When Do You Need an OFAC (Office of Foreign Assets Control) Check?

Must your business conduct an Office of Foreign Assets Control (OFAC) check on a potential customer or new hire? Learn about sanction checks and the rules surrounding them.

Although the daily demands of doing business and the need for a long-term strategy consume the most attention among employers, many other critical elements behind the scenes require attention. Ensuring proper due diligence is one of those fundamental tasks, not just because it's an important part of hiring but because there could be serious risks to skipping the proper procedures. Employers often see this process as criminal background checks, license verifications, and other similarly important steps.

However, you might need to go further in some cases, especially within specific industries. Not only that, but you may even need to think about applying some vetting processes to the customers your business engages with. Why? The answer concerns global security, anti-terrorist programs, anti-money laundering efforts, and more. 

What is an OFAC check?

OFAC, or the Office of Foreign Assets Control, is a regulatory enforcement arm of the United States Treasury. On a global level, economic sanctions are some of the most potent tools the nation has to place pressure on other countries for several purposes. For these sanctions to be effective, it is imperative for United States businesses not to engage with the numerous sanctioned parties worldwide today. However, following the events of September 11th, 2001, the Office of Foreign Assets Control gained additional responsibilities—preventing the spread of terrorism.

As a result, OFAC began to expand its maintenance of another list, called SDN or Specially Designated Nationals. From major international traffickers of narcotics to those with links to suspected terrorist groups, the SDN contains an extensive list of people that US businesses should not hire or otherwise do business with deliberately.

So what is an OFAC check? In short, it’s a background check that consults the sanctions lists maintained by the same-named office. OFAC checks are most important (and mandatory) in the financial and insurance industries. Companies that regularly do business with overseas firms or individuals should also have a means of performing an OFAC check as part of regular due diligence.

For the average small business, such as a single-location retail shop, running an OFAC check is likely not a top-tier requirement. Employers using OFAC incorrectly could open themselves to legal liability through discrimination claims. 

By and large, the OFAC sanctions lists are name-only, without much additional information to corroborate or confirm an individual match; this requires extra steps for the business. The lists contain many similar names, and often names that are the same, even though they refer to disparate people. Without a clear understanding of how to use an OFAC check, it can introduce unnecessary confusion in hiring for basic positions.

Lists Firms Should Check Regularly

Consulting sanctions lists is a critical step for companies that intend to transact with multinational or international businesses or individuals. There can be harsh penalties and stiff fines for violating Treasury guidelines on international transactions that US companies engage in. With that in mind, what specific lists should firms regularly consult to ensure they aren't engaging in potentially illegal activity? 

With dozens of lists, it can be hard to check them all individually. So, many businesses opt to work with third-party providers who can assist in automating the process of checking and verifying whether a discovery is valid. For example, our National Security OneSEARCH consults more than 100 different lists. The most notable of these that firms should consult include the following:

• Inspector General Exclusions List from the Department of Health & Human Services.
• OFAC Specially Designated Nationals List.
• FBI Most Wanted.
• FDA Debarment list.
• U.S. Bureau of Industry and Security list
• Unverified Entities List
• Denied Persons List
• OFAC Blocked Persons List
• Interpol Red Notices (also known as the Fugitive List).
• Excluded Parties List from the General Services Administration.
• Enforcement Actions List from the Office of the Controller of the Currency.
• OFAC Foreign Sanctions Evaders List.
• OFAC Consolidated Sanction List.

Some of these lists are industry-specific, but incorporating a wide-ranging look at them into your business processes, ensures you can cover as much ground as possible and leave no stone unturned. Due diligence requires actual diligence, after all—and that includes confirming whether any hits you receive are the actual person or entity involved in your transactions. 

Background Screening Dos and Don'ts for Staffing Companies

Staffing companies that match job-seekers to permanent and temporary positions in other companies must emphasize background checks. Not only is it a selling point for companies using such services, but claims of negligent hiring can trickle back to staffing firms if their failure to conduct due diligence harms a client company. 

