By Patrick McConville
It is both a legal compliance obligation and a risk management tool for your business to complete OFAC screening on vendors. An OFAC check is necessary to avoid security risks to your own business and overall threats to national security.
In this article, we will explain exactly what your compliance obligations are and how you can complete your own OFAC checks on vendors.
Avoid Penalties With a Vendor OFAC Check
An OFAC check is a form of due diligence and a regulatory requirement for U.S. companies.
OFAC stands for the Office of Foreign Assets Control, which is a department within the U.S. government under the U.S. Department of the Treasury. The department is responsible for the enforcement of economic and trade sanctions that threaten national security.
OFAC has a central list of individuals and companies who engage with international and financial crimes such as terrorism, narcotics trafficking, the proliferation of weapons of mass destruction, and other social security threats. It is illegal to do business with “blocked people” or “blocked entities”, which are those found on the OFAC sanctions list, a list of all the individuals and entities that have been sanctioned, and therefore who you cannot engage in business with.
Not only is every company obligated to prevent engaging with companies on the OFAC sanctions list by completing thorough risk and compliance checks, but a failure to do so can have serious consequences such steep as fines or penalties.
Also, if you do not conduct the right OFAC sanctions checks on vendors and third-party companies, you are jeopardizing your company’s security and reputation. A great way to find out if a third party is blocked is to use an OFAC screening tool.
What Is the OFAC 50% Rule?
The OFAC 50% rule means that if any vendor is owned 50% or more by a sanctioned individual or company, otherwise known as “blocked persons” or “blocked entities,” the vendor company is also considered to be sanctioned by proxy.
This means you can’t do business with any vendor company owned 50% or more by a company or individual that is on the OFAC list. This applies to both direct and indirect ownership of the vendor.
Even if a vendor is not blocked, if they’re 47% owned by one or more blocked persons or blocked entities, you should be extra careful about working with them.
The 50% rule even extends to situations where any sanctioned individuals have a combined 50% or more interest in the vendor. For example, a vendor will be considered “blocked” if it is owned by two blocked individuals that own 25% each.
What Are Your OFAC Compliance Obligations?
As a U.S. person or entity choosing whether to work with a third party, you need to do relevant due diligence checks to comply with OFAC regulations.
If you or your company doesn’t complete OFAC compliance checks, you risk fines as large as several million dollars. You can also receive civil penalties or even criminal punishment depending on the violation.
As a business, it’s your responsibility to keep updated on the latest global developments that may affect you. For example, since the Russian attack on Ukraine, many G8 countries have imposed sectoral sanctions on individuals and entities from Russia and Belarus. Therefore, if you are involved with any organization from these jurisdictions, you should check and monitor whether working with them is still safe and compliant. Countries such as North Korea and Iran also raise red flags as high-risk jurisdictions according to the OFAC.
How Do You Perform an OFAC Screening?
As part of your compliance program, you need a sanctions screening process in place to make it as straightforward as possible to conduct and streamline your sanctions checks. Here are the steps you’ll need to follow:
1. Find Out Who Owns the Vendor
Of course, to properly do your due diligence for an OFAC check is to find out who ultimately owns the vendor company. You do this by checking the company’s incorporation documents, organizational structure, or shareholder certificates to understand who owns what percentages within the company and who is the ultimate beneficial owner (UBO), the person or company at the top of the company structure. Keep in mind, they could be either the individual who owns the largest amount in the company or the entity who owns the largest percentage that is regulated by a regulatory body or listed on a stock exchange.
You should do OFAC screening on your vendor company and all the other companies or people who have a shareholding in the vendor. Keep a record of all the checks you do and create a hierarchy structure chart to show that you know who the vendor is owned by.
2. Do an OFAC Search
Again, you can use the OFAC Sanctions List Search Tool to find out whether a vendor is sanctioned. This search tool is essentially compiled OFAC watch lists that let you enter a company or individual’s name on the U.S. sanctions list. A score will then come up based on whether there’s a match for the company in their database. An exact match will give a score of 100, and similar matches or potential matches will have lower scores.
OFAC screening can be completed by your procurement or risk and compliance teams. It is vital that OFAC checks form part of your risk assessments and that you keep a record of them to demonstrate that you have fulfilled your obligations.
3. Use the OFAC 50% Rule
When you are using the OFAC screening tool to check the names of the people and entities involved with the vendor, make sure you remember the 50% rule. The vendor will be considered blocked, and therefore, you are not able to do business with them if they are owned by any blocked persons or entities that own 50% or more of the company. Refer to your hierarchy structure chart to see which people or companies you will need to do OFAC searches on.
4. Make Sure Your Checks Are Done Accurately
You can use software to help make the process as efficient as possible, to limit the chance of mistakes being made and sanctions not being caught. Software solutions can also provide a full audit trail, which can be shared with auditors and regulators to prove compliance with OFAC sanctions programs and other global regulations.
If you have any doubts about OFAC regulations or foreign policy, the Office of Foreign Assets Control has a frequently asked questions section that gives additional information about the U.S. sanctions rules and watch lists.