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Complying with OFAC and Economic Sanctions

Requirements –Is your Organization Following the Rules?

4

Speakers:

Salvatore Scotto, CAMSSenior Compliance OfficerU.S. Department of the TreasuryOffice of Foreign Assets Control

Timothy White, CAMS National Risk Specialist, BSA-OFAC Bankers Toolbox

5

Agenda• What is OFAC ?

– OFAC Terminology & Types of Sanction Programs.

• Elements of the Compliance Program.• Q&A• Why is OFAC and Sanctions Compliance such a challenge?• Updating or Refreshing your Sanctions Program• Which lists need to be Checked?• Hot Issues within OFAC in 2010• Risk based Sanctions Programs• Monitoring Best Practices• Q&A• What really is OFAC enforcement ?• Q&A 

OFAC is a division of the U.S. Department of the Treasury. 

– OFAC administers and enforces economic and trade sanctions against targeted foreign countries and their agents, terrorism sponsoring agencies and organizations, and international narcotics traffickers based on U.S. foreign policy and national security objectives.

– Many of the sanctions are based on United Nations or other international mandates, are multilateral in scope, and involve close cooperation with allied governments.

National Security Council

Office of Foreign Assets Control

The President

Department of the StateDepartment of the

Treasury

Department of Homeland

Security

Federal Bureau of

Investigation

Central Intelligence

Agency

Federal Regulators

Law Enforcement

Department of Commerce

Department of Justice

Individuals‐ U.S. citizens and permanent resident aliens located anywhere in the world

‐ Individuals, regardless of citizenship, physically located in the United States

Corporations‐ organized under U.S. law, including foreign branches of U.S. companies

‐ physically located in the U.S., including U.S. branches, agencies and representative offices of foreign corporations

BLOCKING ‐ Freezing or Blocking ” assets under U.S. jurisdiction.  Across‐the‐board prohibitions against transfers or transactions regarding the blocked property.31 C.F.R. § 500.311

“Property” ‐ contracts “of any nature whatsoever, services, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.”31 C.F.R. § 500.312“Property interest” ‐ any interest whatsoever, direct or indirect.

Rejecting

• Underlying transaction that is prohibited, but contains no “blockable” interest

• Financial institution must simply refuse to process the transaction

Institutions must report the Rejecting  & Blocking of transactions within 10 days of action

General License• Regulatory provision authorizing certain transactions   without written authorization from OFAC

Specific License• A written authorization from OFAC issued on a case‐by‐ case basis to a specific individual or company allowing  an activity that would otherwise be prohibited by the embargo or sanctions program

Sanctions Programs

Comprehensive Programs

Counter Narcotics Trafficking

Non‐Proliferation (NPWMD)

Anti‐Terrorism

Sudan

Cuba

Iran

Limited Programs

Burma (Myanmar)

Conflict Diamonds

North Korea

Syria

Regime­Based Programs

Former Liberian Regime of Charles Taylor

Dem. Republic of Congo

Cote D’Ivoire

IRAQ

Zimbabwe

Balkans

Belarus

ELEMENTS OF THE COMPLIANCE PROGRAM

The fundamental components to any compliance program are management commitment, an 

understanding of the regulations and adequate checks, balances and systemic controls.  

The Compliance Program• Management Commitment 

• Requires management to designate and empower a Compliance Officer or Compliance Executive. 

• Risk Assessment• Customer risk + Country risk + Product risk –PROGRAM Controls = Residual Risk level.

• Program Infrastructure• Detection Tools and Interdiction Software • Training• Independent Audit

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Why is OFAC and Sanctions compliance such a challenge?

OFAC is an component of US foreign policy enforcement. This is very different than enforcement of banking regulations(FinCEN & FFIEC).

OFAC is accelerating (faster changes & more updates)

OFAC sanctions programs and interdiction considerations

• FFIEC - BSA/AML Examination Manual allows for a risk based approach for examinations.

• OFAC’s enforcement standards remain strict liability for violations. (executive orders are not risk based)

• A financial institution’s OFAC compliance program should also be tempered by it’s risk appetite and available compliance resources to avoid both regulatory and OFAC sanction violations.

