Many companies (and individuals) believe “blocked” and “rejected” mean the same thing for purposes of transactions potentially subject to U.S. economic sanctions programs administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). They do not.

Confusing the two concepts can mean the difference between compliance and a violation of U.S. law in a strict liability setting. Depending on the scenario involving a sanctioned target, OFAC’s regulations may require either a blocking action or a rejection of the underlying transaction(s), with distinct legal and reporting obligations—particularly for U.S. persons. While reporting duties generally apply only to U.S. persons, non-U.S. persons should also be cognizant of both concepts in view of the extraterritorial reach of OFAC administered sanctions programs.

This article explains:

• The legal difference between blocked and rejected transactions.
• When reporting is required.
• Why this distinction is critical for businesses and financial institutions.

Blocked Property vs. Prohibited Transaction

With the exception of Cuba, all of OFAC’s sanctions programs stem from the International Emergency Economic Powers Act (“IEEPA”), either as their direct statutory basis and/or other statutes whose blocking provisions and prohibitions are modeled after IEEPA (See e.g., the Foreign Narcotics Kingpin Designation Act). For purposes of this article, we’ll refer to all such sanctions programs as “IEEPA based programs.” The primary statutory basis for OFAC’s Cuba sanctions program is the Trading with the Enemy Act (“TWEA”), IEEPA’s predecessor. OFAC administers these programs through regulations in 15 C.F.R. Chapter V.

IEEPA based programs generally define U.S. person to mean any U.S. citizen, permanent resident alien (i.e., green card holder), entity organized under U.S. laws (including foreign branches), or any person in the United States. The definitionincludes U.S. financial institutions.

Pursuant to its respective statutory mechanisms, IEEPA authorizes the President—with near unfettered discretion—to impose up to full blocking sanctions on a target, subject to limited exceptions. Such targets generally include persons (i.e., individuals and entities), governments, and countries/regions. IEEPA also authorizes the President to prohibit transactions with said targets, with varying degrees of comprehensiveness.

In practice, full blocking sanctions are imposed either on:

• Persons identified on OFAC’s Specially Designated Nationals or Blocked Persons (“SDN”) List (See e.g., E.O. 14024); or
• Specified governments, including Iran, North Korea, and Venezuela.

When full blocking sanctions are imposed on a target pursuant to IEEPA, U.S. persons that are or come within the possession or control of the target’s property interests—a very broadly defined term as detailed below—must block such property and not transfer, pay, export, withdraw, or otherwise deal in such property interests. This prohibition on dealing in the property interests of the blocked target includes a prohibition for U.S. persons to engage in virtually any transactions in funds, goods, or services with the target, whether directly or indirectly, unless authorized by OFAC or exempt under IEEPA.

Non-U.S. persons (i.e., individuals or entities that do not satisfy the applicable definition of U.S. person) are also prohibited from causing any U.S. person to engage in any such prohibited transactions (e.g., payment to a sanctioned target that is indirectly processed by a U.S. financial institution), but they are not required under any OFAC sanctions programs to block the property interests of the target that comes within their possession or control.

Pursuant to IEEPA, Presidents have also imposed comprehensive embargoes on certain countries and regions, which currently include:

• Iran;
• North Korea; and
• Occupied regions of Ukraine (i.e., Crimea, Luhansk, and Donetsk).

U.S. persons are prohibited from engaging in virtually any transactions with these countries and regions—particularly their nationals—unless authorized by OFAC or exempt under IEEPA. These countries and regions themselves aren’t subject to full blocking sanctions—although the governments of Iran and North Korea are—and therefore U.S. persons aren’t required to “block” the property interests of their nationals unless they are also identified on the SDN List, considered a faction of their blocked governments, or otherwise blocked for purposes of OFAC’s 50 Percent Rule (as described below). Again, non-U.S. persons are also prohibited from causing any U.S. persons to engage in these comprehensive embargo-based prohibited transactions.

OFAC’s TWEA based Cuba sanctions program—implemented under the Cuban Assets Control Regulations (“CACR”), 31 C.F.R. Part 515—has similar full blocking requirements and a comprehensive embargo for persons subject to U.S. jurisdiction in relation to Cuba, its government, and its nationals. The term person subject to U.S. jurisdiction is slightly broader in scope than the term U.S. person as used in IEEPA based programs, extending to foreign entities owned or controlled by U.S. nationals or entities (OFAC’s Iran and North Korea regulations also similarly extend their prohibitions). In distinct contrast to OFAC’s IEEPA’s based comprehensive embargoes, the CACR impose full blocking sanctions on any Cuba nationals’ property interests (subject to certain exclusions), regardless of whether they are identified on the SDN List. This is in addition to the comprehensive embargo on Cuba, prohibiting virtually any transaction with the country, its government, and nationals. 