Because staffing companies may encounter a wide range of people from all backgrounds, a thorough screening procedure is key. What are some quick tips such agencies should consider?

Do:

• Use criminal background checks to evaluate candidates for suitability.
• Include OFAC/sanctions checks for individuals with non-US origins.
• Follow state and local regulations on how and when you can consider criminal records.

Don't:

• Overlook background check regulations, such as the Fair Credit Reporting Act.
• Skip steps in the process to slim down time-to-hire rates.
• Forget to conduct verification steps to ensure that any record matches connect to the specific individual in question.

Why Are These Steps Important?

Negligent hiring can have profound effects, and in many cases, due diligence can uncover red flags that could prevent such harm. Unfortunately, no process is 100% foolproof—and background checks aren't predictive of future behavior. However, you could expose your business and others to unnecessary risks without thoroughly screening individuals. Therefore, extending your vetting process as far as possible is essential.

Motor Vehicle Records, Reckless Driving, and Drug and Alcohol Checks 

Depending on the staffing you provide, it is vital to carry out additional verifications beyond sanctions and criminal histories. For example, individuals who will work in Department of Transportation-regulated jobs, such as trucking, must undergo an MVR or motor vehicle record check. Testing for drugs and alcohol are also mandatory requirements for DOT-regulated jobs. Be sure to brush up on the requirements your business faces. 

What Is a Sanction Check?

In essence, a sanctions check is no different in purpose than an OFAC check—it is simply a broader term for any background check that confirms whether the United States government has sanctioned an individual or entity. In some cases, a "sanctions check" may specifically refer to verifying whether a foreign nation itself is subject to any current sanctions. There are also government-connected entities and state-sponsored companies that may fall onto sanctions lists, which you should avoid.

While an "OFAC check" might look specifically or even only at the Specially Designated Nationals List, a "sanctions check" might zero in on the Consolidated Sanction Lists that the Office of Foreign Assets Control maintains. The CSL includes information about sanctioned parties not included in the SDN list. Regular and automated consultation of sanctions information is vital for businesses operating in the relevant industries and international spaces—you won't always hear about changes in the news. With government regulations shifting constantly, the only way to be sure is to check against the list.

The penalties for violating sanctions can be very severe—even at the low end, they are costly. Fines could be as "low" as $90,000 or as massive as $1.5 million for every violation. Willful violations of sanctions acts can even carry jail time with terms ranging from one to five years. For those working in affected industries, it is vital not to overlook the importance of building a comprehensive framework for sanctions compliance.

How Well Do You Know Your Customer?

"Know your customer," or KYC is an essential process in the financial sector. Businesses in this and adjacent sectors are obliged to conduct due diligence on customers to prevent money laundering, funding terrorist activities, and other international threats. KYC is an important process for banks and any financial institution that handles client funds. How well do you know your customers?

There are several critical elements to building an effective KYC program. As we've described, checking OFAC and sanctions lists are fundamental to KYC and anti-money laundering obligations. However, there are other steps you must take as well, beginning with customer identification. Verifying an individual’s identity can take many forms, but validating multiple types of ID is a best practice. 

Beyond background checks, there are also institutional checks you must establish. Determining that the customer's funds come from legitimate sources, though a potentially time-consuming process, is a necessary step. Similarly, you will need to monitor for signs of suspicious activity and take action to freeze accounts for investigation if you do identify unusual transactions. KYC procedures are a must-have for financial institutions since the consequences of overlooking these rules can be very expensive.

Is running an OFAC check right for your candidates?

When considering the hiring process only, an OFAC or sanctions check is not likely to be a "must do" item for most applicants. Still, if an individual applicant was born outside of the United States, recently emigrated, or lived abroad for extended periods, an OFAC check is a crucial step to acquiring a complete understanding. 

It may not be a mandatory step for basic businesses and small companies. However, in regulated industries, such as finance and insurance, you must follow through with extensive additional checks. To develop the best approach, consult with an experienced employment law source to explore what your company's specific legal obligations may be.