OFAC amends 11 answers on when banks must block, reject and report payments

The US Office of Foreign Assets Control amended 11 of its published answers on blocking, rejecting and reporting transactions on 26 October, as part of what it said was an ongoing review to keep its guidance current.

The answers are written for US persons, a group that includes the foreign branches of US banks, which the revised FAQ 42 names among those generally barred from opening an account for a blocked person. The cases this site has followed this month, from the Extreme Networks settlement to the designations in the second Sanctions and Enforcement Ledger, bear on the same question these answers address: what happens to a payment that touches a sanctioned party.

Block or reject: where the line falls

Blocking applies when a blocked person has an interest in the property. Rejection applies when a payment is prohibited but no blocked person has an interest in it, and a rejected transaction "must not be processed forward to the beneficiary", FAQ 36 says. Not every programme blocks property: some only prohibit certain trade or financial dealings, and then a bank may have to reject rather than block, FAQ 35 adds.

FAQ 36 gives three examples. In the first, a payment to a company's account at an Iranian bank wholly owned by the Government of Iran must be blocked, because the bank itself is blocked. In the second, a payment to a non-blocked company in Tehran through a non-blocked bank in a third country must be rejected, because processing it would mean facilitating trade with Iran and exporting a service there. In the third, a wire transfer to a non-blocked individual in the Crimea region of Ukraine must also be rejected.

The revised FAQ 10 lists the jurisdictions under broad, jurisdiction-based sanctions as Cuba, Iran, North Korea, the Crimea region of Ukraine and the so-called Donetsk People's Republic and Luhansk People's Republic regions. The governments under government blocking sanctions are those of Cuba, Iran, North Korea and Venezuela. Russia, the answer says, is not subject to the same degree of jurisdiction-based prohibitions, although certain categories of transactions with it are prohibited.

Ten business days, then an annual return

Reports on blocked property and on rejected transactions are due through the OFAC Reporting System within 10 business days of the action, and must include copies of supporting documents such as payment instructions, cheques, letters of credit, bills of lading and invoices, FAQ 49 says. The deadlines come from the regulations themselves, 31 CFR 501.603 for blocked property and section 501.604 for rejected transactions.

A US person holding blocked property on 30 June must file an Annual Report of Blocked Property by 30 September of the same year, on the spreadsheet form TD F 90-22.50, under FAQ 50. A bank that keeps blocked funds in an omnibus account must include in that annual report a list showing each blocked asset inside it, FAQ 32 says. Blocked funds must sit in a segregated, interest-bearing account and earn interest at a commercially reasonable rate, under FAQs 32 and 33, while normal service charges, in line with a published rate schedule, may generally be debited, under FAQ 34.

The reporting system's own page says all persons subject to the reporting rules must use it for initial blocked property reports, rejected transaction reports and the annual report. A filer that wants to report another way must show "unique and extraordinary circumstances", and such requests are subject to "a presumption of denial", the page says.

A question is not a payment instruction

FAQ 53 separates a customer's inquiry from an instruction. A customer who asks whether money can be sent to Cuba can simply be answered, or referred to OFAC's compliance hotline. An instruction to wire funds to a blocked person means the funds must be blocked and reported. An instruction to send funds to a non-blocked person in Iran must be rejected and reported, but a question about it leaves nothing to reject and nothing to report.

The same logic runs through FAQ 42 on accounts. A bank that receives an application and an initial deposit from a person on the Specially Designated Nationals List must decline the account and block the deposit, an obligation OFAC likens to "a bouncing ball", which "must be stopped if it comes into your possession". The answer also tells banks to confirm that an applicant is the listed person before acting, and to ask for more identifying information where a name match may be a false positive.

Under FAQ 41, a bank may tell a customer that it has blocked property and name the programme or regulation under which it did so, and the customer may apply to OFAC for a licence to release the funds.

For a compliance officer at an emerging-market bank that clears dollars through a US correspondent, the revised answers reduce a held payment to three tests that run through FAQs 36, 41 and 49: whether a blocked person has an interest in it, which programme applies, and whether the report went in within 10 business days with the documents attached.