The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, the foreign policy, or the economy of the United States. See OFAC Mission Statement. The OFAC acts under presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and to freeze assets under U.S. jurisdiction. Many of the sanctions are multilateral in scope, based on U.N. and other international mandates, and involve close cooperation with allied governments.
Congress has provided statutory authority for the OFAC regulatory regime through various legislation. See, e.g., National Emergencies Act , 20 U.S.C. § 1641 (1976); International Emergency Economic Powers Act, P.L. 95–223 (Oct. 28, 1977); Antiterrorism and Effective Death Penalty Act, P.L. 104–32 (Apr. 24, 1996); Foreign Narcotics Kingpin Designation Act, 21 U.S.C. §§ 1901–08, 8 U.S.C. § 1182 (1999); Trade Sanctions Reform and Export Enhancement Act, 22 U.S.C. §§ 7219, et seq. (2000).
The International Emergency Economic Powers Act provides the primary authority for most of the OFAC sanctions programs and grants the president the authority “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President of the United States declares a national emergency with respect to such threat.” See P.L. 95–223 § 202. Pursuant to this authority, the president issues executive orders directing federal administrative agencies, including the OFAC, to act. The OFAC regulations appear in Title 31 of the Code of Federal Regulations (C.F.R.). The OFAC interprets the regulations broadly to effectuate the goals of the various sanctions programs.
The sanctions programs administered by the OFAC under this broad authority are diverse in nature and in purpose and currently include the following:
- Iran Transactions Regulations, 31 C.F.R. Part 560
- Iran Assets Control Regulations, 31 C.F.R. Part 535
- Non-Proliferation Sanctions Regulations, 31 C.F.R. Parts 539 and 540
- Syria Sanctions Regulations, 31 C.F.R. Part 542
- Global Terrorism Sanctions Regulations, 31 C.F.R. Part 594
- Terrorism Sanctions Regulations, 31 C.F.R. Part 595
- Terrorism List Governments Sanctions Regulations, 31 C.F.R. Part 596
- Foreign Terrorist Organizations Sanctions Regulations, 31 C.F.R. Part 597
- Narcotics Trafficking Sanctions Regulations, 31 C.F.R. Part 536
- Foreign Narcotics Kingpin Sanctions Regulations, 31 C.F.R Part 598
- Cuban Assets Control Regulations, 31 C.F.R. Part 515
- Western Balkans Stabilization Regulations, 31 C.F.R. Part 588
- Belarus Sanctions Regulations, 31 C.F.R. Part 548
- Burmese Sanctions Regulations, 31 C.F.R. Part 537
- Côte d’Ivoire Sanctions Regulations, 31 C.F.R. Part 543
- Democratic Republic of the Congo Sanctions Regulations, 31 C.F.R. Part 547
- Iraqi Sanctions Regulations, 31 C.F.R. Part 575
- Iraq Stabilization and Insurgency Sanctions Regulations, 31 C.F.R. Part 576
- Lebanon Sanctions Regulations, 31 C.F.R. Part 549
- Former Liberian Regime of Charles Taylor Sanctions Regulations, 31 C.F.R. Part 593
- Weapons of Mass Destruction Trade Control Regulations, 31 C.F.R. Part 539
- Highly Enriched Uranium Assets Control Regulations, 31 C.F.R. Part 540
- Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. Part 544
- North Korea Sanctions Regulations, 31 C.F.R. Part 510
- Rough Diamonds Control Regulations, 31 C.F.R. Part 592
- Somalia Sanctions Regulations, 31 C.F.R. Part 551
- Sudanese Sanctions Regulations, 31 C.F.R. Part 538
- Darfur Sanctions Regulations, 31 C.F.R. Part 546
- Transnational Criminal Organizations Sanctions Regulations, 31 C.F.R. Part 590
- Yemen Sanctions Regulations, Executive Order (May 16, 2012)
- Zimbabwe Sanctions Regulations, 31 C.F.R. Part 541
Under many of these sanctions programs, U.S. persons are required to block property of any Specially Designated Nationals (SDNs) located in the United States, that comes into the United States, or that come under the control of a U.S. person wherever located. The OFAC maintains a list of all persons whose property is blocked—the SDN List—which is searchable and updated frequently.
