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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   July 2012

Check the List Twice

Avoid individuals and entities on the Office of Foreign Assets Control list

Check the List Twice

Commercial mortgage brokerages  certainly don’t work in isolation from the rest of the market. They are, therefore, prone to fraud attempts and criminal activities, just like any other business that deals with money coming from different sources and entities. That’s why it’s important for mortgage brokers to stay abreast of regulations to avoid legal pitfalls and costly penalties.

The federal government has made extensive efforts to make sure that criminals and terrorists are not allowed to use ill-gotten money. The Office of Foreign Assets Control (OFAC) is one of the primary agencies that regulate potentially illegal transactions. It also monitors mortgage lenders and originators, among other organizations, to ensure no violations are committed. 

As compliance becomes more of a focus in the real estate industry, commercial mortgage brokers must be aware that lenders are faced with the task of ensuring full compliance with the most up-to-date rules and regulations to avoid facing heavy financial penalties.

Compliance requires a thorough understanding of OFAC’s role and scope of monitoring, as well as what individual lenders can do to simplify the monitoring process.

What is OFAC?

The OFAC mission statement defines its role as administering and enforcing economic trade sanctions based on U.S. foreign policy and national security goals against selected targets. In other words, OFAC exists to help keep money out of the hands of terrorists, money launderers, drug dealers and other potential enemies of the United States. It functions under presidential national emergency powers, with the authority granted by specific legislation, to impose controls on transactions and freeze assets under U.S. jurisdiction. This jurisdiction includes:

  • U.S. citizens, wherever they are located;
  • Permanent-resident aliens; 
  • Any person located in the U.S., and
  • Companies incorporated in the U.S. and their non-U.S. branches (excluding Cuba).

Because its scope reaches far beyond U.S. borders, OFAC has explicit guidelines that businesses, including commercial lenders and originators, must strictly adhere to at all times. 

The blacklist

The primary way OFAC enforces its rules is by providing a detailed list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. The list also includes individuals, groups and entities that are considered terrorists or narcotics traffickers, and are designated under the various sanction programs that are not specific to a certain country.

This Specially Designated Nationals (SDN) and Blocked Persons list is commonly referred to as the OFAC list. OFAC also classifies the various sanction programs into three categories: list-based (noncountry specific), list-based (country specific) and country-based.

The OFAC list almost can be thought of as a phonebook of people, companies and countries with which to avoid doing business. In most cases, the assets they hold are blocked and mortgage professionals — along with any other business — generally are prohibited from dealing with them.

The list also is constantly updated, and therefore commercial mortgage brokers must be mindful of any changes being made, as there may not be a grace period following an update. In the event that a covered person is found to be in violation of a sanction issued in accordance with one of the five governing statutes, they could face civil penalties carried by each statute, which include:

  • Anti-Terrorism and Effective Death Penalty Act: $55,000
  • Trading with the Enemy Act: $65,000
  • International Emergency Economic Powers Act: $250,000 (or twice the value of the transaction, whichever is greater)
  • Foreign Narcotics Kingpin Act: $1,075,000

Compliance

The best way to mitigate your risk of potential OFAC violations is by having a structured compliance program in place. The most valuable components of a successful compliance program include:

  • Documenting the risk profile;
  • Creating written policies and procedures based on potential risks;
  • Having designated employees responsible for OFAC compliance;
  • Educating existing and new staff on the latest OFAC sanctions; and 
  • Staying informed of any ongoing changes.

In addition, commercial mortgage brokers should keep a close watch on their transactions to avoid compliance violations. All new relationships should be thoroughly screened before engagement. All accounts — even existing ones — should be re-examined when the OFAC list is updated, and systems should be in place to quickly handle potential and positive matches if they arise.

Automated solutions can be used to match customer data to the SDN list. These solutions handle all of the institution’s OFAC compliance needs and greatly decrease the time and work required of the institution’s employees. Such software can quickly scan all customers and flag any potential matches.

If a potential match has been identified, there are four key steps that must be followed to determine if the hit is a positive match:

  1. Determine if the potential match is made against the SDN list or the targeted-countries list. If the hit is related to OFAC sanctions, qualify the potential match.
  2. Compare information from the SDN list against the information provided by the potential account holder or customer. Determine any similarities, matching names or other information on the SDN list. The point is to obtain enough information to adequately qualify a match.
  3. If the information substantially matches, proceed with established internal procedures, ensure that no prior transaction has occurred with the party in question and place the transaction on hold. 
  4. Be prepared to contact OFAC as soon as possible and provide the needed information to block or reject the transaction. 

Voluntary self-disclosure

A transaction may slip through the process, most often when a new name or additional information is added to the SDN list. In the event that a known or potential violation occurs, OFAC encourages voluntary self- disclosure. In these cases, if a civil monetary penalty is incurred as a result of the violation, the voluntary self-disclosure (VSD) would be taken into consideration when setting the base penalty. Think of this as the equivalent of taking a plea deal in exchange for a lesser punishment.

The presence of a VSD generally will result in a reduction of at least 50 percent in the base penalty amount, which is established under the preceding applicable statute. From there, the final penalty is adjusted based on other general factors detailed in OFAC’s enforcement guidelines.

Remember, the key to a successful OFAC disclosure is submitting a notice as soon as the violation is discovered, as well as collecting adequate information to be included in the final disclosure. Long delays and insufficient information could jeopardize the voluntary aspect of the disclosure and result in a much higher penalty.

Commercial mortgage brokers who are faced with the task of completing a VSD should focus on providing OFAC with pertinent information to help their cases, such as:

  • Precise description of the nature and extent of the violation;
  • Complete discussion of the exact circumstances surrounding the incident;
  • List of past, present and future corrective actions taken; and
  • Names and addresses for all involved parties.

Although this process may be time-intensive, proper cooperation with OFAC could reduce penalties and prevent further consequences.

• • •

For commercial mortgage brokers and lenders alike, understanding the risk is only half the battle. Actively monitoring customer lists to avoid potential violations can keep you well-versed in the various components related to OFAC and drastically decrease the odds of a violation.  


 


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