Updating your SanctionsSanctions programs(on-going process)

Review all external risk factors from previous year:• FFIEC - BSA/AML Examination Manual updated OFAC section

(April 29th, 2010)

• New sanction programs and, changes to existing OFAC sanction programs

• Updates to the actual lists

• Review of enforcement actions and changes to enforcement guidance standards

Recent OFAC Actions 1/13/2011 The following entities have been added to OFAC's SDN list: NPWMD entities

ADVANCE NOVEL LIMITED, ALPHA EFFORT LIMITED, BEST PRECISE LIMITEDCONCEPT GIANT LIMITED, GREAT METHOD LIMITED, IDEAL SUCCESS INVESTMENTS LIMITED]LOGISTIC SMART LIMITEDLOWESWATER LIMITED, , Man, Isle of; M. BABAIE INDUSTRIES MILL DENE LIMITED, NEUMAN LIMITED, NEW DESIRE LIMITED, PARTNER CENTURY LIMITED, SACKVILLE HOLDINGS LIMITED, 982126100191; Fax: 982126100192 [NPWMD]SANDFORD GROUP LIMITED, SHAHID AHMAD KAZEMI INDUSTRIES GROUP,

SHALLON LIMITED, Man, Isle ofSINO ACCESS HOLDINGS LIMITED, SMART DAY HOLDINGS GROUP LIMITED, SPRINGTHORPE LIMITED, Manning House, 21 Bucks Road, Douglas IM1 3DA, Man, Isle of; Business Registration Document # 003647 (Man, Isle of) issued 2 Mar 2009 [NPWMD]STARRY SHINE INTERNATIONAL LIMITED, SYSTEM WISE LIMITED, TOP GLACIER COMPANY LIMITED, TOP PRESTIGE TRADING LIMITED, TRADE TREASURE LIMITED, TRUE HONOUR HOLDINGS LIMITED,

Which lists should your organization

be checking?OFAC & other Global

Sanctions List

US Sanctions Lists• OFAC’s Lists

– (SDNs, PLC and Country Sanctions)

• FinCEN Special Measures Section 311• Bureau of Industry and Security - Denied

Persons List– (BIS) Commerce Department

• Export Administrative Regulations – (EAR) Commerce, State, Homeland Security Departments

• Defense Trade Controls –Debarred Parties List– ITAR -AECA

USA PATRIOT Act Section 311• Special Measures• Administered by FinCEN (within the BSA exam)

– For Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern

• Asia Wealth Bank & Myanmar Mayflower Bank• Burma as a Jurisdiction of Primary Money Laundering Concern• Commercial Bank of Syria (including Syrian Lebanese Commercial Bank)• Banco Delta Asia• VEF Banka

– Notice of Proposed Rules Making)• Infobank (Includes Belmetalnergo) (9-30-04)**

Global Compliance and EDD Lists• UN Lists - UNSCRs• FATF - NCCT List – Money Laundering Concern

• European Union List*• OECD - Tax Haven List

• World Bank Debarred list

*EU Member States

Other Country Sanctions - Regulatory List for Enhanced Due-Diligence

• Hong Kong • Israel• Japan • Latvia• Mexican• Russia• Singapore• Slovak• Spain• Swiss• Taiwan• Ukraine

• AUSTRAC• Argentina • Austria• Belgian• Canada• China • Dutch • France• German (Deutche

Bundesbank)• HM Treasury ( Bank of

England)

Hot Issues within OFAC in 2010• IAT’s and SWIFT Cover Payments• Cuban Assets Control Regulations Amended• SDNTK Mexican Drug Trafficking• Strengthening of the NPWMD & HEU• The Lebanon Sanctions Regulations (7-30-10)

• Strengthening of Iranian Sanctions - CISADA• FinCEN proposal for Cross Border Payments

(Federal Register 9-30-10)

OFAC & The US Treasury are very focused on Iran & NPWMD

“Iran is by far the leading state sponsor of terrorism”

…including the Hamas, Hezbollah, PFLGC, Taliban & Palestinians onJihad…

Mr. Stuart Levey,Under Secretary for Terrorism and Financial Intelligence Department of the TreasuryOctober 8th, 2010

Video of interview with Charlie Rose – 10-8-10http://www.hulu.com/watch/184066/charlie-rose-stuart-levey

Sanctions against Iran• Additional UN Security Council Sanctions

– (global sanctions - UNSC approved 12-2 with Lebanon abstaining. Brazil & Turkey voted against the sanctions)

• Comprehensive Iranian Sanction Accountability and Divestment Act – CISADA (Signed by President Obama July 1st 2010)

– This the 4th level of Iranian sanctions

September 3, 2009TG-273

Fact Sheet: Treasury Amends Cuban Assets Control RegulationsTo Implement the President’s Initiative on

Family Visits, Remittances, and Telecommunications

Family visits. OFAC has eased restrictions on travel-related transactions for visits to "close relatives" who are nationals of Cuba by issuing a general license.

