“OFAC” clauses are becoming more and more common in today’s trading agreements. These clauses set forth how the agreement will address the impact economic sanctions administered by the United States Department of Treasury Office of Foreign Assets Control (“OFAC”) may have on the agreement. Such clauses may include rights for either party to withhold performance if a vessel chartered in connection with a transaction is blocked by an OFAC administered sanctions program or if its owner is a “Specially Designated National” (“SDN”).

These clauses are becoming more common because of severe fines and settlements which have been issued over the past year. As a result of these fines and settlements, US companies are including OFAC clauses to comply with US law, regardless of any lack of jurisdiction the US may have over the counterparty.

OFAC generally enjoys broad jurisdiction because of the facilitation provisions found in various U.S. sanctions regulations. A good example of how OFAC enforces these facilitation provisions came in 2009 then Lloyds TSB Bank plc was fined for deleting references to US sanctioned parties in wire transfer instructions routed through US based banks. The U.S. held jurisdiction by finding that a US nexus existed since the dollars had to pass through Lloyds TSB’s U.S. correspondent banks.

Violating OFAC administered sanctions may lead to considerable civil and criminal penalties. In the aforementioned case of Lloyds TSB, Lloyds agreed to pay a $217 million settlement to OFAC for settlement of the alleged violations which took place. Another aspect of the enforcement process is the blocking of assets by OFAC. For example, OFAC may freeze any payments made in US dollars that relate to a cargo or vessel associated with a sanctioned party. Furthermore, US financial institutions are required by law to reject transactions referencing blocked vessels or cargoes.

This type of jurisdiction and enforcement is what has set the stage for the incorporation of OFAC clauses in to the trade agreements of many U.S. companies. Such clauses may be absolutely necessary to protect against the risk of violating an OFAC administered sanctions program. The clauses essentially afford U.S. companies a defense to any proposed violation if the U.S. company is unaware of its counter party’s violation of U.S. sanctions.

Such clauses can be broad in scope, which may create difficulties for non-US companies who do not have appropriate compliance processes in place. A good OFAC clause will allow parties to reject involvement of a individual, entity, or vessel if they are on the SDN List or if they are is owned, chartered, operated or controlled by anyone on the SDN List.

Before engaging in any transaction which might have a nexus to a sanctioned party, it is incredibly important to consult with an attorney who is experienced in dealing with OFAC administered sanctions programs. It might just mean the difference between a successful transaction and a hard fine or worse.

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.