The Impact of OFAC on Dealers

Hopefully you know that you must “run an OFAC” on every customer you do business with, both cash and credit customers.  But what exactly is OFAC and what does “running an OFAC” mean?  What are the penalties for failing to run an OFAC on your customer or customers?

Running an OFAC

OFAC is the Office of Foreign Asset Controls, an agency of the U.S. Treasury Department that has been around since the mid-1800s.  OFAC administers and oversees a series of laws that impose economic sanctions against companies and persons hostile to the U.S.  Examples include terrorists and terrorist supporters; narcotics kingpins and their associates; persons from blocked countries such as Cuba, Sudan, and Iran; and other persons identified as targets of U.S. foreign policy and national security objectives.

From an auto dealer’s perspective, OFAC’s list of Specially Designated Nationals and Blocked Persons (the “SDN List”) contains the names of over 5,000 individuals, organizations, and foreign entities with which you cannot do any business.  The list is updated frequently and available for search at the following website:

http://www.treasury.gov/ofac/downloads/sdnlist.txt

However, most dealers find it easier to rely on entities like DealerTrack or a credit bureau to check the name of a prospective customer against the SDN List. “Running an OFAC” means using one of these services (or checking against the online list yourself) to see if the customer is a match to one of the blocked persons with whom you cannot do business.

What If I Get a Preliminary Match to Someone on the SDN List?

Most OFAC-checking services will inform you if there is a preliminary match against someone listed on the SDN List.  If you get a preliminary match, you must take steps to determine whether the hit is genuine or a “false positive.”  OFAC recommends the following steps to take:

-  Make sure the “hit” is against the SDN List and not against another list maintained by OFAC such as the World Bank Debarred Parties or Blocked Officials File;

-  If you determine the hit to be against the SDN List, you must evaluate the quality of the hit.  Compare the name of the customer with the name on the SDN List (look up the name online at the above Web page to do this).  Is the name on the SDN List a company or a vessel?   Is the name on the list a male’s name where your applicant is a female?  If yes to any discrepancy, you do not have a valid match.

- How much of the SDN List’s name is matching against the name of your customer?  Get the customer’s middle name, any surname or generational designation (Sr., Jr., III, etc.). 

-  Check the SDN List entry for the type of information listed.  Frequently, the SDN List will contain passport numbers, Social Security or Tax ID numbers, nationality, place of birth, date of birth, cell phone number, and other information.  Get similar information from your customer to evaluate the legitimacy of the match.

- If there are a number of similarities or an exact match, call the OFAC hotline at 1-800-540-6322 and explain your knowledge or belief.  Leave an urgent message if you get a voice mail response.  Be sure to leave a return phone number and email address. 

Will I Get Caught if I Don’t Run an OFAC?

The answer is absolutely you will get caught if you do business with someone on the SDN List.  Banks and financial institutions are obligated to run sophisticated compliance software against new customers and that software is likely to detect any OFAC match.  In that case, the bank or financial institution is obligated to report the match to OFAC within 10 business days.  In reporting the match, they are obligated to name your dealership as the origin of the account.

In every case when such a report is made, OFAC will send an administrative subpoena to your dealership concerning the transaction in question as well as requesting documentation of your OFAC compliance in general.  They will want to see your OFAC compliance program and may audit your dealership’s deal jackets for timely OFAC checks on all cash and credit customer.

What are the OFAC Penalties for Noncompliance?

Criminal violations of statutes administered by OFAC can result in penalties ranging from $50,000 to $10,000,000, and/or up to 30 years imprisonment for willful violations.  OFAC also has authority to impose civil penalties of up to $1,075,000 per violation.

In 2010, OFAC assessed fines and penalties in 24 cases totaling $200,735,996.  Included among the penalized were entities that provided credit to individuals on the SDN List and entities that sold goods or services to SDN List individuals.  Today OFAC is actively investigating a number of auto dealers along with other entities.

In assessing fines and penalties, OFAC will take into consideration the nature of your OFAC Compliance Program generally.  OFAC will assess your compliance program in relation to the size and nature of your business.  Auto dealers are considered an important business to OFAC because drug lords, Cuban nationals, terrorists and their associates will try to launder money by purchasing a vehicle.  Selling a vehicle to one of these individuals may also raise liability risks under other U.S. laws but for OFAC purposes, a comprehensive program where a single customer managed to “fall through the cracks” will be viewed a lot differently than a haphazard or nonexistent OFAC program.

In fact, even if you have not run OFACs in the past, you should consider running them now.  An OFAC compliance officer told me that if you voluntarily self-report a transaction with someone on the SDN List, OFAC will consider a mitigation of liability of up to 50% for the voluntary disclosure.  In 2010, entities that voluntarily reported to OFAC paid a much smaller percentage of OFAC’s “base fine” for the activity in question. 

Being reported to OFAC by a bank or financial institution is not a voluntary disclosure and, as noted above, will result in an administrative subpoena and OFAC audit of the transaction and your entire program.  In 2010, an entity that did not voluntarily disclose its violation (sale of a jet engine ultimately intended for Iran) and withheld documents from an OFAC administrative subpoena response paid a fine of $225,000 where it’s “base fine” for the activity in question was $250,000.

Record-Keeping and Summary

Keep a record of your OFAC transactions for at least five years and keep a separate list with details of any persons with whom you declined to do business because you believed they were included on the SDN List.  Any rejected transaction must be reported to OFAC within 10 business days.  Call the OFAC hotline number (1-800-540-6322) for additional information on reporting rejected transactions.

OFAC is a serious matter and their compliance officer informed me that a number of auto dealerships are currently under investigation.  With six figure penalties common for violations, make sure you meet your OFAC obligations in connection with any sale (cash or credit) of a motor vehicle.

thecomplianceguide.com is intended for information purposes only and does not constitute the giving of legal or compliance advice to any person or entity. Because of the general nature of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on your particular situations and circumstances.