Remittances. OFAC has also eased restrictions on remittances (including from inherited blocked accounts) to "close relatives" who are nationals of Cuba by issuing a general license.

• Persons subject to the jurisdiction of the United States may send remittances to "close relatives" • There is no limit on the amount of such a remittance. • There is no limit on the frequency • Authorized family travelers may carry up to $3,000 of such remittances to Cuba. • Remittances for emigration-related purposes continue to be subject to separate restrictions. • Remittances may be made from depository institutions. To facilitate this, depository institutions

are permitted to set up testing arrangements and exchange authenticator keys with Cuban financial institutions.

Telecommunications. Certain telecommunications services, contracts, related payments, and travel-related transactions are authorized by general licenses.

http://www.treas.gov/press/releases/tg273.htmhttp://www.ustreas.gov/offices/enforcement/ofac/programs/cuba/cuba_tsp.pdf

Updating your SanctionsSanctions programs (at least annually)Review all internal risk factors for changes from the previous year:

Internal OFAC risk tolerance statement, OFAC risk assessment and written policyAs well as…– exam findings, audits, policy, procedures,– new products & services offered– new markets being served (customer base, industries, & locations)– sponsored and supported non-profits and charities (employer matching)– new processing/application systems being used (internal or outsourced)– new interdiction monitoring software– logs and records of (lists being updated and system setting changes) – logs and records of hits reviewed, accounts blocked) – new personnel (bank wide employee screening) – new personnel on your sanctions team (experience, training, testing)– new blocked accounts (interest being paid)

Risk based approach• Conduct a thorough risk assessment

considering the likelihood of encountering a real OFAC hithit oror matchmatch

• Risk Assessment must be an on-going process because your institution changes so does the list (SDN list was updated many times last year)

Risk assessment is not a statutory requirement

Understand what’s on the OFAC lists(specifically and quantitatively)

• 62% of the entities are probably Hispanic surnames (SDNTs, SDNKPs and the Cuban sanctions)

• 21% are SDGTs, FTOs & SDTs(greatest concern for national security)

• 17% are from the other various embargoes - Balkans, Belarus, Burma, Democratic Republic of the Congo, Iran, Iraq, Liberian Regime of Charles Taylor, North Korea, Sudan, Syria and Zimbabwe (see next slide)

Pre Risk Assessment HomeworkUnderstand what’s covered by OFAC Country Sanctions

Programs and NOT on the OFAC lists

• Country Sanctions are economic embargoes.

• Each Country Sanction program is unique.

Balkans, Belarus, Burma, Cote de Ivory, Cuba, Democratic Republic of the Congo, Iran, Iraq, Lebanon, Liberian Regime of Charles Taylor, North Korea, Sudan, Syria and Zimbabwe

OFAC Risk Assessment• OFAC sanctions can reach into virtually every area of

banking.

• A sound OFAC risk assessment will analyze the OFAC risk associated with every aspect of the bank.

• A thorough OFAC risk assessment provides the detailed analysis needed to set up an efficient OFAC monitoring program.

• A sound risk assessment can protect your program from an inexperienced regulator.

Know the facts about your business• Where is your market place? (local, regional or global)• Who are your customers? (retail, commercial, corp., international;

what are the numbers and percentage of each?)• What departments do you have?

(Correspt Bk, Trust, International, Private Bkg, Manufacturing, shipping etc.)• How big is your bank or business ($290 million in assets)• What are your transaction volumes?• # of daily wires (domestic & international)• # of monetary instruments• # of accounts• # of accounts for charities & non-profits• # of loans• # of ACH items (# debits & # credits)• # trust accounts• # E banking customers• RDC – Who, Where

OFAC Risk AssessmentCreate a diagram of the bankCreate a diagram of the bank

Expand your bank’s organization chart to include a description of each department’s:– Customer types – Product and Services– Transaction types– Account and Transaction Parties (Names)

• Unlike BSA /AML where we look for patterns or unusual transactions

– Locations or Involved Geographies – Charitable Organizations– What controls are in place?

