The Key Elements of an Effective OFAC Compliance Program

Question: What advice can you offer on how to set up and maintain a successful OFAC compliance program?

Because each company has different risks and different risk tolerances, there is no simple and clear formula for creating a successful OFAC compliance program. Nevertheless, the “Compliance Program Guidelines” issued by DDTC, the “Compliance Guidelines” issued by BIS, and the summary of “Regulations for Exporters and Importers” issued by OFAC identify certain elements that each agency considers essential for a program to be effective. The advice given by the three agencies has a great deal in common. Here are the key elements of any effective corporate export compliance program, with a few comments about each.

Management Commitment and a Strong Compliance Culture

In order for any compliance measures to be effective, the Board of Directors and senior management must buy into and commit to the success of the program. By clearly demonstrating their support and participation, the company’s leadership can set the tone for the entire staff and foster a culture of integrity—which includes transparency and compliance—throughout the organization. That means, among other things, a culture of self-reporting possible violations and inquiring to assess their scope and the extent of program exposure, instead of a culture of covering up and writing off penalties for violations as “a cost of doing business.”

A Qualified and Empowered Export Compliance Officer

Unless your company is very small, the appointment of a dedicated Export Compliance Officer (ECO) with a clear mandate to focus on this critical function is highly desirable. Consider that your ECO is charged with protecting you from risks where penalties can reach hundreds of millions of dollars. With a roster of laws and regulations that is continually changing, managerial staff in internal control roles today have a more challenging job than ever before, with ever-wider responsibilities.

Your company’s ECO should:

—     have a direct line of communication to the Board of Directors and senior management.

—     be knowledgeable concerning the ITAR, EAR, and OFAC regulations, and have a good working understanding of your company’s products, services, technologies, suppliers, and customer base. Don’t hire an inexperienced individual, unqualified for the role, and don’t skimp on his/her ongoing education and training.

—     have full authority to look into all compliance-related matters and put together a project team to address and resolve problems when they arise.

—     have sole responsibility for managing communications with regulatory agencies (such as Commerce/BIS, State/DDTC, and Treasury/OFAC) for all compliance-related issues.

—     be responsible for monitoring official announcements and press releases from DDTC, BIS, and OFAC daily for developments or enforcement actions that could impact your company’s line of business or its suppliers, and for communicating changes in regulations, policies, or procedures to company personnel by means of in-house e-mails, newsletters, announcements, or notices posted on the company intranet.

Thoughtful, Clearly Articulated Internal Policies, Procedures, and Controls

The level of sophistication of your internal compliance controls will naturally depend on the nature and scale of your business. What is essential is that policies, procedures, and controls be carefully thought out, clearly set down in writing, and effectively communicated to all employees, agents, and business partners. Individual compliance responsibilities should also be expressly included in job descriptions and performance evaluations of personnel, as appropriate.

You need to provide your employees with an easy way—such as an anonymous hotline or “help line”—to report potential violations of U.S. export laws and regulations or of the company’s export compliance policies without fear of reprisal; and you need to be consistent in investigating each report, and in implementing disciplinary procedures to address violations when they are encountered.

Effective Use of Information Technology

To avoid OFAC violations, it is crucial that companies have robust screening procedures in place that cover transactions, customers, suppliers, personnel, and business partners. This is a daunting task, because OFAC is concerned not only with a relatively small number of country sanctions (such as those found on BIS’s Commerce Country Chart and DDTC’s Country Policies and Embargoes chart), but also with many thousands of Specially Designated Nationals (SDNs), an ever-changing list of individuals, business entities, groups and organizations, banks, and even ships (or “vessels of concern,” as OFAC calls them). Nor is the SDN List the only list against which transactions should be screened. There are also the BIS’s Denied Persons List, Entity List, and Unverified List, the DDTC’s Debarred Parties List, the FBI’s Most Wanted Terrorist List, United Nations 1267 List, the European Union Sanction List, the HM Treasury Sanction List, and others as well.

