The Office of Foreign Assets Control (“OFAC”) of the U.S. Treasury Department (“Treasury”) has issued two pieces of guidance for the securities industry: (1) Opening Securities and Futures Accounts from an OFAC Perspective (the “Account Opening Guidance”) and (2) Risk Factors for OFAC Compliance in the Securities Industry (the “Risk Factor Guidance”)
Broad Application of OFAC Programs. In the Account Opening Guidance, OFAC makes clear that all securities and futures firms, like all U.S. persons, are subject to OFAC’s economic and trade sanctions programs, and provides guidance intended to assist securities and futures firms with OFAC compliance when opening new accounts. The Account Opening Guidance recommends that all securities and futures firms establish and maintain effective, risk-based OFAC compliance programs. In the event of an OFAC violation involving a securities and futures firm, OFAC will consider the strength of its OFAC compliance program when determining the severity of potential enforcement actions.
OFAC Screening Focus. The Account Opening Guidance identifies two specific stages of account relationships that firms should focus on in their OFAC compliance programs: (1) the client acceptance process and (2) the selection of new investments. The guidance recommends that firms screen new clients and proposed transactions against OFAC’s list of Specially Designated Nationals (“SDNs”) and other sanctions programs and maintain records of the results of such screening. OFAC also recommends that, depending on a firm’s specific risk profile, periodic screening regarding non‑accountholders, such as beneficiaries, guarantors, or principals, also may be warranted.
OFAC Compliance and AML Customer Identification Programs. The Account Opening Guidance notes that a strong OFAC compliance program will share certain common characteristics with a Customer Identification Program (“CIP”), including procedures to assess the risks posed to the firm by each customer and transaction. Despite these similarities, the Account Opening Guidance recognizes two key differences between OFAC and CIP requirements. First, although Treasury’s Financial Crimes Enforcement Network (“FinCEN”) has stated that are not required to look-through omnibus accounts to identify the underlying beneficial owners, OFAC due diligence on beneficial owners of such accounts may be necessary because OFAC applies broadly to all property and interests in property of a sanctions target that is within the possession or control of a U.S. person. Second, while FinCEN has indicated that it will not take action against clearing firms for failure to apply the CIP rule to certain accounts introduced on a fully disclosed basis, such relief does not extend to OFAC compliance. Firms that delegate OFAC compliance responsibilities to third parties remain liable for any OFAC violations that occur due to the third parties’ negligence, although OFAC will take the a firm’s role and access to customer information into account in the event of an enforcement action.
Risk Factor Analysis. The Risk Factor Guidance may be helpful to firms when implementing the risk assessment portion of OFAC compliance programs. Recognizing the importance of a risk-based approach to OFAC compliance, the Risk Factor Guidance stresses the need for OFAC due diligence by securities firms and identifies possible risk factors that may warrant heightened scrutiny. These risk factors include (1) a high number of international transactions, (2) a large number of non-U.S. customers or accounts, particularly in high-risk jurisdictions, (3) foreign broker-dealers which are not subject to OFAC regulations, (4) investments in foreign investment funds or securities, (5) personal investment corporations or personal holding companies beneficially owned by non-U.S. persons, (6) very high net worth institutional accounts, investment funds, and intermediary relationships that lack transparency regarding investments and beneficial owners, (7) business introduced by third parties based in high risk or inadequately regulated countries, and (8) confidential private banking accounts established for non-U.S. persons.