Doreen Edelman, Partner, Chair Global Trade & Policy Group, Lowenstein Sandler and Zarema Jaramillo, Partner, Antitrust & Trade Regulation, Lowenstein Sandler
The Office of Foreign Assets Control (OFAC) introduced an interim rule that expands mandatory reporting requirements for all U.S. persons. The rule requires all U.S. persons to file reports with OFAC when a transaction is rejected because the transaction would have resulted in an OFAC violation. The interim rule will remain in effect until OFAC considers the comments received and issues a final rule.
The reporting requirement expands OFAC's jurisdiction in two key ways.
First, proactive reporting requirements are extended to U.S. persons selling goods and services. Second, the reporting requirement applies to all rejected transactions based on sanctions compliance, not just incidents of rejected fund transfers.
"Transaction" is defined broadly as "transactions related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services."
In the past, OFAC only required that "blocked" transactions, where property or an interest in property was frozen, be reported to OFAC. Now, companies outside of the financial services community will need to report to OFAC when a decision is made to avoid a transaction because moving forward may violate an OFAC prohibition. This will require companies to have a compliance system in place to identify "rejections" and administer the notification process. Without compliance procedures, companies will have no way to protect themselves from inadvertent reporting violations.
There is no explicit definition identifying when a potential or proposed transaction has reached the point where a "rejection" is triggered. Thus, companies will have to determine what constitutes a transaction and when activities will need to be reported. OFAC will hopefully provide more clarity regarding the point at which rejection formally occurs for purposes of OFAC reporting in the coming months.
Failure to report a rejection to OFAC as now required will be viewed by OFAC as a violation of the reporting requirement regulations. The maximum monetary civil penalty that may be imposed for an OFAC regulatory violation typically is the greater of $302,584 or twice the amount of the underlying transaction to which the violation relates.
What compliance obligations are needed?
U.S. companies must create procedures to both identify and report rejected transactions within 10 business days. These procedures must define what the company considers a transaction and what it considers a rejection. Businesses should consider whether discussions involving potential business transactions could be viewed as a rejected transaction under the reporting requirement. Existing sanctions policies and procedures should be revised as soon as possible to create implementation procedures. This requirement will affect sales and business development personnel in a company, which means additional training may be needed. One silver lining is that more corporate executives will become aware of OFAC sanctions programs and how to reduce risk for their companies.