Customer types• non-profit and charitable organizations (international and

domestic) Risk Matrix for the charitable sectorhttp://www.treas.gov/offices/enforcement/ofac/policy/charity_risk_matrix.pdf

• international customers (every type)- manufactures, material & chemical suppliers (Dual Use Goods)- retailers, food suppliers, and individuals

• transportation businesses - common carriers (air and marine, passenger and freight)- freight forwarders & shipping companies- container management and logistic facilitators

• importers, exporters and intermediaries - consignors and consignees

• non-resident aliens (NRA)• students

Account and Transaction Parties• originators, intermediaries, beneficiaries

• principals, guarantors, beneficial owners, nominee shareholders, directors, signatories, Power of Attorney’s (POA)

• consignors and consignees– bills of lading and waybills

Transaction types• large amounts • letters of credits• foreign exchanges• SWIFT messages

– (Society for Worldwide Interbank Financial Telecommunications)

• wire transfers • cash purchases (large denominations)• prepaid value cards• ACH one time (web & tel)• ACH International (IAT)• Internet banking• RDC• Mobile Payments (international)• Loans (last step)• (updated 1-18-11)

RDC – Sanctions Risk Exposures• International applications- outside of internal

operations could be very high risk. - Domestic applications much lower risk.

• RDC could be abused by sanctioned entities attempting to replace the SWIFT/stripping payment scheme.

• High risk jurisdictionsMENA, Latin and South American locations

• Front Companies (KYC)

Locations and Involved Geographies• international locations • proximity to drug transshipment countries

– Afghanistan, Burma, Bolivia, Canada, Caribbean Basin, Columbia, Laos, Mexico, Pakistan, Peru and Thailand

• proximity to state sponsors of terrorism – Cuba, Iran, North Korea, Sudan, Syria

• high intensity financial crime areas (HIFCA) • high intensity drug trafficking areas (HIDTA) • proximity to major cities and ports• proximity to Canadian & Mexican borders

Drug Transshipment Countries

Evaluate and rate each riskAccording to the FFIEC BSA/AML Examination

Manual, an effective risk assessment “should be a composite of multiple factors, and depending on the circumstances, certain factors may be weighted more heavily than others

Evaluate how these risk factors match up with:Quantity of Risk Matrix - Appendix M FFIEC Manual

OFAC Risk Matrix for the charitable sector http://www.treasury.gov/offices/enforcement/ofac/policy/charity_risk_matrix.pdf

Document all OFAC Program DecisionsOFAC Issue: Screening payees on On-Us checks

within the normal automated processDecision Made: Not to screen payees on On-Us checks

within the normal automated process.Date: September 19th, 1999Who was involved in thedecision-making process: Mary Miller & Sam Smith Associated Risk: Low

Justification of Decision: Screening payees on On-Us checks is not an effective use of time and money because the information is not in an electronic format that is conducive to automating the screening process and the volume of items is prohibitive.

4 steps for risk assessment documentation (Document Everything)

• Include an enterprise wide INHERENT risk assessment that outlines all identified OFAC risk factors. Include all high-risk OFAC locations, departments (wire room, etc), transactions, and customers.

• Provide details for all CONTROLS that reduce each of the inherent OFAC risks: policies, procedures, software systems, monitoring and training). Establish procedures to communicate this to department personnel, audit and examiners.

• These findings will enable the bank to establish its RESIDUAL RISK Profile -(amount or area of risk that is not mitigated (reduced) by controls) This is the assessment of the institution ultimate OFAC risk assessment.

• These findings will enable a financial institution to …establish and maintain an effective, written OFAC program commensurate with its OFAC risk… and institution risk tolerance.

OFAC Compliance Baseline• Identify your high risk accounts and transaction

• Screen international items• Screen wire transfers (real time)

• Screen significant non-customer transactions• Screen new accounts • Screen existing accounts (regularly)

• International ACH transactions (IATs) • (before origination and posting)

• Assess your OFAC risk with: RDC, E-banking, Pre-Paids, Mobile Payments, etc.

• Domestic ACH transactions • Loans prior to funding

OFAC Screening ConsiderationsNew Account Openings

A centralized back office approach in batch mode – Reduces the exposure of a violent reaction– Minimizes the disruption of the work flow– Often provides a higher standard of OFAC review– Simplifies and minimizes software implementation

issues (cost savings in software licensing)

– Simplifies and minimizes training issues

Why Should ACH Participants Understand IAT?

OFAC violations carry penaltiesOFAC violations carry penalties. • ACH Receivers and Originators are subject to U.S. law, including OFAC

sanctions.• Originating Financial Institutions will obligate an Originating Company or

Third Party Sender through the warranties in their ACH origination agreement or terms & conditions.

• Originating Company acknowledges that they may not initiate ACH entries that violate the laws of the United States.

ACH entries could be delayedACH entries could be delayed.• Financial institutions when handling ACH transactions are subject to both

U.S. law and the NACHA Operating Rules.• Financial Institutions will be required to OFAC screen both inbound and

outbound ACH IAT entries so there may be delays if an entry needs to be scrutinized further.