Various IEEPA based programs maintain prohibitions that are much more limited in scope than full blocking sanctions or comprehensive embargoes. Many such programs also have their own lists administered by OFAC.  For example, under OFAC’s Russia-related sanctions programs U.S. persons are prohibited from engaging in certain types of defined transactions—e.g., dealings in new debt of specified tenors or new equity of persons subject to Directive 1, as amended, under E.O. 13662, or Directive 3 under E.O. 14024—with persons identified on OFAC’s Sectoral Sanctions Identifications (“SSI”) List or OFAC’s Non-SDN Menu-Based Sanctions (“NS-MBS”) List. The Russia-related sanctions programs also maintain certain limited transactional prohibitions for U.S. persons in relation to Russia (e.g., any new investments in Russia under E.O. 14071). Non-U.S. persons are also prohibited from causing any U.S. persons to engage in these prohibited transactions.

It is also important to note with regard to IEEPA based programs that any attempts to violate applicable sanctions prohibitions is itself prohibited.

OFAC’s 50 Percent Rule

Pursuant to OFAC’s 50 Percent Rule:

• An entity that is owned 50% or more by a person subject to full blocking sanctions (including a blocked government), directly or indirectly, whether individually or in the aggregate, is automatically blocked (i.e., “constructively blocked”);
• The same blocking requirements and prohibitions apply to the constructively blocked entity; and
• This applies even if not listed on the SDN List.

OFAC’s 50 Percent Rule also applies to many other of the less restrictive lists administered by the agency, including for example the SSI List. As with the persons actually identified on such lists, any entities subject to the same less restrictive sanctions because of the application of the 50 Percent Rule are not required to have their property interests blocked by U.S. persons. In short, application of the rule to such other OFAC lists extends the same transactional prohibitions that fall short of full blocking sanctions.

Reporting Obligations

Blocked Property

OFAC’s regulations in 31 C.F.R. § 501.603 require U.S. persons (or persons subject to U.S. jurisdiction for purposes of the CACR) that have in their possession or control any property required to be blocked pursuant to OFAC’s sanctions programs, to file:

• An initial blocking report within 10 business days from the date that the property becomes blocked;
• Annual reports by September 30for all blocked property held as of June 30 of the current year; and
• Reports within 10 business days from the date blocked property is unblocked or transferred pursuant to a valid order from a U.S. government agency or U.S. court, subject to certain specified exceptions in § 501.603.

The required information for all such reports and relevant filing instructions through the online OFAC Report System (“ORS”) are detailed in § 501.603. Although these reports may be filed by an attorney, agent, or other person, the primary responsibility to report rests with the actual holder, transferrer, or releaser of the property, or the person exercising control over property located outside the United States, subject to the following exceptions: primary responsibility for reporting any trust assets rests with the trustee; and primary responsibility for reporting real property rests with any U.S. co-owner, legal representative, agent, or property manager in the United States. While non-U.S. persons are generally not required to block and report property interests that U.S. persons would otherwise be required to blocked under OFAC’s sanctions programs, they may still find themselves in a situation where they have the primary responsibility to report.

Failure to file a required blocking report is subject to civil enforcement action by OFAC that may result in civil monetary penalties.

Once a property is reported as blocked to OFAC, even if it was in error, it can only be unblocked pursuant to an OFAC license (See, OFAC FAQs #9 and #402) or pursuant to certain procedures that are only available to financial institutions with regard to property believed to have been blocked in error due to mistaken identity. Blocked property is not the same as a legal seizure where the property may legally vest in the government or with a third party. Title to the blocked property remains with the blocked person while the sanctions are in place, but the exercise of powers and privileges normally associated with ownership is prohibited without authorization from OFAC.

Rejected Transactions

As detailed above, many OFAC administered laws prohibit U.S. persons (or persons subject to U.S. jurisdiction) from engaging in a transaction in which there is otherwise no simultaneous requirement to block any underlying property interests that come into their possession (e.g., the prohibitions related to the SSI List). Furthermore, even an intended transaction with an SDN, blocked government, or constructively blocked party (i.e. full blocking sanctions) may not lead to a circumstance in which a U.S. person comes into possession of any blockable property, but where engaging in the transaction itself would be prohibited (e.g., an SDN proposing business). While there are no blocking-related reports required for such transactions, U.S. persons would need to abstain from engaging in them (remember that even attempt is prohibited), and must still file a rejected transaction report with OFAC within 10 business days in accordance with 31 C.F.R. § 501.604 through ORS.

Failure to file a required rejected transaction report is also subject to civil enforcement action by OFAC that may result civil monetary penalties.

While non-U.S. persons may be prohibited from engaging in a transaction under relevant OFAC sanctions programs because doing so may cause a U.S. person to engage in a prohibited transaction, such non-U.S. persons are not required to file a rejected transaction report. However, engaging in any such transactions could still subject the non-U.S. person to civil and/or criminal liability. For non-U.S. persons, there is also always the risk of so-called secondary sanctions when dealing with U.S. sanctioned targets (e.g., “secondary sanctions” on Russia).

Why the Distinction is Critical

For Individuals and Businesses

Compliance requires more than just screening names as part of a restricted party screening process. Once a sanctioned party is identified, you must quickly determine:

• Is the transaction prohibited?
• Is there blockable property in your possession or under your control?

