On February 20, 2020, the US Office of Foreign Assets Control (OFAC) issued two new FAQs on the Reporting Procedures and Penalties Regulations (RPPR), 31 CFR part 501. The FAQs follow OFAC’s June 2019 amendments to the RPPR, which significantly expanded the requirement for US persons (and in some circumstances non-US persons subject to OFAC’s regulatory jurisdiction) to report blocked property, unblocked property, or rejected transactions to OFAC.
Newly issued FAQ 819 emphasizes that “OFAC expects all U.S. persons and persons otherwise subject to U.S. jurisdiction, including parties that are not U.S. financial institutions, to comply fully with all requirements of this rule.” The agency has said it prefers to receive reports electronically through the OFAC Reporting and License Application Forms webpage.
FAQ 820 clarifies that OFAC “does not expect reporters [of rejected transactions] to seek further information from their counterparty solely to obtain additional information required to be reported,” in cases where a reporter does not have all of the information specified in the RPPR at Section 501.604(b). Rather, the reporter should submit information “that is in the filer’s possession” as well as basic information such as “information regarding the submitter of the report, the date the transaction was rejected, the legal authority or authorities under which the transaction was rejected, and any relevant documentation received in connection with the transaction.”
Prior to June 2019, the requirement to report rejected transactions was limited to US financial institutions that rejected funds transfers pursuant to OFAC regulations. The amendments expanded this requirement to cover all U.S. persons, “persons otherwise subject to U.S. jurisdiction,” and all transactions rejected pursuant to OFAC regulations. The amendments were published as final rules and, thus, have been in effect as of June 21, 2019.
Expanded Requirements
Those subject to the expanded requirements may face significant burdens, including having to implement compliance controls for escalating and reporting of rejected transactions, as well as blocked and unblocked property, to OFAC within 10 business days. The requirement to report rejected transactions, in particular, is broadly worded, and OFAC has yet to issue guidance on its application to common scenarios faced by practitioners, as noted by commentators in various forums since June 2019..
Among those scenarios are instances where US companies decline to participate in transactions that are known or suspected to involve US comprehensively sanctioned territories (e.g., Crimea, Cuba, Iran, North Korea, and Syria). For example, a US exporter that receives an order of goods from a European importer that is known or suspected to be intended for re-export to Iran, and declines to accept the order, may be required to report its decision to OFAC within 10 business days. Given this relatively short deadline, companies in higher risk sectors may wish to adopt procedures for escalating and reporting rejected transactions in compliance with the RPPR.
The circumstances under which non-US financial institutions and entities may be “persons otherwise subject to U.S. jurisdiction” is not yet fully defined. As the definition of “transaction” refers also to “goods and services,” the amended RPPR could apply to non-US entities that decline to fulfill contracts based on OFAC considerations. Consider, for example, an Asia-based distributor that declines to fulfill a contract to provide items subject to the Export Administration Regulations (EAR) to a Specially Designated National (SDN). Another example concerns transactions that are interdicted by automated screening software based on IP addresses, name matches, or other factors, which may constitute rejected transactions, even without human intervention or decision making.
OFAC has indicated that it continues to welcome public comments on the amendments to the RPPR, although the rule is already in effect. In particular, the agency is seeking “additional information regarding the business impact of this rule; examples of rejected transactions that are proving challenging to report; the quantity of rejected transactions; and the types of information in the filer’s possession for a rejected transaction report.” Based on comments, OFAC may consider “whether any clarification or modification to the rule is appropriate.”
Enforcement Prospects
OFAC may bring enforcement actions against US (and, potentially, non-US) companies that fail to report rejected or blocked transactions pursuant to the RPPR, as illustrated by a March 2016 finding of violation issued against a US financial institution for failing to report accounts in which SDN Iranian banks held interests (read the Steptoe Client Advisory on that case by clicking here).
For more information about how the RPPR may apply to your business or for guidance on reporting blocked property, unblocked property, or rejected transactions, contact a member of the Steptoe sanctions team.