I just returned from a week long trip where I was working on various matters related to U.S. economic sanctions programs administered by the United States Department of the Treasury Office of Foreign Assets Control (“OFAC”). A lot of the rumors I heard prior to my trip ended up being true and reflected what I have seen in cases in other parts of the world.

What I am referring to here is that the various sanctions programs are, more than ever before, beginning to strangle the ability of international businesses and business people to engage in transactions with targeted parties. That, however, is not surprising. What is surprising is that banks, including foreign banks not under OFAC’s jurisdiction, refuse to deal with sanctioned targets even when those parties have obtained the proper authorization pursuant to a specific license. This is the latest development that is really causing transactions with blocked parties which might have gone through a few years ago to grind to a halt.

While it’s true that OFAC is still licensing otherwise prohibited transactions, the difficulty increasingly lies in how to transfer the funds. Now that banks are taking the position that they will not service transactions related to a sanctioned party or country regardless of authorization pursuant to an OFAC specific license, such licenses and the licensing program itself are being rendered useless. With no banks to service the exchange of funds in transactions authorized by specific license, there is no reason to obtain the authorization or to engage in the transaction. Or worse for OFAC parties might turn to more clandestine methods to carry out the transaction.

Effectively, OFAC through their strict enforcement and heavy settlements and fines over the past few years has strangled all transactions related to blocked parties. While some might state that this is the entire reason for the sanctions in the first place, I would ask them to consider the following. OFAC is not merely a federal agency regulating trade, but rather an agency that also plays a very critical role in the implementation of U.S. foreign policy. Part of this role involves the gathering of intelligence which can potentially be shared with other federal agencies within the national security apparatus. This intelligence gathering is not only done by OFAC investigators and agents, but also by the obtaining of license applications and the quarterly reports submitted in accordance with the requirements of a specific license authorization. Both of these provide valuable intelligence on the activities and financial dealings of blocked parties who have been designated as such for engaging in activities contrary to U.S. national security interests. However, OFAC’s strict stance against banks and the heavy fines they face has rendered the environment so dangerous as to even scare banks away from transactions that are licensed. For the reasons noted above, this effectively renders the licensing program impotent. In effect, in attempting to suffocate the ability of blocked parties to engage in prohibited transactions, OFAC may very well also be suffocating it’s own ability to gather intelligence. .

This is not to condemn OFAC for what they have done; rather these are just comments on the possibly unintended consequences that might be occurring. It seems clear from my travels this past week and from some of my cases that the time has come for OFAC to provide some clarity on these issues for the banks so they have a clearer understanding that it it ok to process transactions pursuant to an OFAC license and/or guidance for foreign banks with no nexus to the United States which states something similar. In short, it’s my belief that something needs to be done to resolve this issue as it may not only be having an adverse impact on business with blocked parties; it may also have an adverse impact on OFAC ability to do their job..

The author of this blog is Erich Ferrari, an attorney specializing in OFAC litigation. If you have any questions please contact him at 202-280-6370 at 202-351-6161 or ferrari@ferrari-legal.com.