On March 31, 2026, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an advisory on sham transactions, highlighting the compliance risks financial institutions must navigate when facilitating international property transactions.
What is a Sham Transaction?
OFAC defines a “Sham Transaction” as one in which a blocked person, typically operating through proxies or intermediaries, effectuates the transfer or concealment of a continuing interest in property, without genuinely extinguishing said interest, in an attempt to evade U.S. sanctions. In other words, sham transactions are those in which an individual appears to relinquish property on paper but remains effectively in control of it.
Who do Sham Transactions Apply To?
OFAC publishes a List of Specially Designated Nationals and Blocked Persons (“SDN List”) that is intended to restrict the access of the named individuals to the American financial system by preventing them from transferring, withdrawing, or otherwise dealing with any property and interests that are within the United States or within the possession or control of a U.S. person and prohibiting U.S. persons from transacting with them.
If an individual is blocked, their assets are frozen, and they are unable to exercise the powers and privileges of their property and interests without authorization from OFAC.
How Do Sham Transactions Operate?
OFAC identifies numerous methods by which blocked persons conceal their property interest, often by manipulating opaque legal structures and working with proxies. The following are some examples of sham transactions:
- A blocked oligarch transferred ownership of his private jet to a trust, whose sole beneficiary was his unsanctioned wife, while the oligarch continued to use the jet for travel.
- A blocked person transferred millions of dollars of funds into trusts held for his minor children and then attempted to move these funds through U.S. banks.
- Following its designation, a company sanctioned for narcotics trafficking was reincorporated under a different name with new nominal owners while continuing the blocked company’s operations.
How Can Financial Institutions Recognize a Sham Transaction?
OFAC’s advisory highlights a non-exhaustive set of red flags that may indicate a sham transaction. The advisory stresses the importance of employing a functional approach, considering the totality of the circumstances, when evaluating a potential sham transaction.
For additional analysis on OFAC guidance, see our related posts here.
The following are some indications financial institutions should be aware of when evaluating a transaction:
- Commercially Unreasonable Transactions: Transfers of property in which a blocked person once held an interest on terms that are commercially unreasonable or at odds with fair market value may indicate a sham transaction.
- Transfer to Family Members or Close Associates: Transfers of property to an individual with close personal or professional ties may indicate that the receiving party is acting as a nominal owner and may be acting on behalf of the transferring party.
- Unclear Purpose: Transfers to an individual with no clear business purpose or relevant expertise with respect to the property at issue may be evidence of a sham transaction.
- Complex Corporate Structures and High-Risk Jurisdictions: The presence of unnecessarily complex corporate structures, particularly in jurisdictions that lack robust regulatory oversight, may suggest an effort to conceal true ownership interests.
- Involvement of a Blocked Person: If the circumstances indicate that a blocked person remains involved in the operation of a property, they may hold a concealed interest. The use of evasive or vague responses regarding the extent of a blocked person’s involvement may present further indicia of a concealed interest.
- Transfer At Time of Designation: If a property or interest is transferred immediately preceding or following a person’s designation by OFAC, the transaction may warrant additional scrutiny.
Guidance for Financial Institutions
If financial institutions become aware that a blocked person once held an interest in property, OFAC recommends reviewing the available information to see if any of the above-listed red flags are present. OFAC acknowledges in its advisory that institutions may encounter legitimate business transactions where this occurs and does not wish to interfere with parties and institutions who seek to comply with OFAC sanctions in good faith.
If institutions become aware that a blocked person retains an interest in property that is held within the United States or is in the possession or control of a U.S. person, the property must be blocked and reported to OFAC.
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