The term “property” includes, but is not limited to, money, checks, drafts, bank accounts, securities and other financial instruments, letters of credit, bills of sale, bills of lading and other evidences of title, wire transfers, merchandise, and goods. See, e.g., 31 C.F.R. § 594.309.Blockable property also includes any property in which there is any interest of an SDN, including direct, indirect, future or contingent, and tangible or intangible interests.
The OFAC has jurisdiction and enforcement power only over “United States persons.” A U.S. person is defined as “any United States citizen, permanent resident alien, entity organized under the laws of the United States (including foreign branches), or any person in the United States.” See, e.g., 31C.F.R. § 560.314; 31 C.F.R. § 542.312.
OFAC’s Effect on Air Carriers and Their Insurers/Reinsurers
In light of the vast sanctions regulatory regime administered by The OFAC and the broad application thereof to U.S. persons, air carriers and their insurers/reinsurers must carefully consider these sanctions regulations when presented with a claim by either a third party for property damage, personal injury, or death, or a claim for damage sustained by an insured party. This is especially evident in the event of a major air crash given the diverse interests involved.
In recognition of insurers’ obligation to comply with the OFAC, many insurance policies advise policyholders regarding the potential impact that OFAC regulations may have on insurance coverage. The following is an example of the notice provided to policyholders within the insurance policy:
OFAC administers and enforces sanctions policy, based on Presidential declarations of “national emergency”. OFAC has identified and listed numerous
- Foreign agents
- Front organizations
- Terrorist organizations
- Narcotics traffickers
as “Specially Designated Nationals and Blocked Persons”. This list can be found on the United States Treasury’s web site- http/www.treas.gov.ofac.
In accordance with OFAC regulations, if it is determined that you or any other insured, or any person or entity claiming the benefits of this insurance has violated U.S. sanctions law or is a Specially Designated National and Blocked Person, as identified by OFAC, this insurance will be considered a blocked or frozen contract and all provisions of this insurance will be immediately subject to OFAC. When an insurance policy is considered to be such a blocked or frozen contract, neither payments nor premium refunds may be made without authorization from OFAC. Other limitations on the premiums and payments also apply.
This notice to policyholders illustrates the consideration that must be given to the OFAC sanctions regime in regard to insurance claims.
Given the relatively high limits of aviation hull and liability policies, the risks are generally placed through the United States and/or international aviation-insurance markets and for most air carriers are insured/reinsured by multiple insurers/reinsurers, some of which may be U.S. insurers/reinsurers, foreign branches of U.S. insurers/reinsurers, or insurers/reinsurers controlled by U.S. entities. As noted above, foreign branches of U.S. insurers/reinsurers are subject to the OFAC regulations.
Assuming a policy is insured by a U.S. person, the OFAC regulations and the SDN List must be consulted before any payments under the policy can be made. The universe of possible SDNs in an air-crash case is vast given the scope of the various sanctions programs and include the airline itself; passengers injured or killed aboard an aircraft insured by U.S. persons; beneficiaries of passengers killed or injured aboard an aircraft insured by U.S. persons; service providers, including counsel, adjusters, investigators, emergency response providers, and more; and financial institutions that facilitate the transactions.
To ensure OFAC compliance, each transaction must be evaluated from various perspectives with particular attention being paid to the entity making payment; the person on whose behalf the payment is being made; to whom the payment is being made; and the means and method by which the payment is being made.
