Revised OFAC Rule Requires Rejected Transaction Reporting

On June 21, the Department of the Treasury’s Office of Foreign Assets Control (“OFAC”)(1) issued an interim final rule(2) that included, among others, new requirements for all US Persons to file reports on rejected transactions. In the past the requirement to report on rejected transactions only applied to financial institutions that rejected a “funds transfer” where processing the transaction may violate OFAC’s rules.

Reports on Rejected Transactions

The rule revises § 501.604(3) to:

  • Clarify that the section applies to all rejected transactions (not only to rejected funds transfers)

    • OFAC replaced references to “rejected fund transfers” with references to “rejected transactions” and added a definition for the term “transactions”

    • The term transaction includes transactions related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services(3);

  • Provide additional details around the information that should be provided to OFAC in connection with reports on rejected transactions;

  • Provide guidance on where/how to report the information on rejected transactions; and

  • Make other technical and conforming changes.

Other Revisions

  • Revising § 501.603(4) to provide more detail regarding information to be reported in connection with blocking reports;

  • Revising § 501.801(5) to include information regarding OFAC’s electronic license application procedures; and

  • Other technical and conforming changes to § 501.602(6), § 501.701(7), and § 501.806(8).

The interim final rule was effective on June 21, 2019 and comments were allowed to be submitted until July 22, 2019.

Contact our Advisory team to learn more about this rule change.

References

  1. US Department of the Treasury - Office of Foreign Assets Control

  2. 84 FR 29055-29062

  3. 31 CFR 501.604

  4. 31 CFR 501.603

  5. 31 CFR 501.801

  6. 31 CFR 501.602

  7. 31 CFR 501.701

  8. 31 CFR 501.806

U.S. Sanctions NK and Chinese entities supporting Kim Regime

On January 24, 2018, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) sanctioned an additional nine entities, 16 individuals, and six vessels related to North Korea's violations of UN Security Council Resolutions (UNSCRs).  

The actions target actors located in North Korea, China, Russia, and Georgia.

"Treasury continues to systematically target individuals and entities financing the Kim regime and its weapons programs, including officials complicit in North Korean sanctions evasion schemes," - Secretary of the Treasury Steven T. Mnuchin (1)

Summary of OFAC Actions Taken

  • Designated 10 representatives of the Korea Ryonbong General Corporation (Ryonbong) and one Workers' Party of Korea official - Pursuant to Executive Order (EO) 13687
  • Designated 5 additional North Koreans with links to North Korean financial networks - Pursuant to EO 13810 or 13687
  • Designated Beijing Chengxing Trading Co. Ltd., Dandong Jinxiang Trade Co., Ltd., and Hana Electronics JVC - Pursuant to EO 13810
  • Designated five North Korean shipping companies (Gooryong Shipping Co Ltd, Hwasong Shipping Co Ltd, Korea Kumunsan Shipping Co, Korea Marine & Industrial Trdg, and CK International Ltd) and blocked six vessels (Goo Ryong, Hwa Song, Kum Un San, Un Ryul, Ever Glory, and UL JI Bong 6) as property of these five companies - pursuant to EO 13810
  • Sanctioned the North Korean Ministry of Crude Oil Industry

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Customer Due Diligence Requirements

On May 11, 2016 the Department of the Treasury, Financial Crimes Enforcement Network (FinCEN) published final rules (81 FR 29397-29458) under the Bank Secrecy Act to clarify customer due diligence requirements for Banks; brokers or dealers in securities; mutual funds; and futures commission merchants and introducing brokers in commodities. 

Unlike most other federal agencies where they've taken the approach to provide guidelines or inferred expectations around customer due diligence, these rules contain explicit customer due diligence requirements.

FinCEN makes the case that there are four core elements of customer due diligence (CDD):

  • Customer identification and verification (already a requirement)
  • Beneficial ownership identification and verification (required by the new final rule)
  • Understanding the nature and purpose of customer relationships to develop a customer risk profile (implicitly required already and will now be explicitly required by the new final rule)
  • Ongoing monitoring for reporting suspicious transactions and, on a risk-basis, maintaining and updating customer information (implicitly required already and will now be explicitly required by the new final rule)

These four core elements are also good basic guidelines for any global business, regardless of industry, with third party relationships.  Companies that fail to maintain an adequate level of oversight of their third parties risk conducting business with people and entities that do not share their same values for integrity.  This can lead to relationships that end with compliance failures that could damage the company's reputation and in some instances result in criminal/civil penalties.

A good third party due diligence program will include these basic elements:

  • Written policy with Executive level support
  • Third Party verification and screening against denied party/restricted party lists as well as for adverse media events
  • Desktop procedures that include when, what and how a third party is to be on-boarded and for how an existing third party relationship is to be monitored (for changes in their risk profile)
  • Red Flags awareness and a process for handling Red Flags as they arise
  • Prioritization of third parties by level of risk and categorization by required levels of due diligence (low, moderate, high)
  • Training    

Global Compliance Solution Group (GCSG) is well versed in assessing and implementing corporate third party due diligence programs.  If you have any questions or needs in this area please contact us directly at j.mellard@globalcompliancesg.com or +1-225-229-2984. 

The final rules become effective on July 11, 2016 and covered institutions must fully comply by May 11, 2018.

Key definitions:

  • Third Party - means customers or intermediaries that conduct business on a company's behalf with persons outside of the company and encompasses those contracted in both sales and supply channels.
  • Intermediaries - may include joint venture partners, consortium partners, agents, advisor (e.g. legal, tax, financial, consultant, lobbyist), supplier, vendor, service provider (e.g. communications, logistics, storage, brokers, forwarders, etc.) or distributor/reseller. 

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