On May 10, 2024, the US Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an Interim Final Rule, effective August 8, 2024 (the “IFR”), that clarifies the scope of OFAC’s rejected transaction reporting requirement, and introduces other amendments to the Reporting, Procedures and Penalties Regulations (“RPPR”) at 31 CFR Part 501.
While reported enforcement actions under the RPPR are not common, there are past examples, such as one that we reported on in 2016 and a 2022 enforcement action involving Nodus International Bank, Inc. (“Nodus”), an international financial entity located in Puerto Rico, for failure to maintain full and accurate records related to the handling of blocked property and inaccurate reporting of the blocked property to OFAC. Given OFAC’s increasing regulatory focus on the RPPR requirements, such as rejected transaction reporting, one can expect that the agency may increase its enforcement focus in this area as well. Therefore, parties subject to OFAC’s regulatory jurisdiction, including organizations that are not financial institutions, would be well advised to consider how to integrate these changing RPPR requirements into their compliance programs.
- New Requirements for Electronic Filing
This IFR requires that initial and annual reports of blocked property and rejected transaction reports be filed electronically through the OFAC Reporting System (“ORS”). Reports of unblocked or transferred blocked property can be submitted via email (OFACReport@treasury.gov) or through ORS. Reports relating to litigation or other disputes as required under § 501.605, and requests to unblock property due to mistaken identity or typographical or similar errors, must be provided by email (OFACReport@treasury.gov). Delisting-related requests must be provided via email (OFAC.Reconsideration@treasury.gov). The IFR suggests that OFAC will be quite restrictive going forward in accepting required reports by other means, such as physical mail.
- New Emphasis and Some Clarity on Rejected Transaction Reporting
OFAC has been emphasizing repeatedly in recent years that it expects non-financial institutions to comply with its rejected transaction reporting requirement, which was expanded beyond financial institutions in 2019 (see our previous post on this topic). Soon after those expanded regulations were promulgated, OFAC issued guidance emphasizing 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.” Over four years later, OFAC still appears to be concerned about compliance with this rule. With this IFR, OFAC states that it “confirms that this reporting requirement applies to all U.S. persons, as identified in the relevant parts of this chapter (or in the case of part 515, persons subject to U.S. jurisdiction), not only U.S. financial institutions.”
OFAC stated in the preamble to the IFR that it “has not received a large number of reports of rejected transactions from non-financial institutions as compared to the number of such reports from financial institutions.” With the agency again underscoring and seeking to clarify this requirement, while noting that it is not receiving as many reports as it might expect from non-financial institutions, one could reasonably conclude that OFAC may be concerned about the degree to which non-financial institutions are complying with this rule. Companies outside the financial sector in particular should therefore consider re-evaluating their compliance with the rejected transaction reporting requirement.
With that said, there still seems to be a wide gap between OFAC’s view of this requirement and how it is viewed by industry. OFAC stated in the IFR’s preamble that it “does not expect the volume of reported rejected transactions to be overly burdensome for businesses, particularly given that OFAC is providing additional clarity on the scope of rejected transaction reporting through this rule.” But there remain several fundamental aspects of this rule that are quite unclear, and OFAC has not yet offered any guidance to resolve these ambiguities. For example, many companies implementing sanctions screening procedures that identify potentially restricted parties face the threshold question of when/whether there has been a “transaction” that has been “rejected” and that must therefore be reported to OFAC, particularly when the screening is conducted on the front end before any commercial activity commences. Is declining to proceed with a transaction in the first place the same as “rejecting” a transaction? Industry would benefit greatly from more guidance on these very basic triggers for this reporting requirement. In the meantime, given OFAC’s view that this rule should not be “overly burdensome for businesses,” it may be reasonable for companies to interpret the requirement narrowly, as a broad rejected transaction reporting requirement could be quite burdensome indeed.
The bit of additional guidance OFAC did offer in this IFR was to amend the definition of the term “transaction” to indicate that wire transfers and trade finance are themselves “transactions,” whereas only “transactions related to” securities, checks, or foreign exchange, and sales or purchases of goods or services, are considered “transactions.” OFAC stated that this clarifies “that securities, checks, foreign exchange, and goods and services are not in and of themselves transactions, when not provided as part of a transaction.” To the extent this slightly amended definition could be helpful in some cases, it does not address many of the fundamental questions companies face when evaluating how to comply with this rule.
What is helpful here is OFAC’s clarification that only the information available to the filer at the time of the transaction must be reported, as set out in § 501.604(b).
- New Requirement to Report Transfers and Unblocking of Blocked Property
This IFR imposes new obligations to file reports when blocked property has been transferred, and amends the reporting requirement for unblocking property to apply as the default rather than only when specifically required by OFAC. The IFR also clarifies that, if such reports are already required as a condition of a general or specific license, no additional reporting is required under the RPPR. As an example, OFAC states that such reports must be filed when blocked property is unblocked or transferred pursuant to a valid order from a U.S. government agency or a U.S. court, including a forfeiture order, and including actions under Section 201(a) of the Terrorism Risk Insurance Act (which provides that certain blocked assets of a terrorist party are subject to execution to satisfy judgments against such a party). But OFAC clarified that these reports do not need to be filed for debits to blocked accounts for normal service charges that are authorized by OFAC.
- Clarification of OFAC Authority to Restrict and Require Reporting for Potentially Blocked Property
OFAC is clarifying its authority in cases when the agency “has reason to believe an account or transaction (or class of transactions) may involve” blocked property. In such cases (e.g., if the ownership information is not clear or if the government believes the purported ownership information may not be accurate or complete), OFAC can provide “information or criteria to aid in the identification of blocked property.” This is not entirely new; for example, in June 2022, OFAC issued a notification of blocked property to a Delaware trust due to information about an interest in the trust held by a sanctioned Russian individual, following “an extensive enforcement investigation.” OFAC’s clarification of this authority suggests that OFAC may issue such proactive notifications more frequently going forward as it continues to grapple with the complex financial structures that surround many of the assets that are the target of U.S. sanctions.
In addition, OFAC clarified that this authority allows OFAC to require financial institutions to “report transactions that meet the specified criteria and notify OFAC prior to processing such transactions.” Then, “[u]pon review, OFAC may determine that a reported transaction involves the property or interests in property of a blocked person and take further action.” This would presumably involve requiring the blocking of the property in question if OFAC determines, aided by the information reported by the financial institution, that the property indeed should be blocked. OFAC may also pursue enforcement actions, for example, if a party may have “caused” the financial institution to process transactions involving blocked property without a required authorization from OFAC.
- Compliance Releases of Blocked Property due to Mistaken Identity
OFAC is revising the procedures at § 501.806 for requesting the release of funds blocked due to “mistaken identity” to extend to property blocked due to “typographical or similar errors leading to blocking.” OFAC is also narrowing these procedures so they are available only to the person that mistakenly blocked the property. In these cases, the person that mistakenly blocked the property may request a “Compliance Release” from OFAC’s Compliance Division. Other parties may continue to request unblocking of property through license applications submitted to OFAC’s Licensing Division.
- Conclusion
Failure to follow the reporting requirements under the RPPR would appear to carry heightened enforcement risk, as OFAC has signaled that it views these reports as increasingly critical to its mission. For more information about how the RPPR may apply to your business, contact a member of the Steptoe sanctions team.