Many foreign air carriers are, in whole or in part, government-owned. To the extent that there are OFAC regulations blocking the property of foreign governmental entities, for example, Iranian Assets Control Regulations, 31 C.F.R. Part 535, states that no claims may be paid to or on behalf of the airline, which likely would be listed as an SDN. While paying an SDN airline for hull damage would obviously be considered a prohibited transaction of blocked property, the OFAC would also consider all payments made on behalf of the SDN air carrier to be subject to OFAC regulatory review, even if the SDN air carrier never receives a payment. Thus, a U.S. insurer/reinsurer of an SDN cannot make payments on a policy issued or covering an SDN without obtaining a license.
Considering the amount of potential payees implicated in an air-crash case, the vast reach of the regulations becomes apparent. Payments are typically made to emergency service providers; insurance adjusters; defense counsel; investigators; and legal, aviation, and economic experts, as well as liability payments to injured passengers, representatives/beneficiaries of deceased passengers, and property-damage claimants for damage on the ground. There may also be payments made in relation to the remediation of the crash site and the storage of the wreckage.
If the airline involved in the crash is an SDN, none of these payments can be made without a specific license. Given that the purpose of the OFAC regulations is not likely to be to block the transfer of property to the above-listed persons/entities, it has been our experience in prior dealings with the OFAC that such a license request would be granted, assuming no payment will be made to or through the SDN airline and none of the prospective recipients of the insurance funds are SDNs themselves. The OFAC also will require confirmation that payments are not processed through a financial institution that has been designated as an SDN, which could be problematic with regard to payments to Iranian nationals. In some cases, the OFAC has issued licenses for payments to non-SDN Iranian nationals processed through banks in other countries such as Dubai.
Careful consideration must be given prior to making any payments to wrongful death and personal-injury claimants. In the case of wrongful-death payments, the recipients, and not the decedent, must be considered for OFAC purposes. Thus, payments may be made to the family of a decedent SDN, provided no one receiving payment is an SDN, because the decedent will not receive a payment. Many countries, including the United States, will determine judicially who is entitled to payment as a result of a passenger’s death. Payment cannot be made to any beneficiary who is on the SDN list.
It is important to note that the OFAC regulations provide for strict liability and that payment to an SDN without a license is a violation. Thus, it is imperative that reasonable inquiry be undertaken to determine to whom payment is being made. Ideally, this will prevent payment to an SDN in violation of the regulations. If payment is made despite reasonable inquiry, an argument can be made to the OFAC that the violations do not warrant the imposition of a financial penalty. For example, if an SDN-decedent was so designated because of his or her ownership of an SDN company, all reasonable diligence should be made to determine if one or more of his or her beneficiaries have ownership and/or control of the SDN entity following his or her death. Assuming none of the claimants or beneficiaries is an SDN, a license is not required to make payment simply because the decedent was an SDN.
Miscellaneous Service Providers
Although discussed above in the context of an SDN airline, the status of any entity providing a service on behalf of an airline and/or its insurers/reinsurers must also be considered to ensure OFAC compliance. For example, the Iranian Transactions Regulations prohibit almost all transactions between U.S. persons and Iranian persons in Iran. See 31 C.F.R. 560 et seq. As such, the regulations must be considered if the airline and/or its insurers/reinsurers retain any Iranian persons to assist in the handling and resolution of the claims. This would include Iranian counsel retained to evaluate legal and quantum issues; investigators, adjusters, and so on, if they are located in Iran. Under these circumstances, payments cannot be made without a license.
As a practical matter, the SDN List should be consulted to ensure full OFAC compliance before making any payments.
General and Specific Licenses
If a proposed transaction involves blocked property, it cannot be effectuated without a license. The OFAC issues both general and specific licenses for otherwise blocked transactions. General licenses are issued by the OFAC under the various sanctions programs and often are indicative of a change in U.S. policy toward a particular country. For example, when first issued, the Libyan Sanctions were very broad. See Exec. Order No. 13566, (Feb. 25, 2011), 31 C.F.R. Part 570. However, during the course of the next several months, there was a regime change in Libya resulting in the issuance of several general licenses, each of which narrowed the scope of the Libyan sanctions program. This series of general licenses all but eliminated the Libyan sanctions program, save for very limited situations.
