On October 7, 2024, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) confirmed some rather significant changes to its unblocking procedures for blocked property, which will have a notable impact on organizations’ sanctions compliance efforts. Most of these changes were initially announced in an interim final rule on May 10, 2024 and became effective as of August 8, 2024, with a fractional remainder to become effective on November 7, 2024. In this article I break down these regulatory and policy changes that are specific to the agency’s Procedures for unblocking property believed to have been blocked and reported in error due to mistaken identity or typographical or similar errors—codified in 31 C.F.R. § 501.806—as well as provide relevant compliance considerations.
For reasons explained below, the newly added term “similar errors” is likely to cause some confusion in relation to OFAC’s revamped unblocking procedures, which the agency may need to further clarify in future public guidance. Nevertheless, overall, these changes simplify the process for persons that initially blocked property and reported it to OFAC, while arguably making it more difficult for all other parties with an interest in such property. In short, the former can now just file a report with OFAC to unblock blocked property in certain defined instances, whereas the latter will need to submit a specific license application to OFAC in all instances.
Relevant Background
On May 10, 2024 OFAC issued an interim final rule to amend its Reporting, Procedures and Penalties Regulations (the “Regulations”), 31 C.F.R. Part 501—which set forth general procedures relevant to economic sanctions programs administered by OFAC—to require the electronic filing of certain submissions to the agency, and to describe and modify certain reporting requirements related to blocked property and rejected transactions. This interim final rule was to become effective August 8, 2024, with written comments from the public to be submitted before June 10, 2024.
In relevant part, the interim final rule revised OFAC’s existing procedures at 31 C.F.R. § 501.806 for requesting the release of funds blocked due to “mistaken identity” to extend to a broader category of any property blocked due to “typographical or similar errors leading to blocking.” It also narrowed the scope of these procedures to only be available to the person that blocked and reported the property, whereas before they were available to any person party to the transaction. Such persons that mistakenly blocked the property under such circumstances would now be able to request a “Compliance Release” (more on that term later) from OFAC’s Compliance Division, whereas all other persons would continue to request unblocking of property through specific license applications submitted to OFAC’s Licensing Division.
On October 7, 2024, OFAC responded to public comments made to the interim final rule, including in relation to 31 C.F.R. § 501.806, in a final rule that is to become effective November 7, 2024. No changes were made for the interim final rule specific to § 501.806, which otherwise became effective as of August 8, 2024, although OFAC did separately clarify its position on the available methods for unblocking of property believed to have been blocked and reported in error due to mistaken identity or typographical or similar errors, in response to certain noted public comments, by publishing Frequently Asked Question (“FAQ”) #1196 on October 7, 2024. As described below, the guidance provided in this specific FAQ will have a substantial impact on the unblocking process, removing the need to make any unblocking requests to the agency in certain instances.
Summary of Changes in Relation to 31 C.F.R. § 501.806
In consideration of OFAC’s most recent regulatory updates and published guidance in relation to 31 C.F.R. § 501.806, the following procedures are available for unblocking property reported as blocked—purportedly pursuant to 31 C.F.R. § 501.603—under any OFAC administered sanctions programs (my attempt at a summary).
A party that has itself blocked and reported to OFAC property pursuant to the agency’s sanctions programs due to “…mistaken identity or typographical or similar errors…” may seek such property’s unblocking by either: (a) requesting a “Compliance Release” from OFAC pursuant to the revamped administrative procedures detailed in § 501.806; or (b) unblock such property of their own accord after filing an unblocking report with OFAC consistent with the reporting procedures described in 31 C.F.R. § 501.603(b)(3). For the latter option, § 501.603(b)(3(ii)(F) requires a citation to the legal authority or authorities under which the property was unblocked, and OFAC has confirmed that the reporting person can cite “FAQ #1196” for that purpose.
This latter self-release process will allow parties that have blocked property and reported it to OFAC due to the various types of mistakes, to no longer have to apply and wait for OFAC’s long processing times for applications. However, if the blocking party is uncertain whether their blocking was due to “mistaken identity or tyogrphical or similar errors,” they should resort to the former “Compliance Release” procedures, and not the latter option. All other parties to a transaction that resulted in a blocking (i.e., parties other than the blocking party) will need to request unblocking of the property through license applications submitted to OFAC’s Licensing Division.
Public commentators to the interim final rule for “Compliance Releases” had asked OFAC to clarify the circumstances that fall under the “similar error” category, amongst other requests. Unfortunately, OFAC made no changes to the rule in response to any such comments, including in providing any relevant definition or interpretation for the term “similar errors.” However, OFAC did specifically state while discussing such commentary that it does not require persons to use the “Compliance Release” procedures in the updated § 501.806 for unblocking property believed to have been blocked and reported in error due to mistaken identity, or typographical or similar errors. In doing so, the agency shed some light on its own interpretation of the term “error,” noting that persons can treat the property that was blocked in error as not blocked in the event they determine that there was never any valid blockable interest in the property, provided that they notify OFAC of the change. The agency noted that it plans to issue relevant guidance, which may have been a reference to relevant guidance published in FAQ #1196, but this cannot be confirmed.
