I have had some recent clients who we procured licenses from the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) for come back and say that despite their licenses, no banks were willing to transfer the funds. There are also numerous reports of banks refusing to process payments for exports of agricultural commodities, medicine, or medical devices pursuant to licenses issued by OFAC. While this phenomenon seems most prevalent in regards to transactions related to Iran, it is also impacting other types of licensed activities. This is leading some to believe that indicating that a transaction is related to an OFAC license is a sure fire way to have the banks refuse to process the payment. Since this is obviously not a problem caused by the OFAC license itself, the problem is being caused by the self monitoring practice imposed by the banks.
It should be noted that while OFAC can authorize a transaction, they cannot mandate a financial institution to process the transaction. Moreover, financial institutions are expected to self monitor for sanctions violations. Due to numerous large penalties and settlements for sanctions violations over the past few years, an atmosphere of hyper sensitivity has developed around sanctions violations. As such, most financial institutions are engaged in over compliance, as many banks believe that the benefit of processing licensed transactions does not outweigh the risks. This is further exacerbated by those at Treasury who are traveling around the world speaking to financial institutions and warning them of the risks of running afoul of U.S. sanctions. None of this promotes licensed trade, and as such there is a phenomenon occurring whereby OFAC licenses mean very little to the foreign financial institutions who are called upon to process payments pursuant to those licenses.
Does this mean OFAC licenses are now useless? No, not necessarily. First, it should be noted that if you are engaged or are planning to engage in a transaction prohibited by an OFAC administered sanctions program, you will need a license to be in compliance with the law. Second, it depends on who is holding the license. Larger companies are still able to leverage their size by threatening the foreign financial institutions of withdrawing from those banks if they do not process authorized payments. This of course, leaves those who don’t fall into the high wealth or the Fortune 500 categories out of luck.
Therefore, OFAC licenses are not useless, and indeed they are required if a party seeks to engage in otherwise prohibited activity. However, over compliance by banks is causing many OFAC license holders to experience difficulty in acting under those licenses. When the banks’ compliance costs outweigh the benefits, and there is no authority to force the banks to process OFAC licenses payments, there is very little recourse for those holding OFAC licenses. There clearly needs to be some statutory or regulatory fix to this problem. One possible solution could be indemnification for financial institutions processing a payment pursuant to an OFAC license when carrying out good faith due diligence in relation to the transaction. A similar type of indemnification has been provided to insurers in recent sanctions legislation, and may also work well to quell the fears of financial institutions and restore the practical effectiveness of OFAC licenses.
The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or firstname.lastname@example.org.