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The Importance of OFAC and Sanctions Compliance in International Trade

  • May 28, 2024
  • 5 min read
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The Importance of OFAC and Sanctions Compliance in International Trade

The Office of Foreign Assets Control is a significant regulator of international trade and business. OFAC is an office under the United States Treasury that carries out and enforces economic and trade sanctions. These are aimed at enemy countries, groups, and individuals. Any business in international trade needs to understand the OFAC regulations and should stay sanctions-compliant. Failure in compliance could lead to severe penalties.

Whether you have a small business or a large corporation that trades with international partners. It remains essential that all transactions and dealings are done as per the set up by OFAC. The increasing volume of goods, services, and money moving across borders today has made the world a smaller place. 

A better way to lessen this risk is for companies to learn about OFAC sanctions lists and screening guidelines to avert legal and reputational problems that may harm their bottom line.

Types of sanctions OFAC enforces

The Office of Foreign Assets Control enforces various kinds of economic sanctions and embargo programs. The important one that is implemented is a trade embargo that restricts exports or reexports of goods from the U.S. There are other kinds of sanctions, such as foreign assets controls. Which freeze property under U.S. jurisdiction that is associated with sanctioned regimes. 

OFAC also has blocklists of certain persons, groups, and countries in the form of its Specially Designated Nationals (SDN) list. More than 3,500 persons and entities are prohibited from doing business due to this list. So, proper due diligence regarding OFAC has to be done to ensure that no business is transacted with these people and entities. In the last fiscal year, OFAC added over 700 new sanctions designations, further underlining the need for continuous monitoring and OFAC and sanctions compliance.

Possible penalties for non-compliance to OFAC sanctions

Failure to comply with OFAC would result in hefty fines and penalties. Compliance is ensured not to be penalized, although, in the past, lack of due diligence has set companies back to millions of dollars in fines out of OFAC investigations. In one of the latest cases, an immense transportation firm was fined $85 million for apparent violations in trading with countries such as Cuba and Iran. 

Other penalties will be imprisonment for up to 30 years imposed on an individual. Almost 90% of the major companies have at least one sanctions in OFAC screening failure per year. To avoid these non-compliance costs, organizations must install the OFAC compliance program to check OFAC sanction lists regularly and train their employees.

Importance of trade sanctions and embargo programs

Government sanctions and trade embargoes are vital tools in U.S. foreign policy. Administered by OFAC programs, the sanctions limit the flow of goods and funds into and out of targeted countries, groups, and regimes as much as possible. For example, loathing OFAC sanctions on Cuba, North Korea, and Iran are restricting the flow of goods and funds. 

It is easy for firms to be aware of which countries are under comprehensive or partial sanctions. To avert any sanctions violations that could hurt America’s geopolitical strategy, OFAC checks, and proper sanctions compliance are necessary. Accurate OFAC compliance means screening to ensure that no goods or technology pass around embargoes.

Impact of OFAC sanctions on international business dealings

OFAC regulations have been modified, and it’s getting tough for international businesses to stay compliant with all such modifications. It is estimated that more than $8 billion is spent each year by international firms on screening systems and vetting their overseas partners. The cost of mistakes can be high: large firms have paid out more than $1 billion in fines for sanctions lapses. 

Banks have lost their correspondent banking relationships because of sanctions compliance breakdowns. It is thus evident that global businesses ought to have thorough sanctions compliance imbibed in their international transactions to avoid business disruption. Careful attention to OFAC lists is critical to continued success in global trade.

Critical elements of an OFAC compliance program

A strong OFAC compliance program is crucial for any organization engaged in international activity. A good program integrates OFAC compliance into business practice and has senior management commitment. It designates a compliance officer responsible for managing the training, screening tools, and audits. This allows a company to focus a few resources on risky partners and transactions. 

More than 60% of such companies screen all their customers, but focused screening of risky deals is essential. Regularly reviewing the OFAC compliance system ensures the system is compliant with changes in the sanction.

Performing sanctions screening on customers, partners, and transactions

The screening of all parties and transactions for potential sanctions matches should be an essential part of any compliance program. High-risk countries require heightened diligence for transactions as well. About 15% of all sanctions screening failures detected during testing come from cross-border (international) wire transfers, so that’s where you should focus your attention. Look for the ability to do all these OFAC checks on a timely basis so there are no time lags between list updates.

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