What is Office of Foreign Assets Control (OFAC)?

What Is OFAC?

The Office of Foreign Assets Control is the financial intelligence and enforcement agency of the United States Treasury Department, which is responsible for the administration and enforcement of economic sanctions programs against countries and individuals like terrorists and narcotics traffickers. In this blog content, we will touch upon its history, operations, programs, and more. 

History of OFAC

The U.S. Department of the Treasury actually has a long history of applying economic sanctions against foreign states, which dates back to the War of 1812. During the war, Secretary Albert Gallatin administered sanctions against the UK under the Embargo Act, in retaliation for the impressment of American sailors. He was one of the first U.S. officials to implement a nationwide economic sanctions regime. Despite having predecessor agencies such as the Foreign Funds Control and the Division of Foreign Assets Control, OFAC was founded in 1950. Its role has become gradually more crucial over the years, but its importance really took off after 9/11. Today, it is one of the most powerful financial enforcement authorities in the world. 

How Does OFAC Work?

OFAC is responsible for many enforcement actions. Its sanctions programs and lists, such as the SDN List, which we will discuss later, are among the organization’s best-known activities. OFAC implement and enforces U.S. sanctions across many jurisdictions. Moreover, we must also mention its role in licensing; OFAC is able to issue licenses that allow certain prohibited activities, which may be classified as general or specific.

Who Must Comply with OFAC Regulations?

According to OFAC’s website, all U.S. persons must comply with OFAC sanctions. These include all individuals and entities residing or incorporated in the United States. However, some non-U.S. persons are also subject to certain sanctions prohibitions such as those who cause the U.S. persons to violate sanctions and those who engage in conduct that evades U.S. sanctions.

What Are the Types of OFAC Sanctions?

It is possible to divide the OFAC sanctions into three categories: Country-Based Sanctions, Sectoral Sanctions, and List-Based Sanctions. 

Comprehensive Country-Based Sanctions are mainly targeted against countries, regimes, or specific regions. OFAC forbids nearly all imports, exports, financial transactions, services, and dealings with these countries, including their governments, citizens, and businesses. North Korea, Syria, and Cuba are among these sanctioned countries. However, there may be certain selective sanctions that solely target transactions concerning particular organizations or persons. 

Now, let’s give an example. According to the U.S. Department of The Treasury, OFAC sanctioned five individuals and one entity for their role in generating illicit revenue for the Democratic People’s Republic of Korea (DPRK) government’s weapons of mass destruction and ballistic missile programs.

Sectoral Sanctions, on the other hand, refer to restrictions against specific industries. These often aim to limit critical sources of revenue without banning all transactions with the country. Some notable examples are Russian Harmful Foreign Activities Sanctions, Chinese Military Companies, and Rough Diamond Trade Controls. 

For example, recently OFAC designated 21 entities and 17 individuals involved in networks that facilitate the acquisition of sensitive goods and technology for Iran’s Ministry of Defense and Armed Forces Logistics and its missile/military production efforts. 

Lastly, there are sanctions that target illicit activities and threats. These sanctions do not directly target jurisdictions but are instead “smart sanctions” that aim at designated individuals, groups, or companies such as Counter Narcotics Trafficking Sanctions, Counter Terrorism Sanctions, Cyber-Related Sanctions, and Transnational Criminal Organizations. 

What is OFAC Sanctions List?

The most renowned list is the SDN List (Specially Designated Nationals and Blocked Persons List). This list concerns individuals, entities, and countries linked to terrorism, nuclear proliferation, human rights violations, or other illicit activities. OFAC prohibits dealing with individuals and entities on the SDN List as well as freezing their assets within U.S. jurisdiction. 

There are also additional lists that OFAC maintains: 

• Sectoral Sanctions Identifications (SSI) List, 
• Foreign Sanctions Evaders (FSE) List, 
• Non-SDN Palestinian Legislative Council (NS-PLC) List, 
• List of Foreign Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (CAPTA List), 
• Non-SDN Menu-Based Sanctions List (NS-MBS List), 
• and Non-SDN Chinese Military-Industrial Complex Companies List.

