OFAC getting more common in contract terms and background checks

Do you know what OFAC is about? OFAC is the acronym of the U.S. Department of Treasury’s Office of Foreign Assets Control, and its function is to administer and enforce sanctions against countries or individuals (like terrorists or narcotics traffickers) with actions ranging from trade restrictions to the blocking of assets.

For U.S. companies, the agency’s enforcement applies to banks, insurers, and others in the financial industry that may be involved in covered dealings, which include engaging in transactions prohibited by Congress such as trade with an embargoed country or with a specially designated national (SDN).

Violations of regulations, which extend to all U.S. citizens, can result in substantial fines and penalties. Criminal penalties can reach up to $20 million and imprisonment up to 30 years; civil fees can range from up to $65,000 to $1,075,000 per violation, depending on the activity at issue.

OFAC has significantly stepped up its enforcement efforts that have resulted in sizable settlement agreements with U.S. entities, and thus companies increasingly are incorporating sanctions compliance language based on OFAC regulations into contracts and agreements, as well as including OFAC checks in their employment-purpose background screening or in connection with business transaction due diligence.

Contract terms requiring a party to affirm that it is not the subject of any OFAC sanctions status, that no OFAC investigations are in process, or that it does not engage in transactions with countries like Iran or North Korea, are becoming standard. Some deals also include a provision attesting that a company is not owned by an individual on the list of SDNs, that the company is not based or located in an embargoed country, or to assure that the monies used to make an investment or purchase were not provided by a sanctioned country or individual. Of course, it is also important to conduct background checks to confirm these representations at the start of the contract and at reasonable intervals thereafter.

The use of compliance language does not insulate a company from OFAC liability. While such a provision may create a contract-based remedy to recover monetary damages based on a fine or settlement with the agency, the clause cannot eliminate liability. Like any other governmental regulator, OFAC is not bound by private contract and can take action even with such terms in place.

Learn more about OFAC.