ACAMS Global Sanctions Compliance 2 — Questions and Answers
Question 1: What is OFAC's 'Specially Designated Nationals and Blocked Persons' (SDN) list and what obligations does it create?
- A list of foreign companies approved for U.S. government contracts; creates procurement requirements
- A list maintained by the U.S. Treasury of individuals, entities, and countries subject to U.S. economic sanctions; financial institutions must block transactions and freeze assets of listed parties (Correct answer)
- A list of convicted money launderers maintained by FinCEN; triggers enhanced due diligence
- A list of non-U.S. banks that have failed AML examinations; prohibits correspondent relationships
Correct answer: A list maintained by the U.S. Treasury of individuals, entities, and countries subject to U.S. economic sanctions; financial institutions must block transactions and freeze assets of listed parties
The OFAC SDN list identifies persons, entities, and countries subject to U.S. economic sanctions. Financial institutions must block (freeze) property of SDNs and reject or block transactions involving SDN parties, reporting blocked or rejected transactions to OFAC.
OFAC administers U.S. economic sanctions programs and maintains the SDN list. Key obligations for U.S. persons (including financial institutions): Block all property and interests in property of SDNs that come within U.S. jurisdiction; Report blocked transactions to OFAC within 10 business days; Report rejected transactions (where funds are returned rather than blocked) within 10 business days; Screen all customers, beneficial owners, counterparties, and transactions against the SDN list; Apply the 50% Rule — entities 50% or more owned by SDNs are also considered blocked, even if not explicitly listed; and maintain records of all blockings and rejections for five years. Non-U.S. persons can also be subject to OFAC sanctions if they conduct transactions in U.S. dollars or through U.S. financial institutions.
Question 2: What is OFAC's '50% Rule' and why is it significant for sanctions compliance?
- OFAC permits 50% of a sanctioned entity's transactions to proceed without penalty
- Any entity that is 50% or more owned (directly or indirectly) by one or more SDNs is itself considered blocked, even if the entity is not explicitly listed on the SDN list (Correct answer)
- OFAC imposes civil penalties at 50% of the transaction value for first-time violations
- U.S. financial institutions must block 50% of funds in accounts of suspected sanctions violators
Correct answer: Any entity that is 50% or more owned (directly or indirectly) by one or more SDNs is itself considered blocked, even if the entity is not explicitly listed on the SDN list
The OFAC 50% Rule extends sanctions to entities owned 50% or more by SDNs even if those entities do not appear on the SDN list. This prevents SDNs from evading sanctions by operating through nominally separate entities they control.
OFAC's 50% Rule (codified in OFAC guidance and regulations) provides that: An entity owned 50% or more in the aggregate by one or more SDNs is itself considered an SDN, regardless of whether it appears on the SDN list. The rule applies to direct and indirect ownership. If SDN A owns 60% of Company B, Company B is blocked even if not listed. If SDN A owns 30% and SDN C owns 25%, their combined 55% ownership makes Company B blocked. The rule creates significant due diligence challenges because: unlisted entities may be blocked; ownership structures may be opaque; public registries may not reflect actual beneficial ownership; and frequent ownership changes require ongoing monitoring. Financial institutions must conduct beneficial ownership analysis as part of sanctions screening, not just name-match against the SDN list.
Question 3: What is the difference between 'primary sanctions' and 'secondary sanctions' in the U.S. sanctions framework?
- Primary sanctions apply to criminal violations; secondary sanctions apply to civil violations
- Primary sanctions apply to U.S. persons and transactions in U.S. jurisdiction; secondary sanctions target non-U.S. persons conducting significant transactions with sanctioned parties even without U.S. nexus (Correct answer)
- Primary sanctions are imposed by the UN Security Council; secondary sanctions are unilateral U.S. measures
- Primary sanctions require congressional approval; secondary sanctions can be imposed by executive order
Correct answer: Primary sanctions apply to U.S. persons and transactions in U.S. jurisdiction; secondary sanctions target non-U.S. persons conducting significant transactions with sanctioned parties even without U.S. nexus
Primary sanctions prohibit U.S. persons and U.S.-nexus transactions from dealing with sanctioned parties. Secondary sanctions target non-U.S. persons who conduct significant business with sanctioned countries or entities, threatening them with exclusion from the U.S. financial system.
Primary sanctions apply to U.S. persons (U.S. citizens, residents, companies, and anyone conducting transactions in U.S. dollars or through U.S. financial institutions) — they are prohibited from transactions with SDNs or sanctioned countries. Secondary sanctions (notably used in Iran and Russia programs) target non-U.S. persons by threatening: loss of access to the U.S. financial system (correspondent banking termination); loss of access to U.S. markets; visa restrictions on company executives; and designation on U.S. sanctions lists. Secondary sanctions create extraterritorial reach of U.S. law and have been controversial internationally. Financial institutions outside the U.S. must assess secondary sanctions risk because engaging in significant transactions with sanctioned parties (even in non-U.S. currency) can result in exclusion from U.S. dollar clearing.
