Securities firms and the brokers that work in them have a lot of rules and regulations that they need to follow. Some of the obligations that are the most likely to fall through the cracks are those made by the Office of Foreign Assets Control (OFAC) at the U.S. Department of Treasury. Unfortunately, given the recent global upheaval and the resulting flurry of economic sanctions issued by the United States, OFAC’s regulations are likely to be some of the most important and difficult to comply with in 2024. Failure to do so, however, will likely lead to an investigation by the Financial Industry Regulatory Authority (FINRA), which can culminate in administrative sanctions by the agency.

OFAC Regulations: An Overview for Broker-Dealers

The Office of Foreign Assets Control is the part of the U.S. Treasury that imposes and enforces economic sanctions against foreign individuals and entities. The goal of OFAC is to cripple the finances of people or organizations that threaten the national security or interests of the United States. Generally, sanctioned parties are:

• Drug cartels
• Terrorists
• Foreign governments, individuals, or organizations that destabilize their region of the world
• Private entities or governments that commit human rights abuses

To do this, OFAC creates a list of people and organizations that are off-limits. The list is called the specially designated nationals and blocked persons list, commonly referred to as just the SDN list. Conducting any type of transaction with a party that is on the SDN list carries the risk of violating U.S. economic sanctions.

Additionally, OFAC mandates that financial institutions, including brokerages, freeze any of the accounts in their possession that belong to anyone on the SDN.

From the perspective of securities professionals, OFAC regulations create two areas that raise the risk of legal liability for noncompliance:

1. Buying or selling securities on behalf of a person or entity on the SDN, and

2. Transacting in securities issued by an organization on the SDN.

Additionally, it is important to appreciate how quickly those risks can change. If OFAC amends the SDN, trading with any party that gets added to the blocked list can amount to a violation. If you are already doing business with someone and they get added, then you need to back away immediately and freeze their accounts to comply with OFAC. It is difficult to overstate the importance of staying on top of OFAC developments.

Basic Compliance Measures are Necessary

At the very least, broker-dealers must have basic OFAC compliance measures in place. According to the Department of Treasury, there are five general components of compliance that are essential:

1. A managerial commitment to compliance,

2. Routine and thorough risk assessments and reviews,

3. Internal controls,

4. A robust testing and auditing program, and

5. Regular training of OFAC requirements.

These measures, however, are the bare minimum. Moreover, the practical details that they require will vary by securities firm.

Due Diligence is a Key Component of Compliance

Because OFAC forbids trading with certain people and entities, a big part of a securities firm’s obligations will be to ensure that they are not dealing with anyone on the SDN.

While FINRA has an SDN search portal that you can use to see whether an issuer or customer is under embargo by OFAC, just because you do not find the name on the list does not necessarily mean that the person you are dealing with is just the intermediary of someone who is on the SDN. Generally, you will need to go further in order to adequately ascertain whether a transaction will violate OFAC.

Taking those “know your customer” precautions can help you uncover signs that a seemingly innocuous transaction would actually violate international trading sanctions. Furthermore, performing that due diligence can also give you an effective defense if, in the end, it turns out that you were, indeed, dealing with someone on the blocked list: The steps that you took can be used to show OFAC that you were acting in good faith and did all that you could to comply.

Maintaining Compliance is Extremely Difficult

Out of all of the unique challenges of OFAC’s regulations, it is maintaining compliance with them that is the most arduous. Every time OFAC adds a name to its SDN, broker- dealers have a legal obligation to not just avoid that entity, but also to ensure that they are not already dealing with them. It means that securities firms have to constantly review their list of ongoing business relationships whenever the SDN updates, and to freeze the accounts of anyone who has joined the thousands of other names on the SDN list.

This is already difficult enough when international politics are not in chaos. However, the invasion of Ukraine by Russia and the growing threats from China have made OFAC rapidly update the SDN to reflect these new threats to American interests. The quick additions of hundreds of names to the SDN and numerous updates every month are likely to continue into 2024 and potentially beyond.