Best Practices - ACH Transactions• Disseminate OFAC knowledge to your ACH originators.

• To further bolster a customer due diligence approach to ACH OFACcompliance, it is imperative for the Originating Depository Financial Institution (ODFI) to develop a systematic approach for regularly disseminating OFAC knowledge to all of its ACH-originating customers.

• A concerted effort to keep your customers informed of U.S. sanction programs can substantially reinforce your institution’s frontline defense as your customers start to contemplate to whom they are providing goods and services (know your customer’s customer).

International Trade PaymentsIf a Letter of Credit (LC) is used check for items

listed on the dual use list.

An LC will normally require several documents:– Transport Document (Bill of Lading), – Packing and Weight List,

These docs contain information on the merchandise or contents shipped.

Information from FATF Proliferation Finance Report June 18th, 2008

CIP & Customer Due Diligence for OFAC • Be on the alert for name deviations.

• (first name, last name transpositions)

• Pay attention to national and local media.

• Research charitable organizations

• Use the internet to check out customers

Common Mistakes in OFAC Compliance

• Not performing a risk assessment• Not having a written policy • Not Screening often enough• Believing that you can rely on your wire correspondent without

a formal OFAC servicing agreement• Not Screening inbound wires• Rejecting an account opening because it was considered an

illegal transaction

Q&A• Locate the Q & A box on the bottom right

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• Type in your question and click send!

What leads to an OFAC enforcement investigation?

Most frequent financial institution violations:‐ Processing transactions involving SDNs or target 

countries‐ Operating Iranian accounts‐ Operating SDN accounts, including those belonging to Cuban nationals‐ Rejecting rather than blocking a prohibited payment‐ Relying on an outdated SDN list

Enforcement Action Illustration for Discussion Only – Note : In reality the flow varies greatly

OFAC EnforcementCivil Penalties (Statutory Maximums):

$65,000  Trading With the Enemy Act$250,000 International Emergency Economic 

Powers Act (or twice the value of the transaction)

$1,075,000 Foreign Narcotics Kingpin Designation Act$55,000  Anti‐Terrorism and Effective Death 

Penalty ActMitigating factors:

‐ Voluntary disclosure‐ First time or inadvertent offense‐ Compliance program 

General Enforcement Factors• Willful or Reckless Violation of Law• Awareness of Conduct• Harm to Sanctions Program• Individual Characteristics• Compliance program• Remedial Response• Cooperation with OFAC• Timing of Apparent Violation in relationship to imposition of Sanctions.

• Future Compliance / Deterrence effect• Other relevant factors –case by case

Closing thoughts: What could an institution do?

Always Revisit your risk assessment.Products, Customers, geographic risk

Always examine your controls & process.Home‐office procedures.

Manage  the OFAC message upward and outward.Review Policy statements, Meeting minutes.Examine remote locations – procedures  vs. actual practice.

FIU – AML monitoring integration.Post transaction review

OFAC References:• http://www.ustreas.gov/offices/enforcement/ofac/programs/iran

/iran.shtml

• Risk Matrix for the charitable sectorhttp://www.treas.gov/offices/enforcement/ofac/policy/charity_risk_matrix.pdf

• FinCEN Advisory -FIN-2010-A008Update on the Continuing Illicit Finance Threat Emanating from Iran Issued: June 22, 2010

• Federal Register – http://www.gpo.gov/fdsys/pkg/FR-2010-09-28/pdf/2010-24211.pdf OCC Bulletin

on ACH 2006-39 September 24, 2006 (Page 3)

• How to Implement Risk-Based OFAC Monitoring Practices –-http://www.aba.com/NR/rdonlyres/CC139B64-7199-4568-BAD5-3EFFE9F7BDA3/49045/OFACCoverStoryWhite.pdf

Q&A• Locate the Q & A box on the bottom right

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• Type in your question and click send!67

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Thank you for joining us today!

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Conducting Effective AML Investigations: Law Enforcement Methodologies and Private Sector Techniques

February 28 & April 29 | New York, NYFebruary 25        | Washington, DC

Join veteran law enforcement speakers, Dennis Lormel and Edward Rodriguez, as they present a full review of the investigative process from start to finish. In this comprehensive, full‐day seminar, attendees will gain invaluable insight on:

• Increasing your AML expertise based on case study analysis from the law enforcement and private sector perspectives

• Practicing critical interview processes and techniques• Determining when to file a suspicious transaction report

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