFAC determines that a CMP is appropriate, it will assess the existence, nature and adequacy of the organization's SCP.4 A favorable assessment could result in mitigation of a CMP.

It is therefore important for organizations subject to US jurisdiction or that deal with US parties, the US financial system or US-origin goods to consider this guidance when developing or updating their SCPs.

Five Essential Components

In the Framework, OFAC outlines five essential components that each organization's SCP should address at a minimum, which we discuss below:

  1. Management Commitment

    OFAC considers senior management's commitment to, and support of, an organization's SCP to be vital for ensuring that the program is adequately resourced and fully integrated into the company's daily operations. In addition to promoting a "culture of compliance," OFAC expects senior management to (a) review and approve the company's SCP, (b) ensure that its compliance personnel are delegated sufficient authority and autonomy to implement policies and procedures designed to mitigate OFAC risk, (c) take steps to make certain that the compliance function is adequately resourced (e.g., human capital, expertise, information technology) and (d) demonstrate recognition of the seriousness of apparent OFAC violations and SCP failures and implement measures to reduce their occurrence.
  2. Risk Assessment

    OFAC recommends that a company inform other elements of its SCP by conducting a holistic risk assessment to understand the sanctions risk associated with specific clients, products, services and geographic locations. OFAC expects a company to conduct risk assessments in a manner, and with a frequency, commensurate with its potential sanctions exposure and pursuant to a methodology designed to identify, analyze and address specific sanctions risks. Risk assessments should be periodically updated to account for any systemic deficiencies identified during the normal course of business, such as through the company's testing or audit function.
  3. Internal Controls

    OFAC views internal controls, including policies and procedures, as an integral part of an effective SCP. Internal controls should be informed by a company's risk assessment and risk profile and be designed to enable a company to "identify, interdict, escalate and report (as appropriate)" any activities that may be prohibited by OFAC. Among other measures, OFAC expects a company to (a) design and implement written policies and procedures outlining the SCP and communicate them to relevant personnel, (b) appoint personnel for integrating policies and procedures into the company's daily operations and (c) enforce policies and procedures through internal and/or external audits. A company should also be prepared to take immediate and effective action to remediate any identified weaknesses in its internal controls.
  4. Testing and Auditing

    A comprehensive, independent and objective testing or auditing function is seen by OFAC as an important tool for a company to understand how its SCP is performing and whether updates or enhancements are needed. OFAC expects a company to (a) ensure that the testing or auditing function is accountable to senior management and sufficiently staffed with adequate resources and expertise, (b) employ testing or audit procedures that reflect a comprehensive and objective evaluation of the company's OFAC risk assessment and internal controls and (c) ensure that it will take immediate and effective action to identify and implement compensating controls in response to SCP-related issues identified through the testing or audit function.
  5. Training

    OFAC expects a company to implement a sanctions training program tailored to its risk profile, employees and stakeholders. Training should be conducted with a frequency based on the company's risk assessment (but at a minimum, annually) and with a scope appropriate for its products and services, customers, clients and other third-party relationships, as well as the geographic areas in which it operates. The training program should also be capable of effectively training personnel on any corrective actions taken as a result of a negative testing or audit finding.

"Root Causes" of SCP Breakdowns or Deficiencies

In addition to the five essential components of an SCP, OFAC notes that it has finalized numerous public enforcement actions in which it identified deficiencies and weaknesses within the subject organization's SCP. In an appendix to the Framework, OFAC provides a list of 10 root causes of SCP breakdowns or deficiencies based on its enforcement actions. The list is meant to assist organizations in designing, updating and amending their respective SCPs. OFAC's examples include (1) lack of a formal OFAC SCP; (2) misinterpreting or failing to understand the applicability of OFAC regulations, especially in connection with US-owned or controlled affiliates abroad; (3) facilitating transactions by non-US persons, again with an emphasis on the activities of non-US locations of an organization; (4) exporting or re-exporting US-origin goods with the specific intent of transferring the items to a sanctioned jurisdiction; (5) routing payments through the US financial system, even if no other US parties are involved; (6) sanctions screening software faults, including the failure to screen alternate spellings; (7) improper due diligence on customers/clients; (8) de-centralizing compliance functions and inconsistent application of an SCP; (9) use of non-standard payment or commercial practices; and (10) individual liability.

Although OFAC describes this as a list of root causes of SCP breakdowns or deficiencies, it is more accurately described as a list of typologies of the kind of conduct that has led to OFAC enforcement action in the past or of red flags that institutions should be looking for. Notably, the last category regarding "individual liability" is neither a root cause nor a typology. To date, OFAC generally has not imposed individual liability in connection with its enforcement actions (other than conditioning settlement agreements on, or granting mitigation credit for, companies terminating responsible individuals). In discussing individual liability in the Framework, however, OFAC is expressly warning that it may impose it in the future. After noting that in some cases, "supervisory, managerial or executive employees" conducted or facilitated prohibited conduct notwithstanding the existence of a "fulsome" SCP and that such employees of foreign entities also made efforts to hide their activities from others in the organization, OFAC warns: "In such circumstances, OFAC will consider using its enforcement authorities not only against the violating entities, but against the individuals as well." This appears to be a reference to a series of recent enforcement actions in which management of newly acquired foreign subsidiaries of US companies continued to engage in prohibited conduct notwithstanding the US parents' SCP prohibiting such activity. It will be interesting to see whether and how OFAC follows through on this threat, given the challenges of penalizing individuals who are outside the United States.

Takeaways for Companies

US companies—and foreign companies that do business with the United States, use the US financial system for payments or export or re-export US-origin goods or services—should carefully review OFAC's guidance and determine if their SCPs are appropriate for their level of OFAC risk and contain the essential elements that OFAC has outlined in the Framework. The Framework contains detailed examples of key risk areas that OFAC views as important, providing a roadmap for assessing a company's compliance program. OFAC's publication of the Framework is a welcome step toward transparency by OFAC, building on its recent practice of including key takeaways in its description of public enforcement actions. Industry should take advantage of this transparency by ensuring that its compliance culture and programs will withstand scrutiny in the event of a breakdown that leads to a sanctions violation. While much about OFAC's operations is opaque, the agency has long stated that it expects companies to adopt risk-based compliance programs. The Framework is the latest signal that the existence and quality of such programs will continue to be a critical consideration in how OFAC decides to resolve its enforcement actions.

Companies seeking to develop, review or refine their compliance programs should consult experienced sanctions counsel to ensure their programs are in alignment with the Framework and appropriately tailored to their sanctions risk exposure.

Footnote

1 US Department of Treasury, A Framework for OFAC Compliance Commitments (May 2, 2019) (available at https://www.treasury.gov/resource-center/sanctions/Documents/framework_ofac_cc.pdf).

2 Press Release, US Department of the Treasury, Under Secretary Sigal Mandelker Remarks, ABA/ABA Financial Crimes Enforcement Conference (Dec. 3, 2018) (available at https://home.treasury.gov/news/press-releases/sm563).

3 Press Release, US Department of the Treasury, OFAC Issues a Framework for Compliance Commitments (May 2, 2019) (available at https://home.treasury.gov/news/press-releases/sm680).

4 See 31 C.F.R. Pt. 501, App. A (Economic Sanctions Enforcement Guidelines).

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