OFAC Updates Reporting Regs, Offers Guidance on Property Blocked by Mistake

In a final rule released Oct. 7 and effective Nov. 7, OFAC said it will include three new exceptions in its reporting regulations after several public commenters said they were confused about how the changes will impact reports of blocked and unblocked property.

OFAC said reports are required for:

• Certain transfers of funds or credit by a financial institution between blocked accounts within its branches or offices
• Blocked property that’s unblocked or transferred under the terms of a general or specific license, unless the license specifically requires the user to submit a report
• Blocked property that’s unblocked because OFAC removed someone from its Specially Designated Nationals List.

The agency said it introduced those three exceptions after organizations said they were unclear about the scenarios under which they needed to submit a report, including whether a report was required each time the agency removes someone from its sanctions list or ends a sanctions program. Others asked whether they needed to submit reports each time a company unblocks property under the terms of a specific license or transfers blocked property within the same financial institution.

The agency is expecting the changes to “reduce the reporting burden on the public for unblockings about which OFAC generally does not have a strong interest in obtaining additional information or for which information is received via other reporting channels, while still allowing for tracking the status of blocked property.”

Commenters also asked OFAC to clarify language in its May rule that changed the procedures by which people can ask for the release of blocked funds because of a “mistaken identity” or due to “typographical or similar errors leading to blocking.”

The agency declined to change its regulations but expounded on those procedures in a new frequently asked question issued Oct. 7, saying banks and other companies are free to unblock any property that they blocked by mistake. They should file an unblocking report to OFAC and cite FAQ 1196 to show OFAC that the blocking was an accident.

They can also seek a "Compliance Release” from OFAC, the agency said -- a specific, non-mandatory request submitted by a company to OFAC to ask the agency “for authorization” to release the blocked property that was blocked by mistake. The agency stressed that banks and other organizations shouldn’t rely on Compliance Releases as a “substitute” for sanctions compliance controls or solely to mitigate sanctions risks.

It also said companies shouldn’t ask for a Compliance Release in cases where property was correctly blocked “but the status of the property has subsequently changed” due to a change in ownership. “In such scenarios, organizations should apply for a specific license,” OFAC said.

“The Compliance Release process is solely for cases of mistaken identity or typographical or similar error, in which there was never a blockable interest in the subject property,” it said, such as false positives that may occur during sanctions screening.

The agency said it “strongly encourages organizations subject to U.S. jurisdiction to develop risk-based sanctions compliance programs that allow for the proper evaluation and adjudication of potential name matches to blocked persons,” the agency said. It specifically said banks and other financial institutions should investigate whether a match is a true hit before blocking property.

OFAC also stressed that the Compliance Release process is only available to the organization that blocked the property, rejecting a request from at least one public commenter who said any party involved with the property should be able to request a Compliance Release. “Thus, if a financial institution or other organization has blocked your property and you are requesting that the property be unblocked, you should engage directly with the financial institution or other organization that blocked your property in cases of mistaken identity or apply for a specific license.”

The agency added that companies don’t need a specific license or Compliance Release to unblock property when a person is delisted from the SDN List. But unblocking property without a license when a blocked person “does in fact have an interest” in the property could “expose U.S. persons to civil penalties.”

OFAC’s May rule also announced that the agency would begin requiring filers of initial reports and annual reports of blocked property to submit those documents electronically instead of through mail. Several public commenters asked OFAC to abandon the change until it improves its electronic OFAC reporting system (ORS), including its “functionality and reliability.”

OFAC declined to suspend the new requirement, saying it “has not experienced issues with the functionality and reliability” of the reporting system. It said it “already works closely with filers to address any issues in the ORS system.”

It also noted that the rule doesn’t require unblocking reports to be filed through ORS. “However, OFAC is planning to develop an unblocking and transfer form in ORS and will notify the public once this feature is deployed.”