Navigating OFAC sanctions compliance is imperative for organizations to prevent potential legal repercussions and safeguard their reputation in the global marketplace.
Risks in sanctions compliance are potential threats or vulnerabilities that, if ignored or not properly handled, can lead to violations of OFAC’s regulations and negatively affect an organization’s reputation and business. The OFAC recommends that organizations take a risk-based approach when designing or updating an ICP.
The risk-based approach has become the standard. One of the central tenets of this approach is for organizations to conduct a routine and, if appropriate, ongoing “risk assessment” to identify potential OFAC issues they are likely to encounter. This should take into account the development of the organization’s own economic activities (such as opening up new markets) and the sanctions law framework.
While there is no “one-size-fits-all” risk assessment, the exercise should generally consist of a holistic review of the organization from top-to-bottom and assess its touchpoints to the outside world. This process allows the organization to identify potential areas in which it may, directly or indirectly, engage with OFAC- prohibited persons, parties, countries, or regions. In this context, it is important that beneficial owners of the organization be also examined.
Navigating OFAC Sanctions Compliance
The organization should conduct an OFAC risk assessment in a manner and with a frequency that adequately accounts for the potential risks. If a positive result of the investigation remains without consequences, then the entire audit approach fails to achieve its essential objective, i.e. the prevention of possible or actual sanction violations. Therefore, the risk assessment must be updated to account for the causes of any apparent violations or systemic deficiencies identified by the organization during the routine business.
Having a closer look at the manner on how the risk assessment should be conducted, it is important to have the following in mind:
For an effective risk assessment, it is crucial to consider several elements and define various parameters right from the start of an assessment That is why it is important to clearly determine who should be checked against which sanctions list, why and in relation to which action and / or transaction as well as in which time intervals the risk analyses should be carried out.
The risk assessment requires a clear understanding of which actions and legal transactions (e.g. payments, exports, deliveries) take place, by whom (e.g. subsidiaries), and where (country or group of countries). It should not only ensure that all sanctions lists relevant to the organization or its economic activities are recorded, but also prevent avoidable additional work. Risk analyses should be carried out at regular basis and periodically, taking into account the development of the organization’s own business activities (e.g. development of new markets) and the sanctions environment.
To ensure that no element is forgotten, it is recommended to conduct an assessment in the following steps: Firstly determine, who has to be reviewed (customers, supply chain, intermediaries, and counterparties). Then what has to be screened. This might be the organization’s products, payments or services, including how and where such items fit into other financial or commercial products, services, networks, or systems.
The third element to keep in mind is where the screening has to be conducted and the regulation of which parts of the world are relevant. Therefore, geographic locations of the organization and its customers, supply chain, intermediaries and counterparties are relevant. Finally, one has to determine how the screening has to occur. This means to decide which screening strategies and company policies are used, if parts of the screening can be outsourced to third parties and which authorities are relevant.
The organization should conduct an OFAC risk assessment in a manner and with a frequency that adequately accounts for the potential risks. Such risks could be posed by its clients and customers, supply chains, intermediaries, counterparties, products, services, as well as geographic locations of the involved parties or transaction, depending on the nature of the organization. As appropriate, the risk assessment will be updated to account for the root causes of any apparent violations or systemic deficiencies identified by the organization during routine business.
The results of a risk assessment are integral in informing the ICP’s policies, procedures, internal controls, and training to mitigate such risks.
Risk assessments and sanctions-related due diligence are also important during mergers and acquisitions, particularly in scenarios involving non-US companies or corporations.
In the end, the organization must have developed a methodology to identify, analyze, and address the particular risks it identifies. The risk assessment is updated to account for the conduct and root causes of any apparent sanction compliance violations identified by the organization during the business, for example, through independent testing or audit.
Final Thoughts
The importance of a comprehensive risk assessment in sanctions compliance cannot be overstated. Firms must adhere to OFAC’s guidelines, recognizing that the landscape of sanctions and international business is ever-evolving. Implementing a risk-based approach, organizations should consistently review their touchpoints to global entities, ensuring they do not inadvertently engage with prohibited individuals or regions. Such assessments not only focus on the organization’s external engagements but also scrutinize its internal structures, including its beneficial owners.
To be effective, these evaluations should be precise, defining specific parameters, such as entities to be screened, relevant transactions, and applicable geographic locations. The results derived from these risk assessments subsequently shape the organization’s internal control measures, policies, and training endeavors. Especially during mergers and acquisitions, this diligence is crucial. Ultimately, a methodological and adaptable approach ensures that companies remain compliant, addressing potential threats and vulnerabilities proactively.
