OFAC, what is it? Does it worry you? Don't be like one banker who thought that
OFAC was the name of a new NFL expansion team! Get informed!
OFAC stands for Office of Foreign Assets Control,
and yes you should be worried. If you do not have a system in place to protect
your bank from illegal money laundering by one of many SDN'S (Specially Designated
Nationals) or transactions involving one of a number of blocked countries, you
could be exposing your bank to substantial fines.
At a recent compliance seminar, a banker asked how long OFAC regulations had
been around. The speaker replied, "about 200 years -- it's known as doing
business with the enemy." A new twist, however, is that the U.S. Treasury
Department now requires that all banks and other financial institutions monitor,
block and report every attempted transaction by certain designated individuals
and organizations or face stiff fines and prison sentences for non-compliance.
This includes transactions involving U. S. currency, check processing, ACH activities,
wire transfers and letters of credit.
Are you worried yet?
Quoting from an ALERT Bulletin published by the U. S. Treasury Department, "Is
your cost/benefit analysis not winning any converts because OFAC has never fined
your bank or even contacted you about a possible violation? It may just
be a matter of time."
They continue, "Have you concluded that your small bank would simply not
be exposed to the kind of transactions OFAC would be interested in? Think again.
Small banks all over the country are being drawn into illegal transactions by
their customers: individuals wiring family remittances to relatives in Cuba and
Iraq, local exporters utilizing bank financing to cover prohibited shipments
from Iran, and individuals routing financial contributions to terrorists and
terrorist organizations, for example."
As examples, the U.S. Treasury ALERT bulletin
reports the following cases of illegal activities:
- "A small bank in Utah was fined $5,000 for merely advising a letter
of credit involving commercial activity in Libya. Before your bank issues,
confirms, amends or advises an L/C, the face of the credit should be examined
for OFAC issues."
- "A savings & loan in the Midwest took direct instructions from
a customer whose own name actually included the word "Serbian." The
S & L paid a civil monetary penalty of $9,000 after another U.S. bank
caught the transfer and correctly blocked the funds before sanctions were
suspended against the Federal Republic of Yugoslavia."
- "A federal savings bank in California was fined $5,000 for attempting
to transfer funds for a customer through the Arab Bank for Investment and
Foreign Trade (ARBIFT) in Abu Dhabi."
- "A credit union in Washington paid $9,000 for a similar transaction
involving Arab Turkish Bank (ATB) in Istanbul."
OFAC is not limited to banks. Insurance companies, securities and investment
firms, and import/export trading companies are also subject to OFAC regulations.
For example, an insurance company could be fined for issuing a life insurance
policy to an American citizen who named a Libyan citizen as one of the beneficiaries.
OFAC regulations provide for criminal prosecution with penalties ranging up
to 10 years in prison and $1 million in corporate fines and $100,000 in individual
fines, per incident. In addition, civil penalties can be assessed up to $50,000
per violation.
Bank examinations now include a review of written policies and operational
procedures to assure compliance with OFAC. Banks must establish adequate internal
controls to assure that the sanctions imposed by OFAC have not been violated.
With over 2000 names and aliases currently listed, some of which are changing
frequently, you need to consider a software interdiction system to protect
your bank.
In addition, correspondent banks will be screening transactions between other
banks and their bank for OFAC activities. The correspondent bank is required
to report any violation on the part of any respondent to OFAC within 10 days
which will result in penalties against the violating bank. This means if you
miss one, your clearing bank has to report you to OFAC to be fined.
How to Find the Right System for Your Bank
When considering an interdiction software system for your bank, the following
features should be an essential minimum before you make a decision to purchase:
- The system must be accurate
It must find a correct match even if a name is entered incorrectly. For example,
the system should be able to account for missing or extra letters, incorrect
letters, transposed letters, names run together, and varying name order.
The system should also check for initials, abbreviations, and alternate
foreign transliterations. If a name is missed, your bank may still be liable.
- The system should eliminate false positives
False positive matches can create a major waste of time if you have to check
an extended list of names because each false positive must be checked manually.
Current systems being marketed range from a high in excess of 1% (1000
false positives per 100,000 names checked) to a low of 1/10 of 1% (100
false positives per 100,000 names checked).
- The system should be fast
The system you select should be able to check names very quickly, thereby
reducing the intrusion in your work schedule. Current systems available
range in speed from 7 names per second to 4000 names per second.
- Automated updates of OFAC data
The system you select should update your watch list whenever new data is
released by OFAC, so that you can be assured of always being current. The
updating process should also be considered. Many interdiction solutions
have a complex updating system that requires extensive training. Others
are so user friendly, updating the system can be done in a matter of minutes.
- Reports produced by the system
The system you select should produce comprehensive reports or be able to
import the results into another database for further processing. Without
reporting capabilities, your job will be much more difficult.
- The cost of the system
The system should be relatively inexpensive, while providing the above minimum
features. There are three principal approaches taken by OFAC compliance
software developers, which are listed below along with survey price ranges
for each:
- Single name checking $300 to $2,000
- Database checking $600 to $3,500
- Annual update fees range from 30% to 100% of the original cost of the
system.
It should now be evident that there are wide ranges of prices and complexity
of systems. While OFAC regulations require that every financial transaction be
checked, it is totally unrealistic for any bank to consider doing it manually.
The choice is then to ignore the issue or to select the most cost effective system
available that will keep the bank in compliance. We all know from experience
that ignoring a law is not a viable option.
Most smaller banks don't really need the expensive, interactive, online systems
which will do all the checking automatically. However, they can still protect
themselves at a substantially lower cost by selecting a system that analyzes
their entire database whenever new OFAC data is released. From that point on,
only new customers need to be checked. There are low cost systems available that
include the CIF review plus new customer checking with almost no impact on existing
staff.
In summary, the system you select must be accurate, easy to implement, fast,
and cost effective. While some bankers believe that OFAC will not affect them,
they could be sitting on a time bomb, which could go off at any time. Like
Reg Z, OFAC is here to stay and it does affect you! Whatever you do, don't
be like one banker who said that his bank would rather budget for OFAC fines
as opposed to spending money to acquire a system to interdict blocked persons.
The only problem with that approach is that knowingly and willfully violating
such a federal law would likely become a criminal matter with jail time in addition
to fines. |
