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Analysis and Takeaways from the DOJ’s and SEC’s Recently Released Second Edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act

The Criminal Division of the U.S. Department of Justice (DOJ) and the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) released the Second Edition of A Resource Guide to the U.S. Foreign Corrupt Practices Act (FCPA) on 3 July 2020 (the “2020 Resource Guide”), updating the first edition released in November 2012 (the “2012 Resource Guide”). The 2020 Resource Guide does not make fundamental changes to the structure and general guidance provided by its predecessor, but serves as a repository of developments in case law and guidance issued since 2012, including the DOJ FCPA Corporate Enforcement Policy, Selection of Monitors in Criminal Division Matters, Coordination of Corporate Resolution Penalties (or Anti-Piling On Policy), and the Criminal Division’s Evaluation of Corporate Compliance Programs.

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OFAC Expands Reporting Requirements for Rejected Transactions


Time to Read: 2 minutes Practices: Anti-Corruption / International Risk

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In late June, with minimum notice or fanfare, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an interim final rule (the “Interim Rule”) that, inter alia, introduced new, broad requirements for covered parties to report rejected transactions. The Interim Rule amended the Reporting, Procedures and Penalties Regulations (“RPPR”), 31 C.F.R. § 501 et seq., which set out reporting, recordkeeping, and license-related procedures relevant to the economic sanctions programs administered by OFAC. These changes took effect on June 21, and OFAC has invited comments on the Interim Rule through July 22, 2019.

Background

Persons subject to U.S. jurisdiction—including, for purposes of the Cuba and Iran sanctions, non-U.S. entities that are majority-owned or controlled by a U.S. firm—are subject to certain blocking and reporting requirements under U.S. economic sanctions. In particular, covered parties have long been required to block the property (typically, funds) of sanctioned parties—i.e., parties included on the Specially Designated Nationals (“SDN”) List, as well as entities majority-owned by SDNs (collectively, “Blocked Persons”)—that come within their possession or control.

“Blocking” property involves transferring the property to a segregated, interest-bearing account, from which only OFAC-authorized debits may be made. Covered parties who block the property of Blocked Persons are required to file a report with OFAC within ten business days, as well as an annual report of all blocked property. Although the Interim Rule clarifies the information that must be included in reports of blocked property, the rule does not change the scope of the preexisting blocking requirement.

In addition, prior to publication of the Interim Rule, financial institutions (at minimum) were required to reject—but not block—proposed transactions where the transaction would be prohibited under U.S. sanctions, but there is no blockable property interest. In this context, “rejecting” a transaction means refusing to process the transaction. As with blocking measures, covered parties who reject a transaction must file a report with OFAC within ten business days.

Expansion of Reporting Requirements

The Interim Rule clarifies—and thereby expands—the scope of OFAC reporting requirements for rejected transactions in two key respects:

  • First, the rule clarifies that the reporting requirement applies to all rejected transactions, and not just rejected fund transfers. In particular, the rule clarifies that the reporting requirement extends to rejected transactions related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services.
  • Second, the rule clarifies that the reporting requirement applies to all parties subject to U.S. jurisdiction and is no longer limited to financial institutions.

Collectively, these changes significantly expand the scope of transactions that must be self-reported to OFAC. As amended, the RPPR now appear to require that covered parties report all contemplated transactions involving embargoed countries that covered parties elect not to pursue for sanctions-related reasons. For example, a majority-owned German subsidiary of a U.S. firm now appears for the first time to be required to report prospective transactions involving Cuban or Iranian counterparties that do not move forward, if the transaction is not consummated for sanctions-related reasons. Failure to comply with the new mandatory reporting requirement for rejected transactions would constitute an independent violation of the OFAC sanctions regulations.

Conclusion

In view of the cost and administrative burden that these recent changes will impose upon companies subject to U.S. jurisdiction, many stakeholders likely will submit comments encouraging OFAC to narrow the scope of the Interim Rule’s reporting requirement for rejected transactions. However, unless and until OFAC issues new rulemaking, companies subject to U.S. jurisdiction should promptly review their sanctions-related escalation procedures, to ensure compliance with the newly expanded reporting requirements.

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