If it is only prohibited with no blocking requirement applicable, then only a rejection report would be required. However, if there is in fact a blockable property interest, then you must:

• Block it and prevent any further dealing in the property;
• Take heed of all relevant blocking reports required by OFAC; and
• Maintain compliance with OFAC’s regulations as to the handling of such property while the relevant sanctions are in place (See e.g., expenses of maintaining blocked tangible property in 31 C.F.R. § 587.204).

Even if there is no intended or ongoing transaction involving a sanctioned target, a U.S. person may already be in the possession or control of a blockable property interest that will need to be blocked and reported. For example, as illustrated by the broad regulatory definition of property interest below, the accounts payable of a business may include a former vendor to whom payment is still owed. Such a property interest will need to be identified for prompt blocking and reporting to OFAC, with the business ensuring that any further payment requests from the vendor are appropriately handled. Therefore, it may be prudent for a business with the relevant risk profile to subject existing and historic customers and vendors to regular ongoing restricted party screening as well.

In addition, you should be careful not to erroneously conclude that a transaction only needs to be rejected because there is no apparent property interest of a sanctioned target that would legally require blocking. Keep in mind that the term property interest is very broadly interpreted by OFAC for all of its sanctions programs, and is generally defined to include all of the following:

• Money, checks, drafts, bullion, bank deposits, savings accounts, debts, indebtedness, obligations, notes, guarantees, debentures, stocks, bonds, coupons, any other financial instruments, bankers acceptances, mortgages, pledges, liens or other rights in the nature of security, warehouse receipts, bills of lading, trust receipts, bills of sale, any other evidences of title, ownership, or indebtedness, letters of credit and any documents relating to any rights or obligations thereunder, powers of attorney, goods, wares, merchandise, chattels, stocks on hand, ships, goods on ships, real estate mortgages, deeds of trust, vendors’ sales agreements, land contracts, leaseholds, ground rents, real estate and any other interest therein, options, negotiable instruments, trade acceptances, royalties, book accounts, accounts payable, judgments, patents, trademarks or copyrights, insurance policies, safe deposit boxes and their contents, annuities, pooling agreements;
• Services of any nature whatsoever, contracts of any nature whatsoever, and any other property, real, personal, or mixed, tangible or intangible, or interest or interests therein, present, future, or contingent.

The term interest itself is broadly defined to include an interest of any nature whatsoever, direct or indirect.

Failing to properly account for blocked property can lead not just to reporting violations, but also potential ongoing violations of the relevant legal prohibitions. For example, in a November 2025 OFAC civil enforcement action, a U.S. individual was found to have engaged in multiple violations of OFAC’s Russia-related sanctions program and assessed a $4,677,552 civil monetary penalty when the individual failed to recognize that real property was still blocked after it transferred through foreclosure, and continued to deal in it by renovating and mortgaging it, and then selling the property to a third party.

For Financial Institutions

U.S. financial institutions face heightened compliance risks due to;

• OFAC’s regulations requiring the holding of blocked funds in interest-bearing accounts, as well regulations related to their investment and reinvestment (See e.g., 31 C.F.R. § 587.203);
• Othe regulations related to the management of such blocked accounts; (See e.g., 31 C.F.R. § 587.505); and
• Time sensitive wind down and divestment general licenses in which they are a key player, and that may require certain categories of payments to be blocked vs. rejected.

For example, a financial institutions was previously been found to have violated OFAC’s reporting regulations for failing to block and report dormant accounts of SDNs on its books. Historically speaking, financial institutions have regularly been the subject of hefty OFAC civil penalties.

Consequently, financial institutions have been prone to taking an interpretation of their blocking obligations that is much broader than what the law requires. I have had many clients in which upon closer examination of a blocking action of their funds, it was clear that the financial institution (including crypto exchanges) should have at most rejected the customer transaction as opposed to blocking and reporting it to OFAC. Even if the blocking was in error, the clients still had to apply to OFAC for an unblocking license. It is therefore no surprise that OFAC amended its regulations in 2024 to further enable financial institutions to unilaterally unblock certain property blocked and reported in error due to mistaken identity or typographical or similar errors.

Over-blocking has exposed banks to civil litigation by their customers in the past. See e.g., Hausler v. JPMorgan Chase Bank, N.A., 845 F. Supp.2d 553 (S.D.N.Y. 2012); JPMorgan Chase Bank, N.A. v. VTB Bank  (S.D.N.Y. 2012). Financial institutions giving themselves the benefit of the doubt as to whether a blocking action ends up being erroneous in retrospect appears to boil down to their calculation that whatever the harm done to customers in the process is outweighed by the cost of resources they wish to allot to proper compliance (e.g., better trained staff) and the risk of hefty civil penalties for any violations in a strict liability area of law.  

Recordkeeping Requirements

Regardless of any applicable reporting requirements, I’ll finish off this article by underscoring OFAC’s recordkeeping requirement in 31 C.F.R. § 501.601: every person engaging in any transaction subject to the provision of OFAC’s sanctions programs must for at least 10 years maintain full and accurate records for any such transaction. This requirement applies to both U.S. and non-U.S. persons. OFAC may request such records on demand, including through administrative subpoenas. Failure to comply can lead to civil enforcement action with monetary penalties.

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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 meshkat@meshkatlaw.com.