Question 4: What is a 'voluntary self-disclosure' to OFAC and why might an institution choose to make one?
- A required annual certification of sanctions compliance
- A proactive disclosure to OFAC by an institution that discovers it may have violated sanctions regulations, before OFAC initiates an enforcement action, which can significantly reduce civil penalties (Correct answer)
- A customer disclosure form required before processing international wires
- A disclosure to FinCEN that the institution has identified a potential sanctions hit
Correct answer: A proactive disclosure to OFAC by an institution that discovers it may have violated sanctions regulations, before OFAC initiates an enforcement action, which can significantly reduce civil penalties
Voluntary self-disclosure to OFAC is a proactive step an institution takes when it discovers a potential sanctions violation. OFAC treats VSD as a significant mitigating factor and typically reduces civil penalties by 50% for fully cooperative self-disclosures.
OFAC's enforcement guidelines provide that voluntary self-disclosure is a significant mitigating factor that can reduce civil monetary penalties by up to 50%. A thorough VSD includes: identifying the nature, scope, and root cause of the apparent violation; conducting an internal investigation to determine the full extent of violations; describing the institution's remediation steps; providing all relevant documentation to OFAC; and being fully cooperative with OFAC's review process. Institutions weigh VSD decisions based on: the likely penalty severity; the strength of their compliance program at the time; whether OFAC is likely to discover the violation independently; and the potential reputational impact of an enforcement action vs. a self-disclosed settlement. A VSD without adequate remediation may still result in significant penalties if OFAC finds systemic compliance failures.
Question 5: How do UN Security Council sanctions differ from OFAC sanctions?
- UN sanctions are legally binding on all UN member states; OFAC sanctions are binding only on U.S. persons (Correct answer)
- UN sanctions apply only to countries; OFAC sanctions apply only to individuals
- UN sanctions are civil penalties; OFAC sanctions are criminal penalties
- UN sanctions require annual renewal; OFAC sanctions are permanent
Correct answer: UN sanctions are legally binding on all UN member states; OFAC sanctions are binding only on U.S. persons
UN Security Council sanctions resolutions (under Chapter VII of the UN Charter) are legally binding on all 193 UN member states, creating universal obligations. OFAC sanctions, while among the most extensive in the world, are U.S. law and primarily binding on U.S. persons.
UN Security Council sanctions (established under Chapter VII of the UN Charter): are binding on all UN member states when adopted under Chapter VII; require each member state to implement them into domestic law; may be imposed only when the UNSC agrees (P5 veto applies); typically target specific countries (North Korea, Iran), terrorist groups (Al-Qaeda, ISIL/Da'esh), or individuals. OFAC sanctions: are U.S. law applicable to U.S. persons and transactions with U.S. nexus; may be imposed by the President via executive order or by Congress; can extend extraterritorially through secondary sanctions; are often more comprehensive than UN sanctions (e.g., the Cuba embargo is far broader than UN requirements). Financial institutions must comply with both UN-derived sanctions (implemented in their domestic law) and any additional unilateral sanctions imposed by their home country.
Question 6: What is 'sanctions evasion' and what are three common methods used to evade U.S. sanctions?
- Filing for a sanctions license; methods include OFAC application, hardship exemption, and congressional waiver
- Illegal attempts to circumvent sanctions prohibitions; common methods include using front companies, falsifying transaction records, and routing transactions through non-U.S. financial institutions (Correct answer)
- Legal use of OFAC general licenses; methods include humanitarian, IEEPA, and EO exemptions
- Corporate restructuring to avoid sanctions; methods include relocation, rebranding, and ownership dilution
Correct answer: Illegal attempts to circumvent sanctions prohibitions; common methods include using front companies, falsifying transaction records, and routing transactions through non-U.S. financial institutions
Sanctions evasion involves illegal actions to circumvent sanctions prohibitions, including: using front companies to obscure the sanctioned party's involvement; falsifying trade documents or transaction records; and using non-U.S. financial institutions to process transactions without U.S. dollar clearing.
Common sanctions evasion methods include: Front companies and nominees — using shell companies or third-party individuals to obscure the sanctioned party's role in a transaction; Trade document falsification — misrepresenting the origin, destination, or nature of goods in trade finance to disguise prohibited transactions; Correspondent banking exploitation — routing prohibited U.S. dollar transactions through non-U.S. banks that strip payment message information before passing through U.S. correspondent banks (hence the FinCEN rule on correspondent account recordkeeping and travel rule); Over/under-invoicing — manipulating trade transaction values to transfer value while obscuring the actual commercial relationship; and Cryptocurrency — using privacy coins or mixing services to move value beyond traditional financial system visibility. Identifying evasion requires enhanced scrutiny of transaction documentation and counterparty information.
ACAMS Global Sanctions Compliance 2
What is OFAC's 'Specially Designated Nationals and Blocked Persons' (SDN) list and what obligations does it create?