Spokane Chapter of the ACFE Annual Fraud Conference November 3 - 4, 2011 Janna L. Wix Whitworth University

 Define OFAC and explain its jurisdiction  Describe the purpose of OFAC  Understand OFAC terminology & definitions  Discuss OFAC’s definition of Due Diligence  Identify effective OFAC compliance strategies  Understand penalties and consequences of non-compliance with OFAC regulations  Review recent cases 2

. Table of Contents What is OFAC? 4 A brief history of OFAC…. 7 What is OFAC and what does it do? 9 What is OFAC’s jurisdiction? 12 OFAC Terminology and definitions 16 Due Diligence according to OFAC 28 Compliance Strategies 34 Penalties and Consequences of Non-Compliance 50 Recent Cases 60 3

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OFAC  The Office of Foreign Assets Control  Enforcement Agency of the  U.S. Department of the Treasury  Specifically under The Office of Terrorism and Financial Intelligence ◦ Administering and enforcing economic sanctions 5

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 Prior to War of 1812  Prior to War of U.S. government used sanctions against Great Britain  Civil War licenses  Civil War -U.S. Congress prohibited transactions with Confederacy and began to administer licenses through the Treasury Department  World War II  World War II -Office of Foreign Funds Control established in part to prevent Nazi use of foreign exchange and securities of occupied countries  Korean War  Korean War – 1950 OFAC created 8

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 OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against hostile targets to include: 10

Foreign countries and regimes Terrorists International narcotics traffickers  AND Those engaged in activities related to: the proliferation of WMD other threats to the national security, foreign policy or The economy of the United States. 11

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 “All U.S. persons must comply with OFAC regulations, including U.S. citizens and permanent resident aliens regardless of where they are located.  All persons within the United States, all U.S. incorporated entities and their foreign branches.” 13

 All American Citizens and Permanent Resident Aliens located anywhere in the world  Any individual, regardless of citizenship, who is physically located anywhere in the U.S. 14

 Any corporation or company physically located in the U.S.  All U.S. incorporated entities and their foreign branches  Generally, all foreign subsidiaries owned or controlled by U.S. companies 15

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 SDN(s)  SDN(s) = “Specially Designated National(s)” ◦ Individuals and Companies owned, controlled by or acting for or on behalf of, targeted countries. ◦ Also individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. 17

 SDNs ◦ The assets of SDNs are blocked and U.S. persons are prohibited from engaging in transactions with them.  OFAC publishes a list of SDNs and ◦ List at ◦ Possible to sign up for updates and RSS feeds 18

 Balkans  Belarus  Burma  Cote d’Ivoire  Cuba  Democratic Republic of the Congo  Diamond Trading  Iran  Iraq  Former Liberian Regime of Charles Taylor  Libya  Narcotics Trafficking  WMD Proliferation  North Korea  Sudan  Syria  Terrorism (Hamas/PA)  Zimbabwe 19

 Prohibited Transactions ◦ Transactions by U.S. persons/entities that are not authorized by OFAC or are expressly exempted by statute. ◦ Each program is based on a different U.S. Foreign Policy and National Security Goal. 20

 1)Trading With the Enemy Act (TWEA), 50 U.S.C. App 1–44  2) International Emergency Economic Powers Act (IEEPA), 50 U.S.C. 1701–06  3) Iraqi Sanctions Act (ISA), Pub L , 104 Stat. 2047–55  4) United Nations Participation Act (UNPA), 22 U.S.C. 287c  5) International Security & Development Cooperation Act (ISDCA),codified 22 U.S.C aa–9  6) The Cuban Democracy Act (CDA), 22 U.S.C. 6001–10  7) The Cuban Liberty and Democratic Solidarity (LIBERTAD) Act, 22 U.S.C. 6021–91  8) The Antiterrorism and Effective Death Penalty Act (AEDPA), enacting 8 U.S.C. 219, 18 U.S.C. 2332d, and18 U.S.C. 2339b  9) The Foreign Narcotics Kingpin Designation Act, Pub L. No , tit. VIII, 113 Stat 1606, (1999)  10) The Criminal Code at 18 U.S.C

 Blocked Transaction ◦ If funds or property from an OFAC- specified country, individual or entity comes into possession or control of a U.S. individual or entity, that individual or entity must block the transaction ◦ (Also called “Freezing”) 22

 Blocked Transaction, continued ◦ Broad definition: ◦ Assets and property include anything of ‘indirect, present, future contingent value, including all bank transactions’ 23

