The apparent new requirement that all U.S. persons, not just financial institutions, report rejected transactions – if that is what OFAC truly intends – constitutes a significant expansion of prior reporting requirements that could impose substantial reporting and internal control burdens on numerous sectors not previously subject to these obligations.
Annual Report of Blocked Property
All holders of “blocked property”1 must file with OFAC, by September 30 of each year, a comprehensive report of all blocked property held as of June 30 of the reporting year. (See 31 C.F.R. § 501.603.) The 2019 version of the ARBP form, which can be accessed through the Treasury Department’s website, requires information regarding, among other things, the ownership, geographic location, value and asset classification of the blocked property.
Detailed guidance on the reporting requirements is provided on OFAC’s website, but it is important to note that no report need be filed:
- If an entity is not holding blocked property;
- Regarding property that has been unblocked by a general or specific license (even if the property has not yet been returned); or
- Regarding property that was blocked pursuant to a now-terminated sanctions program.
Expanded Reporting Requirements
On June 21, 2019, OFAC issued an interim final rule amending 31 C.F.R. Part 501 to incorporate new reporting requirements for parties filing ARBPs or rejected transactions reports. Although these new requirements became effective immediately on an interim basis, OFAC accepted public comments until July 22, 2019, and may issue amended rules in the future.
The new interim rule expands the scope of both who must report, and what must be reported.
Under the previous rule, only U.S. financial institutions were required to report transactions involving rejected funds transfers (those transactions specifically prohibited by sanctions programs). The new rule requires that any “U.S. person” or “person subject to U.S. jurisdiction,” rather than just a “financial institution,” report rejected transactions.2 31 C.F.R. § 501.604.
The new rule applies to:
- U.S. citizens and lawful permanent residents (wherever located);
- Entities organized under the laws of a U.S. jurisdiction (and their foreign branches);
- Any foreign person in the United States; and
- Persons subject to U.S. jurisdiction, including foreign corporations, partnerships, associations and other organizations owned or controlled by U.S. individuals, companies, and other U.S. persons.3
OFAC has expanded the number of transaction types subject to these reporting requirements. Rather than requiring reports solely for “rejected funds transfers,” OFAC is now requiring reports on “rejected transactions” more generally. The rule adds a definition for transaction that includes “transactions related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services.” (Emphasis added)
Repercussions of New OFAC Reporting RequirementsThe expanded scope of the rule could have significant repercussions for U.S. businesses. Read literally, the new rules could require reporting of numerous commercial transactions that are not consummated because, for example, the potential party is screened and found to be a SDN or other restricted party under the sanctions regulations.
The inclusion of “goods and services” could be construed to include virtually all commercial transactions. The new regulations do not clarify when a transaction is deemed “rejected” and requires reporting. Unfortunately, OFAC has yet to publish FAQs addressing, and clarifying, the new rules.
There is some speculation that OFAC may limit the scope of “rejected transactions” through clarification similar to the existing OFAC FAQ 53 regarding “payment instructions.” That FAQ states that for wire transfers, the “receipt of concrete instructions from . . . [the] customer to send the funds” triggers the blocking and reporting requirements.
However, if a customer simply asks if he or she can send money to Cuba, “there is no blockable interest in the inquiry and the bank can answer the question or direct the customer to OFAC.” The FAQ then applies the same logic “to cases where the transaction would be required to be rejected under OFAC regulations. There is not technically a ‘reject’ item until the bank receives instructions from its customer to debit its account and send the funds.”
If OFAC were to extend that logic to rejected transactions involving goods and services, then U.S. persons would not have to report such rejections unless the transaction had advanced to the point of a “payment instruction” before it was rejected. Customers located in sanctioned countries who inquire about potential sales or services could be advised that such transactions are not permitted under U.S. law, without triggering the reporting requirement.
However, at this point, this is only speculation and there is no assurance that FAQ 53 can be applied to the new reporting requirements. Given the substantial amount of data OFAC could begin to receive under the new rules, hopefully it will recognize the over-breadth of the regulation as issued and provide narrowing advice via new FAQs.
Businesses Must Implement or Modify Procedures on Reporting Rejected Transactions
Since the new rule is already effective, U.S. businesses must implement new procedures, or modify existing ones, to memorialize and report rejected transactions under the new requirements. Such transactions must be reported to OFAC within 10 business days of the rejected transaction.
In addition to the aforementioned rolling reports, which must be submitted within 10 business days of a blocked or rejected transaction, OFAC’s interim final rule changes the requirements of the Annual Report of Blocked Property. In order to “lessen the overall reporting burden for submitters,” OFAC is now requiring more information be submitted up front so that fewer follow-up requests will be necessary. See the 2019 Annual Report form posted to the Treasury Department’s website.
The new regulations also clarify the applicability of the Freedom of Information Act (FOIA) to OFAC reporting (and licensing) filings. Rejected transactions reports (along with blocked property reports and specific license applications) generally will be released by OFAC upon the receipt of a “valid” FOIA request, “unless OFAC determines that such information should be withheld in accordance with an applicable FOIA exemption.”4
Businesses should consider the potential effects of the public availability of information about their customers, transactions and other inferences that possibly can be gleaned from such filings.
1 Blocked property includes property subject to sanctions programs and the Specially Designated Nationals (SDN) list administered by OFAC, found in 31 C.F.R. Part 501. OFAC guidance explains that while title to blocked property remains with the targeted entity, the exercise of ownership rights over such property is prohibited without OFAC authorization.
2 Under both the prior and current rules, all entities have an obligation to report to OFAC transactions involving blocked property (those transactions involving property in which a blocked person found on OFAC’s Specially Designated Nationals list has an interest or ownership stake).
3 This group is defined in specific OFAC sanctions programs; for example, the Cuban Assets Control Regulations, 31 C.F.R. § 515.329, or the Iranian Assets Control Regulations, 31 C.F.R. § 535.329.
4 31 C.F.R. §§ 501.603, 501.604 and 501.801.