Key failures in sanctions compliance often stem from a lack of robust internal controls, oversight, and adequate training within organizations.
Many companies, in the quest for rapid expansion and profits, sometimes overlook the necessity of staying updated with the ever-evolving sanctions regimes, leading to inadvertent violations.
Another significant oversight is the failure to perform thorough due diligence on third-party vendors and partners, resulting in indirect breaches of sanctions. Without regular audits and reviews of the compliance program, even the most well-intentioned systems can become outdated and ineffective.
Additionally, a weak organizational culture that doesn’t prioritize or emphasize compliance can exacerbate these issues. It’s not merely about having a compliance system in place; it’s about ensuring it’s proactive, adaptive, and integrated into the company’s daily operations and ethos.
Key Failures in Sanctions Compliance
Here are some discussions regarding the root causes of sanctions internal compliance program failures:
The first root cause for sanctions internal compliance program failures is the lack of a formal Office of Foreign Assets Control or OFAC or a Sanction Internal Compliance Program or ICP. OFAC encourages organizations subject to US jurisdiction, including but not limited to those entities that conduct business in, with, or through the United States or those involving US-origin goods, services, or technology to adopt a formal ICP. In addition, it includes those who particularly engage in international trade or transactions or possess any clients or counter-parties outside of the United States to adopt a formal ICP.
OFAC has finalized numerous civil monetary penalties since publicizing the Guidelines in which the subject person’s lack of an ICP was one of the root causes of the sanction violations identified during the investigation. In addition, OFAC frequently identified this element as an aggravating factor in its analysis of the General Factors associated with such administrative actions.
The second root cause for sanctions internal compliance program failures is misinterpreting or failing to understand the applicability of official regulations. Numerous organizations have committed sanctions violations by misinterpreting official regulations, particularly in instances in which the subject person determined the transaction, dealing, or activity at issue was either not prohibited or did not apply to their organization or operations.
For example, several organizations have failed to appreciate, consider, or in some instances, actively disregard the fact that OFAC sanctions applied to their organization based on their status as a US person, a US-owned or controlled subsidiary in Cuba and Iran programs, or dealings in or with US persons, the US financial system, or US-origin goods and technology. Therefore, it is advisable that institutions should seek legal advice when they are in doubt about the applicability or scope of sanctions.
The third root cause is facilitating transactions by non-US persons, including through or by overseas subsidiaries or affiliates. Multiple organizations subject to US jurisdiction, specifically those with foreign-based operations and subsidiaries outside of the United States, have engaged in transactions or activities violating OFAC’s regulations. They may refer to business opportunities, approve or sign off on transactions conducted, or facilitate dealings between their organization’s non-US locations and OFAC-sanctioned countries, regions, or persons.
In many instances, the root cause of these violations stems from a misinterpretation or misunderstanding of OFAC’s regulations. Companies and corporations with integrated operations, particularly those involving or requiring participation by their US-based headquarters, locations, or personnel, should ensure any activities they engage in, such as approvals, contracts, procurement, etc., are compliant with OFAC’s regulations. That is the reason why every person or entity involved in a transaction should be identified and thoroughly screened to avoid any compliance breaches.
The fourth and the last root cause is exporting or re-exporting US-origin goods, technology, or services to OFAC-sanctioned persons or countries. Non-US persons have repeatedly purchased US-origin goods to re-export, transfer, or sell the items to a person, country, or region subject to OFAC sanctions. In several instances, this activity occurred despite warning signs that US economic sanctions laws prohibited the activity, including contractual language expressly prohibiting such dealings. This can be avoided by being sufficiently aware of the given sanctions risks and therefore conducting a screening for a US nexus in any transaction.
Final Thoughts
In analyzing the root causes of sanctions internal compliance program failures, four primary factors emerge. Firstly, the absence of a formal Internal Compliance Program (ICP) or Office of Foreign Assets Control (OFAC) significantly jeopardizes compliance. OFAC underscores the necessity of a formal ICP for entities operating within US jurisdiction, especially those involved in international trade or transactions. Their emphasis is backed by historical instances where the lack of an ICP directly contributed to sanction violations. Secondly, the misinterpretation or misunderstanding of official regulations frequently results in compliance lapses. This is often due to organizations underestimating or outright disregarding the extent of OFAC’s jurisdiction.
Thirdly, complications arise when non-US persons facilitate transactions, often involving overseas subsidiaries or affiliates, without comprehending the full scope of OFAC’s regulations. This becomes especially critical for entities with integrated operations, where US-based units are intertwined with activities. Lastly, the exporting or re-exporting of US-origin goods to OFAC-sanctioned parties remains a recurrent concern. Despite explicit warnings, non-US persons have proceeded with such transactions, highlighting a stark oversight in recognizing associated sanctions risks. In summation, diligent awareness, rigorous screening, and a thorough understanding of OFAC’s regulations are imperative to ensuring sanctions compliance.
