The Consumer Financial Protection Bureau (CFPB) does not examine mortgage companies or other financial companies for compliance with the Office of Foreign Assets Control (OFAC) rules and requirements. So, why do we care about OFAC?
What is OFAC?
According the the U.S. Department of the Treasury website:
“The Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States. OFAC acts under Presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.”
That’s a mouthful, but, the bottom line is, OFAC enforces federal laws that prohibit all U.S. persons (individuals, businesses, or organizations) from doing business with some pretty bad guys and countries with which the U.S. has imposed economic and trade sanctions. Notice we didn’t say, “banks,” but all U.S. natural or non-natural persons. And, although, the CFPB does not oversee OFAC compliance and enforcement, the U.S. Department of the Treasury does.
Where did OFAC come from?
Dating back prior to the War of 1812, the U.S. Treasury administered sanctions imposed against Great Britain for the harassment of American sailors. During the American Civil War, Congress approved a law which prohibited transactions with the Confederacy, called for the forfeiture of goods involved in such transactions, and provided a licensing regime under rules and regulations administered by Treasury.
OFAC is the successor to the Office of Foreign Funds Control (FFC), which was established at the beginning of World War II following the German invasion of Norway in 1940. The FFC’s initial purpose was to prevent Nazi use of the occupied countries’ holdings of foreign exchange and securities and to prevent forced repatriation of funds belonging to nationals of those countries. These controls were later extended to protect assets of other invaded countries. After the United States formally entered World War II, the FFC played a leading role in economic warfare against the Axis powers by blocking enemy assets and prohibiting foreign trade and financial transactions.
The OFAC office we know today was formally created in December 1950, following the entry of China into the Korean War, when President Truman declared a national emergency and blocked all Chinese and North Korean assets subject to U.S. jurisdiction.
OFAC, because it is administered by the U.S. Treasury, is often linked with Bank Secrecy Act (BSA) rules. Both BSA and OFAC compliance have expanded exponentially in recent years, primarily due to the events of September 11, 2001, and implementation of more stringent anti-terrorist and anti-money laundering initiatives.
What should we know?
OFAC violations bring fines and enforcement actions. The settlements result from the companies’ non-compliance with various aspects of OFAC rules – business activities with sanctioned countries; violations of the Weapons of Mass Destruction Proliferators Sanctions Regulations; violations of Executive Order 13224, “Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism;” or other prohibited activities. Recent settlements include:
October 27, 2015 – $43,875 – Gil Tours Travel, Inc.
October 20, 2015 – $329,593,585 – Crédit Agricole Corporate and Investment Bank
August 27, 2015 – $1,700,100 – UBS AG
August 5, 2015 – $78,750 – Production Products, Inc.
Checks should be conducted of applicants for loans, vendors, and other parties with which your company conducts business to preclude OFAC problems.
For credit applicants and borrowers: One way is through credit reports. Credit bureaus and agencies have adopted new measures to ensure compliance with OFAC regulations. Before issuing a credit report, they use screening software to determine if a credit applicant is on OFAC’s Specially Designated Nationals (SDN) list or one of OFAC’s other sanctions lists. This software matches the credit applicant’s name and other information to the names on OFAC’s sanctions lists. If there is a potential match, the credit bureaus may place a “red flag” or alert on the report. This does not necessarily mean that someone is illegally using the person’s social security number or that they have bad credit. It is merely a reminder to the lender that he or she should verify whether the person is the individual on one of OFAC’s sanctions lists by comparing the information to the OFAC information. If it is not a match, the lender should disregard the OFAC alert, document the results in the file, and there is no need to contact OFAC. However, if it looks like a match, the lender should call the OFAC Hotline to verify and report it.
If a lender does not obtain credit reports that include OFAC checks, a separate function should be established to check all parties to any transaction against the SDN list, such as the process below for vendors and business partners.
For vendors and other business partners: As part of its enforcement efforts, OFAC publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific. Collectively, such individuals and companies are called “Specially Designated Nationals” or “SDNs.” Their assets are blocked and U.S. persons are generally prohibited from dealing with them. To help mitigate the risk of doing business with one of the designated entities or their business affiliates/subsidiaries, OFAC makes available an on-line tool to search the SDN list. The list is updated as changes occur. A best practice in this area is to run checks on a periodic basis, such as when contracts are renewed, or a more broad-based check of all business partners and vendors on a periodic basis, such as annually.
OFAC is not a “consumer protection” compliance requirement; however, it is a requirement of federal law and a critical function of risk protection for your mortgage company and its owners, investors, employees, and customers.
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