OFAC’s New §501.604 Reporting Requirement: A Small Change with a Big Impact
Matt Stankiewicz, Senior Associate, and Jessica Sanderson, Of Counsel, both at The Volkov Law Group, rejoin us for an interesting posting on a new OFAC reporting requirement. Matt can be contacted at firstname.lastname@example.org, and Jessica can be contacted at email@example.com.
On June 21, 2019, OFAC changed its requirements for reporting on blocked or rejected transactions under 31 C.F.R. §501.604. With little fanfare, the interim rule published in the Federal Register greatly expands the affirmative reporting requirements and places a potentially large burden on U.S. persons and entities. Previously, only financial institutions were required to report rejected “funds transfers.” Now, “Any U.S. Person (or person subject to U.S. jurisdiction)” that “rejects a transaction,” due to sanctions concerns must report to OFAC. And, this rule applies to all “rejected transactions,” including those for “goods and services.”
The rule is new, and OFAC did not expressly provide guidance on what constitutes a rejected transaction, especially when it comes to internal corporate deliberations. But the way we see it, we both returned to our first-year law school class on contracts, and use the basic offer-acceptance analysis as a guiding rule. If the potential transaction reaches a point where the formation of a contract is at hand, then that would likely be the trigger point.
As an example, if an individual listed on OFAC’s Specially Designated National List (“SDN List”) submitted a purchase order to your company, and your company with its gold star compliance program rightfully rejects it, then that would trigger the reporting requirement. Similarly, if an established customer sends documents requesting a shipment to a new location in Cuba, and you reject the request, that would trigger a reporting requirement. On the other hand, if your company were to receive a random call one day asking, “do you ship to Cuba?” – quickly slamming the phone down would not require a report to OFAC.
So this obviously leaves a wide grey area, as we both learned in law school during our first year contract’s class. At the risk of overthinking it (though as a lawyer, that’s our job!), we can imagine some ambiguous scenarios. What if you have been negotiating with a potential new third-party distributor and during the course of your due diligence you discover that one of the minority owners is on the SDN List. Despite not in direct violation of sanctions regulations, out of an abundance of caution, you decide not to engage the third party. Is this a potential, contemplated, but never effectuated transaction – that likely would not require reporting – or is this a “rejected transaction” that requires reporting?
We have also seen some discussions in the compliance-sphere around internal business plans – let’s say the operations team is formulating a plan to move into the Iranian market. Compliance gets wind of it and shuts it down. Would that require reporting to OFAC? That does not appear to be the case, unless that plan reaches a point further down the line – such as active discussions with Iranian customers. While I would strongly suggest internal compliance training in this case, there should not be a requirement to report this to OFAC. What about an overseas trade show with a booth selling Iranian textiles? What if they approach you and offer to sell you those forbidden items? What if the discussions go in depth and you start negotiating prices and delivery terms before you realize these goods are sourced from Iran? The latter would trigger the reporting requirement, the former is unclear.
Again, keep in mind that this reporting requirement now extends to all U.S. Persons and anyone subject to U.S. jurisdiction. As such, foreign subsidiaries of a U.S.-based company may need to report rejected transactions. Immediately reporting these rejections to compliance or legal should be included in internal controls to allow them to make that determination.
So now let’s assume one of these transactions comes across your desk and you reject it. What’s next?
First, the clock begins ticking. OFAC is requiring these reports be filed within 10 business days of the rejection. OFAC also clearly enunciated the information required in each report:
- The name and address of the person that rejected the transaction and a contact from whom additional information may be obtained;
- a description of the rejected transaction, including certain required identifying information;
- if applicable, the associated sanctions target(s) whose involvement in the transaction has resulted in the transaction being rejected and its location, if known;
- the date the transaction was rejected;
- the actual, or if unknown, estimated value of the property in U.S. Dollars;
- the legal authority or authorities under which the transaction was rejected; and
- a copy of any related payment or transfer instructions or other relevant documentation.
After preparing this report, it should be filed electronically either by email (OFACreport@treasury.gov) or online through OFAC’s website.
Now to address the elephant in the room here – what is OFAC going to do with the potentially huge number of new reports? Although OFAC determined that notice and comment was not required, OFAC did invite comments on the interim final rule by July 22, 2019. Remarkably, it appears that only one entity submitted comments on the last possible date. The Association of University Export Control Officers (“AUECO”) submitted a letter contending the revisions “significantly expand the scope of the reporting requirement by potentially capturing internal decisions not to pursue contemplated or proposed transactions due to sanctions concerns.” AUECO provided scenarios of “contemplated” transactions that were not pursued and suggested OFAC should clarify that such contemplated or proposed but never consummated transactions are not “rejected transactions,” under the revised rule. We at The Volkov Law Group agree with AUECO, but it remains to be seen whether OFAC agrees and exactly how OFAC intends to enforce this new and significant rule change.