On May 10, 2024, the US Treasury Department’s Office of Foreign Assets Control (OFAC) issued an interim final rule (the IFR) that will amend reporting obligations and procedures for all OFAC sanctions programs, at 31 CFR § 501 (the Regulations), effective August 8, 2024.
The IFR’s changes primarily impact companies with OFAC blocked property reporting obligations. This generally includes revised rules that (i) require electronic submission of blocked property and rejected transaction reports through the OFAC Reporting System (ORS), rather than over email or by mail; (ii) require reporting for all unblocked or transferred blocked property through the ORS or email within 10 days of unblocking or transfer, instead of only being when required as a condition of an OFAC license; (iii) limit the types of “transactions” that must be included in rejected transaction reports and clarifies that US persons (not just US financial institutions) are required to submit such reports; (iv) allow only the party that mistakenly blocked property (e.g., due to mistaken identity, typographical, or other similar error) to apply for release of the property; and (v) authorize OFAC to demand financial institutions provide information to assist in the identification of blocked property and report specified transactions.
The IFR’s amendments, subject to changes OFAC may make in response to public comments, should take effect on August 8, 2024. Companies—and financial institutions in particular—might consider updating compliance procedures to reflect these new reporting obligations.
(i) OFAC Requires Online Portal Submission of Initial and Annual Blocked Property Reports and Rejected Transaction Reports
The IFR would revise the procedures for submitting to OFAC certain reports pertaining to blocked property. Once the IFR takes effect, filers will be required to use ORS to submit initial and annual blocked property reports under 31 CFR § 501.603(d) and rejected transaction reports under 31 CFR § 501.604(d). Prior to the IFR’s proposed revisions, companies could choose, but were not required, to use ORS to submit blocked property and rejected transaction reports. OFAC estimates that, in the first three months of 2023, approximately 96% of reports (but not necessarily the number of persons filing reports) for blocked property or rejected transactions were submitted through ORS.
OFAC acknowledges in the IFR that the ORS mandate “may impose initial costs on businesses that do not already file such reports electronically,” but OFAC expects “ORS to reduce the overall time, cost, and burden of reporting for filers.” Companies should be aware that while OFAC allows filers to request to submit reports in an alternative manner, such requests need to provide evidence of “unique and extraordinary circumstances” that would preclude the filer from using ORS and that such requests will be subject to a presumption of denial.
(ii) New Reporting Requirement for Unblocked or Transferred Blocked Property Reports
The IFR would add a reporting requirement under 31 CFR § 501.603(b)(3)(i) that requires filers to report when blocked property is unblocked or transferred within 10 business days of its unblocking or transfer. OFAC previously only required such reporting as a condition of an OFAC license to unblock or transfer property. In the IFR, OFAC clarifies that additional reporting is not required if reports are already required as a condition of a general or specific license.
OFAC will now only accept electronic submissions of reports of unblocked or transferred blocked property via the ORS or email at “OFACReport@treasury.gov.” Although the IFR would authorize these unblocked or transferred blocked property reports to be submitted over email, the IFR does not authorize such reports to be sent via mail.
(iii) Clarifications of the Scope of “Transactions” for Rejected Transaction Reports
OFAC already generally requires, in 31 CFR § 501.604, US persons to submit a report to OFAC where they reject—but do not block—a transaction that would violate US sanctions if the US person engaged in or processed the transaction. The IFR, in response to public comments received on a 2019 interim final rule, however, clarifies the definition of “transactions” that are covered by this reporting requirement: The IFR would define “transaction” to include wire transfers, trade finance, and transactions related to securities, checks, or foreign exchange, and sales or purchases of goods or services. The IFR, however, states that “securities, checks, foreign exchange, and goods and services are not in and of themselves transactions, when not provided as part of a transaction”, under 31 CFR § 501.604 and therefore are not subject to the reporting requirement.
The IFR also states that the reporting requirement applies to all US persons, not just US financial institutions. In response to questions concerning the utility to OFAC of receiving rejected transaction reports from non-financial institutions, OFAC states that its receipt of rejected transaction reports from US non-financial institutions is valuable in its effort “to identify attempts by sanctioned persons to utilize financial and non-financial institutions to evade sanctions or further illicit activity.” Additionally, the IFR states that filers are only required to submit the information available to the filer at the time the transaction was rejected.
(iv) Updated Procedures for Funds Blocked in Error
The IFR would revise the procedure for requesting the release of funds blocked due to mistaken identity under 31 CFR § 501.806. Under the IFR, this procedure would extend to any property that is blocked due to “typographical or similar errors,” but requests for release of such property would only be available to the person that mistakenly blocked the property. Other parties—such as the party whose property has been mistakenly blocked—may continue to pursue requests to unblock property through a specific license application to OFAC.
(v) Authority for OFAC to Demand Financial Institutions to Provide Information
Finally, the IFR would authorize OFAC to demand a financial institution to provide certain information to aid in the identification of blocked property and require the financial institution to report specified transactions. The IFR would revise 31 CFR § 501.602, the section of the regulations on “Reports to be furnished on demand,” to authorize OFAC to make these demands where “OFAC has reason to believe an account or transaction (or class of transactions) may involve the property or interests in property of a blocked person.” Financial institutions would also be obligated to notify OFAC prior to processing such specified transactions.
Conclusion
The IFR contains a number of changes to reporting obligations and procedures under US sanctions. Most notably, filers would be required to submit reports through the OSR and, in some cases, over email. As the public comment period continues and until the IFR becomes effective on August 8, 2024, OFAC may provide additional guidance on the scope and application of the IFR, and companies might consider reflecting the updated Regulations in their compliance policies.
