FAC Listings and the Magnitsky Act: implications for compliance

Numerous reactions and inquiries have arisen regarding various news shared in public forums, indicating that individuals or legal entities have been sanctioned under the Magnitsky Act and consequently included in the Office of Foreign Assets Control (OFAC) lists. In this article, we provide a brief explanation of these matters and their relevance within corporate compliance systems.

  • OFAC and the Magnitsky Act

According to its official website[1], OFAC is an agency of the U.S. Department of the Treasury responsible for administering and enforcing economic and trade sanctions based on U.S. foreign policy and national security objectives. These sanctions target specific foreign countries and regimes that threaten U.S. national security, foreign policy, or the economy. Sanctions can be comprehensive or selective, employing asset blocking and trade restrictions.

Formally established in December 1950, with roots tracing back to the Foreign Funds Control (FFC) during the early stages of World War II, OFAC’s historical objective was to prevent Nazi use of currencies and assets from occupied countries and halt the forced repatriation of funds belonging to nationals of those countries.

OFAC manages and publishes lists of various sanctions imposed under U.S. regulations. Among these are sanctions derived from the Magnitsky Act on global human rights accountability. Enacted worldwide through Executive Order 13818 on December 20, 2017, this law aims to address severe human rights violations and acts of corruption globally.

According to OFAC’s clarifications, its interest in these sanctions arises from the understanding that human rights abuses and corruption threaten the stability of international political and economic systems. The designation of an individual in such a list imposes tangible and significant consequences on those committing such abuses and safeguards the U.S. financial system.

All U.S. persons, including U.S. citizens, permanent resident aliens (regardless of their location), individuals and entities within the United States, entities incorporated in the U.S., and their overseas branches, must comply with OFAC regulations.

The consequences of OFAC sanctions include:

    1. All assets and interests in assets of the sanctioned person within the U.S. or in the possession or control of U.S. persons are blocked, and such information must be reported to OFAC.
    2. Entities in which 50 percent or more is owned, directly or indirectly, individually, or collectively, by one or more designated persons are blocked.
    3. Generally, all transactions by U.S. persons or persons within the U.S. (or in transit) involving assets or interests in assets of designated or blocked persons are prohibited.
    4. Making any contribution or provision of funds, goods, or services to, for, or for the benefit of any sanctioned person, as well as receiving any contribution or provision of funds, goods, or services from such persons, is prohibited.

Failure to adhere to these behavioral guidelines can result in civil and criminal penalties for the violator, potentially exceeding thousands of dollars, with the type of sanctions program varying and amounts adjusted annually.

  • Implications of this Listing on Compliance

The consultation of international lists, in this case, OFAC, is crucial for compliance, especially within the anti-money laundering and counter-terrorism financing framework. As outlined above, published sanctions have economic and commercial consequences affecting both sanctioned individuals and those connected to them.

Therefore, it is recommended that the consultation of such lists and the generation of alerts become a mandatory part of anti-money laundering and counter-terrorism financing systems, within the context of assessing and qualifying individuals or legal entities with whom commercial relationships are established. The results obtained provide an objective view of potential corruption risks, as well as issues related to illegal trafficking, drug trafficking, money laundering, or terrorism.

Moreover, this type of consultation should be conducted both at the beginning and during the continuation of commercial relationships. The obligation and timing of these consultations should be clearly outlined in codes of ethics, corporate governance guidelines, new hiring assessments, and financial crime prevention.

The absence of these consultations increases the risk of initiating or maintaining commercial relationships with individuals who may pose reputational risks, potential suspension of commercial relationships with other U.S. entities, or even the risk of non-collection or contract breach. These risks are entirely latent, as individuals included in these lists have provided rational convictions of being involved in criminal activities. It is equally rational to consider that they may seek to appear engaged in lawful business with external entities. Therefore, our entities, unknowingly, could become a suitable vehicle for legitimizing or laundering assets.

Given these risks, it is crucial to reinforce or establish the mandatory review of OFAC lists, especially now with increased interest, considering that several subjects from Central America have been added. This obligation can be established within due diligence policies, specifically under the Know Your Customer (KYC) policy. Additionally, the need to provide staff with training, instructions on the use of reporting channels, participation in investigations, and the possibility of receiving disciplinary measures should also be considered. Only in this way can policies be deemed effective and add value to the entity.

Such reviews and policy drafting can be handled through our regional offices to standardize them and contribute timely to strengthening your compliance programs. Policies should be drafted in simple language, be relevant to employees’ daily activities, and provide objective responses and guidance. The outcome of these policies is to empower each worker with the ability to identify, intercept, escalate, and report the presence of any individual within OFAC lists who could cause harm through their hiring.

1 https://ofac.treasury.gov