If a proposed transaction is prohibited under OFAC regulations and no general license applies, a specific license must be obtained. An application for a specific license must contain all relevant information, including, but not limited to, background on the proposed transaction, to whom payment is being made, the purpose for the payment, the method of payment, the financial institutions involved in the transaction, and any other relevant information. It is important to note that many sanctions regulations prevent U.S. persons from structuring transactions in such a way to avoid the application of the OFAC regulations. See 14 C.F.R. § 560.203 (prohibiting any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate any of the OFAC prohibitions). The OFAC will examine the totality of the proposed transaction and will either grant the request in full or issue a limited specific license detailing how the proposed transaction should be structured. A decision on a specific license request can take several months based on the complexity of the request and the workload of the OFAC Licensing Division.
The OFAC will also issue nonbinding advisory opinions in response to a written request for guidance with regard to whether a proposed transaction is allowed or whether a license is required. Such guidance can be an efficient manner in which to ensure OFAC compliance without engaging in the sometimes lengthy, and possibly unnecessary, license application process.
OFAC Investigation and Penalties for Violations of Sanctions Regulations
The OFAC has issued enforcement guidelines applicable to all enforcement matters pending before the OFAC at the time of issuance or that will come before the OFAC. See 74 Fed. Reg. 57593 (Nov. 9, 2009). The goal of the guidelines is to establish a consistent penalties matrix across all of the OFAC sanctions programs. The guidelines set forth the factors the OFAC considers when determining the appropriate fine or penalty for an apparent violation of an OFAC sanctions program.
According to the guidelines, the OFAC will consider numerous factors in determining the appropriate administrative response to an apparent violation. Among these are the willfulness or recklessness of the conduct. To the extent the conduct at issue is the result of willful conduct or a deliberate intent to violate, to attempt to violate, to conspire to violate, or to cause a violation of the law, the OFAC enforcement response will be stronger than for reckless conduct. In that regard, the OFAC will consider whether there was an effort by the person to hide or obfuscate the wrongful conduct, whether the conduct was part of a larger pattern of violations, or whether it was an isolated incident.
The OFAC will also consider the violating party’s awareness of the conduct at issue. Generally, the greater the person’s actual knowledge of, or reason to know about, the conduct constituting an apparent violation, the stronger the OFAC enforcement response will be. In the case of a corporation, awareness will focus on supervisory or managerial-level staff in the business unit at issue, as well as other senior officers and managers. The following factors are analyzed to determine a person’s awareness of the conduct at issue: actual knowledge, whether the person had reason to know (if he or she did not have actual knowledge), and management involvement/sufficient managerial oversight.
The administrative/enforcement response will also depend on several other considerations, such as the harm to the sanctions-program objectives caused by the violation, the size and sophistication of the transactions, whether the violator has a compliance program in place, and the remedial response by the violator upon learning of the violation.
After considering these factors, the OFAC will determine whether the violation was egregious or non-egregious and will assess penalties accordingly. As a general matter, in a nonwillful case, the maximum penalty is $250,000 per violation. A person who willfully violates the statute may be subject to criminal prosecution and, if convicted, may be subject to a fine in an amount of not more than $1 million or, if a natural person, imprisonment for a term of not more than 20 years, or both.
The sanctions programs administered by the OFAC are vast and have wide-ranging implications for air carriers and their insurers/reinsurers. This is especially true in international air-disaster cases where the parties involved often hail from a multitude of jurisdictions. When evaluating a claim, careful consideration must be given to the status of all of the parties involved to determine whether payment would be considered a transaction in blocked property. Failure to consider and comply with OFAC regulations and to obtain licenses, where necessary, could result in enforcement action by the OFAC and significant fines and penalties.
Keywords: litigation, mass torts, Office of Foreign Assets Control, aviation, U.S. Department of the Treasury, insurance
Copyright © 2018, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).