 Blocking -- Banking Examples ◦ If a customer on the SDN list opens an account, those funds must be blocked ◦ If an institution wires funds of an established customer to a sanctioned target (another institution), those funds must be blocked ◦ If a customer attempts to convert Cuban pesos to U.S. dollars, those funds must be blocked pursuant to the Cuban Asset Control Regulations. 24

 Rejected Transactions ◦ A prohibited transaction but with no blockable interest ◦ For example, a commercial transaction not on the SDN list, but located within a country that is on the SDN list….this transaction must be rejected 25

 License ◦ Approval for an otherwise prohibited transaction. ◦ Issued on a case by case basis. ◦ See for application forms or for release of blocked or rejected funds/property or for travel permission to sanctioned countries and other exceptionswww.treasury.gov 26

 Voluntary Self-Disclosure (VSD) ◦ Notifying OFAC of suspected violation ◦ 1) Engaging in prohibited conduct ◦ 2) Solicitation ◦ 3) Conspiracy ◦ 4) Acting with knowledge of a violation ◦ 5) Possession with intent to export illegally ◦ 6) Misrepresentation and concealment of facts ◦ 7) Evasion ◦ 8) License alteration ◦ 9) Acting contrary to the terms of a denial order 27

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 Screen ALL transactions for Sanctions References  Include “Second Tier” Screening, if necessary  Ensure Sanctions information is current  Make Sanctions compliance an organizational priority  Design Compliance Program based on specifics in “OFAC Guidelines for Industry Groups” 29

 “Second Tier” SDNs  OFAC Enforcement Guidelines include transactions that must be blocked from the property and interests in property of an entity if the entity is owned, directly or indirectly, 50% or more by a person whose property and interests in property are blocked pursuant to OFAC regulations. 30

 Strict Liability?  These guidelines imply an expectation that U.S. persons or businesses, through their own, due diligence, will discover entities, NOT ON THE SDN list, in which an SDN has a 50% or greater interest. 31

 In determining its response, OFAC considers “General Factors’ about an individual’s or organization’s actions, including “willful’ or ‘reckless’ conduct.  OFAC will consider the “existence, nature and adequacy of a Subject Person’s risk- based OFAC compliance program at the time of the potential violation” 32

 OFAC has no set schedule to update its SDN list ◦ Sign up for updates ◦ Sign up for RSS feeds ◦ Check regularly  OFAC has a track record of non-public designations ◦ i.e.; Corinthian Hotels  OFAC routinely denies releasing information to sanctioned party on the basis of National Security issues 33

Developing and Maintaining a Program 34

 The most critical mistake for an organization to make when contemplating an OFAC compliance program is to not create or commit to one. 35

 1) A dedicated OFAC Compliance Officer or at least one individual responsible for monitoring OFAC ◦ Objective is to recognize and stop suspect transactions for further review before they are processed. 36

 2) Organizational commitment to a Compliance Program and a Training Program ◦ Simple as explaining regulations in staff meetings ◦ Or ◦ Incorporating complete programs into new employee training procedures 37

 3) Annual Compliance Audit ◦ Verify compliance procedures are followed ◦ Modify where necessary 38

 4) Record-keeping System  OFAC requires records to be kept for 5 years from date of transaction 39

 5) OFAC Compliance Program should be designed based on the type of business  Consider purchasing software if high volume of transactions  OFAC provides best practice guidelines according to industry: 40

◦ Corporate Registration ◦ Credit Reporting ◦ Exporters/Importers ◦ Financial Sector ◦ Insurance Industry ◦ Money Service Businesses ◦ Non-Governmental Organizations (NGO)/Non-Profits 41

 6) Conduct a risk profile assessment using OFAC guidelines by industry.  A.Risk-rank business contacts: vendors, suppliers, etc.  i.How well do you know them?  B.What types of services or relationships are involved in the transaction?  C.Where are they located?  D.What institution do they use for transactions?  E.How well do you know their accountants, attorneys, other professionals, etc.? 42

Low RiskMedium RiskHigh Risk The grantee has explicit charitable purposes and discloses how funds are used with specificity. The grantee has general charitable purposes and discloses how funds are used with specificity. The grantee has general charitable purposes and does not disclose how funds are used. The charity and the grantee have a written grant agreement that contains effective safeguards. The charity and the grantee have a written grant agreement with limited safeguards. The charity and the grantee do not have a written grant agreement. The grantee has an existing relationship with the charity. The grantee has existing relationships with other known charities but not with this charity. The grantee has no prior history with any charities. 43