I’ve represented numerous clients over the years whose property interests were erroneously blocked and reported property to OFAC, not because of mistaken identity or typographical errors, but because a party in possession/control of such property had mistaken or misunderstood the applicable scope of relevant OFAC administered laws and regulations (i.e., a “mistake of law” as opposed to a mistake of identity or typographical error). For example, an intermediary U.S. financial institution (yes, banks compliance divisions get it wrong, a lot!) would block and report to OFAC funds that it was processing, in which an entity on the Sectoral Sanctions Identifications (“SSI”) List pursuant to a directive had an interest. While entities solely identified on the SSI List have certain transactional prohibitions that apply to them pursuant to OFAC’s relevant directives (e.g., certain debt and credit limitations), there is no “blockable” interest, even if processing a transaction would be prohibited under an applicable directive. In short, the bank was never supposed to block the underlying property interest to begin with, and at most they would be required to reject processing the transaction and then report it to OFAC on that basis.
OFAC’s response to the public comments for the interim final rule of § 501.806, read in conjunction with FAQ #1196, suggest that in instances where a party reporting blocked property later confirms that there never was a valid blockable interest—e.g. the SSI List example above—such party could just proceed to unblock it on their own motion by filing the necessary reports with OFAC (or submit a “Compliance Release” if they want to). However, OFAC’s failure to further clarify or define the circumstances that would full under the “similar error” category in § 501.806 itself, nor in any related FAQs, leaves parties that may have reported blocked property to OFAC because of a misunderstanding of the scope of applicable OFAC administered sanctions programs (i.e., “mistake of law”), as opposed to just mistaken identity or typographical errors, uncertain from a regulatory perspective if they can indeed unblock such property solely by filing an unblocking report with OFAC pursuant to FAQ # 1196, or even pursuant the agency’s “Compliance Release” process.
OFAC also declined in response to the public comments to make the compliance-release procedure available to any party to a blocked asset transaction (not just the reporting party), because specific licensing procedures remain available to those additional parties for the release of blocked funds. Therefore, parties to a blocked asset transaction will no longer be able to use the unblocking process as they otherwise could before August 8, 2024, and will now need to apply for a specific license to OFAC in all instances.
Furthermore, “Compliance Release” requests under § 501.806 will now only need to be sent via email to [email protected], as opposed to the previously provided mailing address of OFAC’s Sanctions Compliance & Evaluation Division. Unblocking reports made pursuant to FAQ #1196 must also be submitted via email to the same address, as detailed in the revamped 31 C.F.R. § 501.603.
Compliance Considerations
Organizations with risk exposure to OFAC sanctions programs should consider implementing and/or updating their respective sanctions compliance programs to account for the agency’s regulatory and policy changes in relation to 31 C.F.R. § 501.806, as well as other relevant updates to the agency’s overall Regulations in 31 C.F.R. Part 501 that I haven’t covered in this article. In relevant part, this includes internal procedures for administering the unblocking of property interests that have been reported as blocked to OFAC, especially where a mistake has been made by the reporting party. While blocking mistakes made as a result of identity or typographical errors will be more straightforward to handle in relation to the changes summarized above in relation tot § 501.806, for instances falling under the broader “similar errors” category—including “mistakes of law”—consider reaching out to OFAC to confirm that the simpler process in FAQ #1196 would be applicable before making use of it. Hopefully OFAC provides additional guidance on that issue, and until then the “Compliance Release” process or a specific license application are likely the more appropriate means for addressing blockings resulting from the “similar errors” category.
To avoid mistaken blockings to begin with, organizations should heed OFAC’s own advice set forth in response to public comments to its May 2024 Interim Final Rule for § 501.806. Specifically, ensure that you have developed “…screening and due-diligence procedures that appropriately identify blocked property and, as needed, use the process to request a compliance release, which can provide OFAC an opportunity to confirm the factual assessment and help avoid situations where a transaction is erroneously processed or released in violation of U.S. economic sanctions laws.” Unfortunately, the “appropriate” identification of blocked property must be made within 10 business days from the date that the property becomes blocked under OFAC’s blocked property reporting requirements in 31 C.F.R. § 501.603. Therefore, where warranted under an organization’s sanctions risk profile (and subject to allocated resources for compliance efforts), the use of in-house subject matter experts and/or outside counsel should be relied upon to ensure that blockings and relevant reports to OFAC are indeed appropriate.
The author of this blog post is Kian Meshkat, an attorney specializing in U.S. economic sanctions and export controls matters. If you have any questions please contact him at [email protected].
