OFAC Sanctions: Costly...But Effective?

April 2, 2018 Published Work
New York Law Journal, Volume 259 - No. 62

Economic sanctions are touted as a powerful tool in the fight against terrorism, rogue regimes, and transnational criminal organizations. Each round of new sanctions is accompanied by bold assertions of the positive effect the sanctions will have on national security. Critics, on the other hand, contend economic sanctions will cause unintended consequences by harming U.S. business interests or damaging economic relationships with foreign nations. But a more fundamental question goes unanswered: Is the cost to U.S. business justified by the benefits of sanctions? In other words, are U.S. economic sanctions programs effective in achieving their stated goals?

OFAC Sanctions: A Little Background

The Office of Foreign Assets Control (OFAC) administers economic sanctions programs focused on rogue regimes, terrorist organizations, and other bad actors that pose a threat to U.S national security and foreign policy objectives. While country-based sanctions programs (such as those imposed against Iran, Cuba, and North Korea) receive attention in the headlines, other programs targeting individuals and entities involved in criminal transactions are imposed with less fanfare. Collectively, these individuals and entities make up the Specially Designated Nationals and Blocked Persons List (the SDN List). The SDN List identifies more than 5,000 individuals and entities blocked under one OFAC sanctions program or another.

SDN designations are consequential. With rare exceptions, all U.S. per-sons are prohibited from engaging in any transactions with SDN individuals or entities. Additionally, the property and interests in property of any designated person must be blocked if it comes into the United States or into the possession or control of a U.S. person. See, e.g., the Foreign Narcotics Kingpin Designation Act, 31 C.F.R. Part 598.206. The penalties for violation are heavy indeed. The maximum civil penalty for an OFAC violation under the International Emergency Economic Powers Act (IEEPA) is currently $289,238 (or twice the amount of the underlying transaction, whichever is greater). 82 Fed. Reg. 10434 (Feb. 10, 2017). The Kingpin Act has an even higher maximum penalty of $1,437,153 per violation. 31 CFR 598.701. In 2017, OFAC issued penalties or reached settlements with 15 such entities for a total of more than $119 million.

The SDN List is designed to cut off known bad actors and their criminal networks from access to U.S. financial markets, thus crippling their ability to reap the rewards of their criminal actions and to continuing funding their unlawful activities. The effectiveness of these designations, however, depends not on the U.S. government, but on U.S. financial institutions and U.S. businesses in their role as gatekeepers, preventing SDNs from moving funds, making investments, and purchasing goods and services. Paradoxically, it is these gatekeepers—not the blocked parties on the SDN List—that are the targets of OFAC enforcement actions and penalties.

Exacerbating the situation, OFAC sanctions are enforced according to a strict liability standard. Thus, while the highest penalties are reserved for companies that willfully or recklessly commit violations, companies that commit even inadvertent violations are at substantial risk. For example, Richemont North America (d.b.a. Cartier) reached a settlement for $334,800 for engaging in four transactions violating the Kingpin Act by unknowingly selling jewelry to an SDN. See OFAC Enforcement Information for Sept. 26, 2017. In another OFAC enforcement action, Honda Canada Finance, Inc. (HCFI) agreed to pay $87,255 to settle its potential civil liability for approving and financing lease agreements between an unaffiliated Honda dealership in Canada and the Embassy of Cuba after its compliance program failed to flag transactions with Cuba. OFAC Enforcement Information for June 8, 2017.

To read the full article, please click the PDF link below.

Resources