 1.Screen all transactions for sanctions references ◦ Screen against sanctioned countries, including cities and territories within the countries ◦ Screen all parties connected with the transaction  “Second Tier” SDN? 44

 Screening ◦ For individuals: look at full name, DOB, passport number, nationality, national ID number, address ◦ For Commercial entities: Full name (spell out acronyms), location, tax ID number, determine ownership or possible connection to sanctions targets ◦ For locations: look at complete address, region and country 45

 2. If “hit” or “match” on OFAC SDN list then evaluate quality of match ◦ Is it a full and exact name match? ◦ Do you have enough information?  Full name  Address  Nationality  Passport  Tax ID  Place of birth  DOB  Former names or aliases 46

Weak AKA/Alias  3. Watch for a Weak AKA/Alias  Use all information to confirm that a hit with a weak AKA isn’t a true match  Weak AKA can lead to many false positives  i.e. DOB, passport number, etc  i.e. Allane, Hacene (a.k.a. Ahcene, Cheib) 47

 4.If it is an exact match, then call the OFAC hotline: ◦ If it is hitting on another list, then you must report it to the ‘keeper’ of whichever agency list it is hitting against 48

 Use Current Information! ◦ Sanctions & SDN list can be updated at any time ◦ Lists will be updated without public notice ◦ Subscribe to notifications or RSS feeds on OFAC home page ◦ Commercially available software for compliance, however, compliance strategy should be tailored for your industry type and not ‘one size fits all’ 49

Review of Economic Sanctions Enforcement Guidelines, Effective Nov. 9,

 1) No Action  2) Request for Further Action  3) Cautionary Letter  4) Finding of Violation (non-monetary)  5) Civil Monetary Penalty (CMP)  6) Criminal Referral  7) Other  License Suspension  Cease and Desist Order 51

 1 ) Willful or Reckless Violation of Law  2) Awareness of Conduct at Issue  3) Harm of Sanctions Program Objectives  4) Individual Characteristics of Violator  5) Compliance Program  6) Remedial Response  7) Cooperation with OFAC 52

 OFAC determines a base penalty amount based on 3 factors.  1) Whether case is ‘egregious’ or ‘non- egregious’  2) Whether the apparent violation is voluntarily self-disclosed (VSD)  3) The applicable statutory maximum penalty amount 53

 Egregious Case, not VSD = Statutory Maximum ◦ ($250,000 for IEEPA/$65,000 for TWEA)  Egregious Case, VSD = ½ Statutory Maximum ◦ ($125,000 for IEEPA/$32,500 for TWEA)  Non-Egregious Case, Not-VSD = Statutory Max ◦ ($250,000 for IEEPA/$65,000 for TWEA)  Non-Egregious Case, VSD = ½ Statutory Max ◦ ($125,000 for IEEPA/$32,500 for TWEA) 54

 Companies are encouraged to voluntarily disclose a past violation.  Self-disclosure is considered a mitigating factor by OFAC in Civil Penalty proceedings.  To be effective VSD should be complete and accurate account: ◦ Type of violation and explanation ◦ When it occurred ◦ Identities of those involved ◦ Description of items involved ◦ Supporting documents ◦ Mitigating circumstances 55

 Adam Szubin  Director, Office of Foreign Assets Control  U.S. Department of the Treasury  1500 Pennsylvania Ave. N.W.  Washington, DC

 1) Pre-Penalty Process  2) Response to Pre-Penalty Notice  3) Penalty Notice  4) Referral to DOJ for Collection 57

 Failure to Furnish Requested Information: ◦ $20,000 Penalty ◦ $50,000 Penalty if value of transaction or property greater than $500,000 ◦ May be considered a continuing violation and penalty imposed each month 58

 Civil Penalties  Denial of Export Privileges  Exclusion from Practice  Criminal Sanctions 59

Small to Large, OFAC is monitoring transactions 60

MetLife – 4/2011JP Morgan Chase – 8/11  Non-Egregious, no- VSD  One Violation  No History with OFAC  A Compliance Program  Cooperated with OFAC  Violation amount $30,162 Settlement, ½ of Base CMP = $22,500  Egregious, non- egregious, VSD & no- VSD  Reckless  Over 1711 violations  Over $44,626,740 in total violations  Base penalty of  $115,016,146  Settlement $88,300,000 61

 Create some form of a compliance program  Commit to the compliance program  Follow OFAC’s due diligence steps  Check frequently – make this part of your due diligencewww.treasury.gov  Voluntarily Self Disclose if you find an apparent violation  Don’t ignore OFAC because it won’t ignore you 62