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Recent Enforcement Actions Demonstrate the Critical Importance of OFAC Screening

Businesses must navigate complex regulations to operate legally and ethically. One of the most critical areas of compliance is adhering to sanctions imposed by the U.S. government. The Office of Foreign Assets Control (OFAC), part of the U.S. Department of the Treasury, is responsible for enforcing these sanctions. Complying with these regulations is vital. Violations can lead to severe penalties, damage to reputation and substantial financial loss. OFAC screening must be part of your regular vendor data management.

What Sanctions Are For

Sanctions are tools the U.S. government uses to achieve foreign policy and national security objectives. They are designed to pressure countries, entities and individuals involved in activities that violate international norms or threaten the United States. Government sanctions target various entities and activities, including:

  • Countries: The U.S. government might sanction an entire nation due to that country’s involvement in activities such as nuclear proliferation, terrorism or human rights abuses.
  • Individuals: Specific individuals, such as government officials or business leaders, can be sanctioned for their involvement in illicit activities.
  • Organizations: Companies, banks and other organizations may be sanctioned if they support or engage in prohibited activities.
  • Sectors: The U.S. also might target a country’s economic sectors, such as energy or finance, to weaken a sanctioned country’s economy and limit its ability to engage in harmful activities.

Compliance with sanctions ensures that businesses do not inadvertently support such activities as terrorism, drug trafficking, nuclear proliferation or human rights abuses.

Compliance Is Crucial

OFAC compliance is a legal obligation; ignorance or negligence is not a defense against enforcement actions. Failure to comply with sanctions has consequences. Companies may face hefty fines, restrictions on their ability to conduct business internationally and damage to their reputation.

Recent Enforcement Actions

For example, consider several recent enforcement actions, which underscore the importance of adhering to U.S. sanctions. Three notable cases involve SCG Chemicals, Construction Specialties Inc. and 3M Company.

  1. SCG Chemicals: This Thailand-based company was fined $20 million by OFAC for violating sanctions against Iran. SCG Chemicals was found to have engaged in transactions with a sanctioned entity, resulting in a significant penalty. This case highlights companies’ need to thoroughly vet their international business partners and ensure they are not engaging with sanctioned entities.
  2. Construction Specialties Inc.: This U.S.-based company faced penalties of $600,954 for violating sanctions against Iran and Syria. The company had exported products to these countries, both of which are subject to U.S. sanctions. The OFAC enforcement action demonstrates the importance of understanding and complying with export controls and ensuring that all international sales comply with U.S. laws.
  3. 3M Company: The multinational conglomerate was penalized $9.6 million for violating sanctions related to Iran. 3M’s subsidiary engaged in transactions that violated the sanctions, resulting in a substantial fine. This case illustrates that even large, well-established companies must have robust compliance programs to prevent violations.

These are a sampling. In 2023, penalties totaled $1.5 billion.

The Necessity and Challenge of Robust Compliance Programs

Companies must implement comprehensive compliance programs to avoid the severe consequences of sanctions violations. These programs should include:

Regular Training: Organizations should regularly train employees on sanctions regulations and the importance of compliance.
Due Diligence: Companies must conduct thorough due diligence on all international partners and transactions.
Monitoring and Auditing: Regular monitoring and auditing of business activities can help identify and address potential compliance issues before they result in violations.
Clear Policies and Procedures: Clear, well-documented policies and procedures should be in place to guide employees in complying with sanctions.

OFAC screening must be an ongoing process. U.S. sanctions are dynamic. While step one in compliance is to review every new vendor against OFAC’s lists, more is needed. Changes may occur to the OFAC sanctions list several times within a week, or there may be no changes for two weeks. They are driven by events and policy decisions, not by a schedule. When the government adds new entities to the list, they may already exist in your vendor master file (or customer master, but our focus here is on accounts payable and vendor management).

Consequently, your compliance procedure must involve a regular, daily review of your vendors against the sanction lists. A few years ago, Microsoft faced OFAC penalties when it failed to notice and cease doing business with a vendor that had been added to the SDN list. Their mistake highlights that an automated, daily OFAC check is the best process to ensure compliance.

Legal Requirement, Ethical Business Conduct

Complying with U.S. sanctions is a legal requirement but also a critical aspect of ethical business conduct. The enforcement actions against SCG Chemicals, Construction Specialties Inc., 3M Company and Microsoft serve as stark reminders of the importance of robust compliance programs. By adhering to these regulations, companies can avoid severe penalties, protect their reputation and contribute to global security and stability.

Contact us via the form at right to learn how VendorInfo’s automatic daily sanctions review process enables your compliance.

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