What Does OFAC Stand for in Banking?

The Office of Foreign Assets Control (OFAC) plays a significant role in banking, safeguarding the United States’ financial system against illicit activities. It implements measures that support national security and foreign policy goals.

Understanding OFAC’s Mandate

OFAC is an agency of the U.S. Department of the Treasury. Its mission involves administering and enforcing economic and trade sanctions programs that advance U.S. national security and foreign policy objectives. OFAC targets foreign countries, regimes, terrorists, international narcotics traffickers, and those involved in weapons proliferation, along with other threats to the U.S. economy or security.

The agency operates under presidential national emergency powers and legislative authority. OFAC controls transactions and freezes assets under U.S. jurisdiction. Its regulations prohibit “prohibited transactions,” which are dealings U.S. persons cannot engage in unless authorized by OFAC or expressly exempted by statute.

OFAC Sanctions Programs and Lists

OFAC administers various sanctions programs, which can be comprehensive or selective. These programs block assets and implement trade restrictions to achieve foreign policy and national security goals. Sanctions can be country-specific, such as those targeting Cuba, Iran, Syria, or North Korea, or they can be directed against specific individuals or entities.

A central component of OFAC’s enforcement is its sanctions lists, notably the Specially Designated Nationals and Blocked Persons (SDN) List. This list includes individuals, organizations, and entities with whom U.S. persons are prohibited from doing business. When an individual or entity is added to the SDN List, their U.S. assets are blocked, and their names are integrated into automated screening systems used by banks globally. Beyond the SDN List, OFAC also maintains other sanctions lists, such as the Foreign Sanctions Evaders (FSE) List and the Sectoral Sanctions Identifications (SSI) List, which carry different prohibitions and investment restrictions.

OFAC Compliance for Financial Institutions

Financial institutions, including banks, are on the front lines of enforcing OFAC sanctions. They are required to monitor all transactions to identify those involving any sanctioned entity. This necessitates screening all incoming and outgoing transactions against OFAC’s various sanctions lists. Screening helps identify potential links to sanctioned parties or countries.

When a transaction involves a sanctioned party or country, banks have two primary obligations: blocking or rejecting the transaction. Blocking involves freezing assets and accounts of specified countries, entities, or individuals, which must be placed in a separate, interest-bearing account. Rejected transactions are those prohibited under an OFAC sanctions program but without a blockable interest, meaning funds are not frozen but simply not processed. Both blocked and rejected transactions must be reported to OFAC.

Banks establish risk-based OFAC compliance programs. These programs typically involve:
Management commitment
Risk assessment
Internal controls
Independent testing and auditing
Employee training

Due diligence on customers is an aspect of these programs, helping banks identify potential sanctions risks from their client base.

Implications for Banking Customers

OFAC regulations, enforced by banks, can directly affect individuals and businesses using banking services. International transfers, or transactions with specific regions or individuals, may experience delays or be blocked due to the bank’s screening processes. This is because banks must meticulously screen all parties and details of a transaction against OFAC’s sanctions lists.

Banks may request additional information about the nature or parties involved in a transaction to ensure compliance. This is part of their due diligence and Know Your Customer (KYC) procedures, which are driven by OFAC requirements to identify and assess potential risks associated with customers. In instances where a transaction is flagged, customers might be asked for documentation or explanations regarding the funds’ origin or destination.

Accounts might face restrictions if linked to sanctioned activity or individuals. If a bank identifies a valid match to an OFAC list, it must take action, which could include blocking funds or restricting account access. Banks may notify customers if funds are blocked, and the customer has the right to apply to OFAC for the release of blocked funds.