The US Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces U.S. economic and trade sanctions programs against targeted foreign governments, individuals, groups, and entities in accordance with national security and foreign policy goals and objectives. OFAC recently issued guidance strongly encouraging domestic and foreign entities that conduct business with the US, US persons, or using US-origin goods or services to develop, implement, and continuously update a sanctions compliance program (SCP).
While each individual entity’s SCP will vary based on the entity’s size, products or services, geographic location and various other factors, OFAC has identified five essential components of compliance: management commitment, risk assessment, internal controls, testing and auditing and training.
OFAC emphasizes that senior management (including senior leadership, executives, and/or the board of directors) support of an organization’s SCP is imperative to it’s success and is essential in ensuring the SCP receives adequate resources and is fully integrated into the organization’s daily operations. Additionally, senior management support helps legitimize the program, empower its personnel, and foster a culture of compliance throughout the organization.
Risks in sanctions compliance are potential threats or vulnerabilities that, if ignored or not properly handled, can lead to violations of OFAC’s regulations and negatively affect an organization’s reputation and business. OFAC recommends that organizations take a risk-based approach when designing or updating an SCP. OFAC suggests that a risk assessment should consist of a holistic review from top-to-bottom and assess its touch points to the outside world. This process allows the organization to identify potential areas in which it may, directly or indirectly, engage with OFAC-prohibited persons, parties, countries, or regions.
According to OFAC, an effective SCP should include internal controls, including policies and procedures, in order to identify, interdict, escalate, report (as appropriate), and keep records pertaining to activity that may be prohibited by the regulations and laws administered by OFAC. The purpose of internal controls is to outline clear expectations, define procedures and processes pertaining to OFAC compliance (including reporting and escalation chains), and minimize the risks identified by the organization’s risk assessments. Policies and procedures should be enforced, weaknesses should be identified (including through root cause analysis of any compliance breaches) and remediated, and internal and/or external audits and assessments of the program should be conducted on a periodic basis.
Given the dynamic nature of U.S. economic and trade sanctions, a successful and effective SCP should be capable of adjusting rapidly to changes published by OFAC. These include the following: (i) updates to OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List”), the Sectoral Sanctions Identification List (“SSI List”), and other sanctions related lists; (ii) new, amended, or updated sanctions programs or prohibitions imposed on targeted foreign countries, governments, regions, or persons, through the enactment of new legislation, the issuance of new Executive orders, regulations, or published OFAC guidance or other OFAC actions; and (iii) the issuance of general licenses.
Testing and Auditing
Audits assess the effectiveness of current processes and check for inconsistencies between day-to-day operations. A comprehensive and objective testing or audit function within an SCP ensures that an organization identifies program weaknesses and deficiencies, and it is the organization’s responsibility to enhance its program, including all program-related software, systems, and other technology, to remediate any identified compliance gaps. Such enhancements might include updating, improving, or recalibrating SCP elements to account for a changing risk assessment or sanctions environment. Testing and auditing can be conducted on a specific element of an SCP or at the enterprise-wide level.
An adequate training program, tailored to an entity’s risk profile and all appropriate employees and stakeholders, is critical to the success of an SCP. This includes training that is appropriate in scope and frequency, and must be easily available to all applicable personnel.