How to Check OFAC Sanctions?

The easiest way to access the OFAC Sanctions Lists is by using the OFAC SDN Search Tool. However, it is also possible to download the SDN List and the Consolidated Non-SDN lists directly from OFAC’s website. Aside from these, you can use a compliance tool such as Sanction Scanner to access the most important sanctions lists at once. 

What is the OFAC Sanctioned Country List?

There is no single definitive list that shows the countries you are not allowed to do business with because the degree of restrictions varies from country to country. However, we can mention the countries that are subject to the most comprehensive sanctions, namely Cuba, Iran, North Korea, and specific parts of Russia and Ukraine. 

What Is the Regulatory Framework Governing OFAC?

OFAC operates based on a few key foundations. The first is the International Emergency Economic Powers Act (IEEPA), which is the basis for most modern sanctions. It also allows the president to regulate commerce and freeze assets. After the IEEPA, which is an older law, Trading with the Enemy Act (TWEA), also plays an important role by giving broad powers to restrict trade during wartime. There are also Executive Orders, which are issued by the president to declare national emergencies and authorize targeted sanctions. 

How to Detect and Prevent Sanctions Violations

OFAC’s “A Framework for OFAC Compliance Commitments” strongly recommends employing a risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program (SCP).

Furthermore, OFAC guidance also states that entities should continuously screen customers, counterparties, vendors, and transactions against the OFAC’s SDN and non-SDN lists through up-to-date data. According to the BSA/AML Manual, an effective program should be able to identify suspect accounts and transactions, and report blocked and rejected transactions to OFAC. 

There are also preventive measures that you can take within your organization. For example, you can develop written policies and procedures, segregate duties, detail approval processes, and set escalation triggers. Using AML solutions can especially help with these steps. 

Also, do not neglect training your staff so that they can better recognize red flags and understand sanctions requirements, which is among the five essential components of the OFAC’s framework.

Lastly, OFAC expects you to conduct independent tests and audits of the sanctions compliance program to see whether your policies are effective or not. In the case of a possible violation, consider Voluntary Self-Disclosure (VSD) to OFAC. A qualifying VSD may lead to mitigation, such as up to a 50% reduction in the proposed civil penalty. 

OFAC vs. Other Global Sanctions Regulators

While OFAC is one of the most influential sanctions authorities in the world, it doesn’t have direct control internationally. Its reach often only extends through secondary sanctions. Therefore, we believe it is worthwhile to mention other key regulators. 

Let’s start with the European Union (EU), which adopts sanctions through the Council of the EU and expects each member state to enforce its regulations. 

Similarly, the UN is worth mentioning due to its global role. Under Chapter VII of the UN Charter, the UN’s sanctions committees impose sanctions that bind all UN member states. However, implementation depends on each country’s national legislation to a certain extent. 

In the UK, on the other hand, the OFSI (Office of Financial Sanctions Implementation) is the main regulator and operates under HM Treasury. The OFSI maintains the UK Sanctions List and issues guidance, licenses, and penalties. Since Brexit, it has been pursuing an independent sanctions policy.

Let’s finish this section with Canada, where the GAC (Global Affairs Canada) operates as the main sanctions regulator. It maintains the Consolidated Canadian Autonomous Sanctions List, which includes persons and entities subject to Canadian sanctions. It also provides guidance on licensing and humanitarian exceptions, just like OFAC. 

Sanction Scanner’s Role in OFAC Compliance

Most importantly, we enable automated screening against the Specially Designated Nationals (SDN) Lists and the consolidated non-SDN lists so that you remain compliant with OFAC by avoiding any action with sanctioned individuals, entities, or countries. Besides OFAC, our database includes numerous watchlists, PEP (Politically Exposed Persons) data, and adverse media sources. Also, we update these lists every 15 minutes, encompass more than 220 countries, and check more than 3000 data points. 

This way, you can detect potential matches against these lists, monitor updates, reduce false positives through advanced filtering and AI-driven matching, and maintain complete audit trails. These are only part of what we offer. If you would like to find out more, do not hesitate to request demo.