The Office of Foreign Assets Control (OFAC) implements and imposes economic sanctions against those who are reasonably believed to pose a threat to the U.S. economy, foreign policy, or national security. Those against whom sanctions are imposed include certain foreign countries (with respect to country-based sanctions programs) and governments, regimes, corporations, and individuals (with respect to targeted sanctions). OFAC maintains a list of these individuals and organizations which are known as Specially Designated Nationals, or SDNs. This list is called the Specially Designated Nationals and Blocked Persons List or the SDN List.
OFAC prohibits U.S. citizens, permanent residents, U.S. foreign nationals, and U.S.-based businesses and corporations (collectively referred to as U.S. persons) from taking part in most transactions with SDNs, including commerce, business, trade, or finance. The list also serves as notice to U.S. persons of their obligation to block any property or interests in property belonging to blocked persons that may come into their possession. Violating any of the prohibitions or failing to fulfill any of the obligations imposed by sanction can result in both civil and criminal penalties.
OFAC updates its list of SDNs and Blocked Persons on an “as-needed basis.” As new threats arise, additional individuals or organizations may be added. Similarly, as threats dissipate, names may be removed from the list. OFAC, in consultation with other federal agencies (e.g., the Departments of Commerce, State, Justice, or Homeland Security), is ultimately the agency tasked with designating a person as an SDN and administering the SDN List. The most current SDN list is made readily available through the OFAC website with various search options and formats.
When doing business with a foreign individual or organization, it is important to access the list of Specially Designated Nationals and Blocked Persons to ensure that the transaction to take place is, in fact, permissible. A failure to practice due diligence in reviewing current sanctions can lead to a violation of U.S. economic and trade sanctions, leading to serious consequences for all those involved in the transaction.
Removal from the SDN List
Similar names and other coincidental factors may result in individuals finding themselves improperly classified as Specially Designated Nationals or SDNs. This error can result in detrimental repercussions to the individual’s financial status and personal reputation, incurring the freezing of assets, blocking of funds, and possibly, the seizure of property and interests in property. Or, alternatively, the basis for the original designation may have changed, thereby negating any current justification for being designated.
For such an individual designated as an SDN relief may be requested pursuant to 31 C.F.R. § 501.807. This regulation permits a person to seek a reconsideration of his, her, or its designation. In essence, a reconsideration is a request made to OFAC explaining why the designation is either a mistake or no longer relevant. OFAC, however, has the final decision as to whether a name can or will be removed and whether or not economic freedoms be reestablished for that individual.
OFAC has removed more than 800 persons from the SDN List since 2012 and more than 1,300 in the past seven years. As such, the removal is not impossible. However, the process can take many years because OFAC must be able to credibly verify that an SDN can no longer justifiably remain on the list.
Over the years, OFAC has revealed that the primary goal of economic sanctions is behavioral change. If an SDN can credibly demonstrate that their behavior has changed, removal from the list may be possible. For example, on June 19, 2014 OFAC removed 308 names associated with the Cali Cartel from the SDN List. The removals were justified because the cartel had been completely dismantled and the individuals on the list had credibly demonstrated they no longer participated in narcotics trafficking.
Transactions with Unlisted Blocked Entities
OFAC cautions against conducting business with unlisted persons (e.g., businesses and entities not on the SDN List) who may be owned or controlled by blocked persons who do appear on the SDN List. Thus, it is entirely possible that conducting transactions with an unlisted person could lead to unintended violations of economic sanctions.
To this end, OFAC offers “Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked.” In this licensing guidance, OFAC notes the following:
“A person whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (a “blocked person”) is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or greater interest. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive Order or otherwise placed on OFAC’s list of Specially Designated Nationals (“SDNs”). Accordingly, a U.S. person generally may not engage in any transactions with such an entity, unless authorized by OFAC. In certain OFAC sanctions programs (e.g., Cuba and Sudan), there is a broader category of entities whose property and interests in property are blocked based on, for example, ownership or control.
Before assuming that every entity that might be owned or controlled by a blocked person is also blocked, one should first investigate whether the order requires blocking by operation of law or requires some affirmative determination by the Treasury first. If it’s the latter, it is important to determine whether transacting with the entity would constitute evasion or a prohibited indirect transaction with a blocked person. Then, one should investigate whether the entity is less than 50 percent owned by a blocked person. Therefore, the process to protect oneself from dealing with an unlisted blocked entity is both legally and factually intensive.