Even if your company is small, reliance on manual screening and monitoring processes alone now carries an unacceptably high risk and should no longer be considered a viable option. Today it is imperative that U.S. exporters use information technology to the maximum extent feasible in seeking to implement the know-your-customer rule (KYC) and other due-diligence measures for preventing unlawful diversion and ensuring that their shipments will reach only authorized end-users for authorized end-uses. A reliable screening software solution that uploads changes to the list as close to real-time as possible is a critical element in any company’s compliance program.

Many “off-the-shelf” transaction monitoring systems—most of them web-based—are available, at a wide range of prices and with a range of features that include basic screening against multiple denied parties lists, batch screening, sophisticated search algorithms employing “fuzzy logic,” the ability to generate custom reports of all kinds, automated recordkeeping, and real-time monitoring with immediate notification of any changes. But even with the purchase of commercial software, developing and implementing a screening system that will protect your company effectively is going to require the investment of some time and effort to calibrate, configure, and fine-tune the screening algorithm to match your business’s specific needs. The failure to do so will render even the best screening software ineffective and leave your company at risk. Screening software also brings with it certain inevitable limitations, including the potential for false positives, even after the screening algorithm has been optimally configured for your company’s risk profile. In some cases, it will be necessary to follow up the screening with manual reviews of entities or persons.

In the course of performing compliance audits and risk assessments for exporters, both large and small, in the U.S. and overseas, our audit teams still encounter far too many companies who employ a manual transaction screening procedure that consists of logging on to a series of web sites, screening customers, vendors, personnel, and other entities of concern, one at a time, against a hodgepodge of lists, and then updating the results of the search on a tracking spreadsheet. Not only is this manual method time-consuming and limited in the number of lists you can reasonably screen against, but also it does not lend itself well to compliance records retention. Spreadsheet programs, such as Excel, were never meant to function as databases. They are not secure and are notoriously error-prone. They cannot handle attachments of documents, photos, licenses, verifications, and other evidence. While it is true that they are easy to use and convenient to update, because they lack the ability to track changes over a period of time and have no audit trails for data or formulas, they are an auditor’s nightmare. Even the most basic IT-based screening solution and monitoring is clearly preferable.

Ongoing, Relevant Employee Training

Regular employee training ensuring that all staff understand the applicable laws and regulations as well as the business’s policies, processes, and specific risk profile, has always been a key component of any corporate compliance program. But for OFAC compliance, training is even more critical than it is for ITAR and EAR compliance, due to the dynamic nature of U.S. trade embargoes and the speed with which some programs are announced and evolve. Even automated screening can go only so far in helping to detect sanctions violations. Consider that entities on the SDN List can open fake bank accounts, individuals can create false identities, and both can use proxies or agents to place orders on their behalf internationally. There is always some degree of risk that you are doing business with someone you shouldn’t and are violating OFAC’s rules. Alert trained employees will spot red flags and inconsistencies that software can’t.

For that reason, you need to identify your company’s frontline employees from a compliance perspective—those whose duties require an awareness of ITAR, EAR, and OFAC regulations—and train them to understand the sanctions vulnerabilities you face and how serious these are, spot potential problems quickly, and respond appropriately. Those men and women are your ultimate line of defense. Even when there is a strong commitment on the part of management and when sound internal processes are in place, a work force without proper training will leave your company exposed and at high risk. All the compliance policies, procedures, and “best practices” in the world are worthless unless they are known, correctly understood, and followed by your employees. Even worse, they may create a sense of false security.

Export compliance training needs to start right away, with new employee orientation. Regular retraining events should provide updates to internal polices, procedures, processes, and monitoring systems. In order for compliance awareness training to be fully effective, it needs to include realistic practical illustrations of potential violations and credible scenarios of suspicious activities with “red flags” that should put a transaction on hold and trigger a report to Compliance. For that reason, off-the-shelf employee training materials should never be simply purchased and deployed “out of the box”; they must first be tailored to the specifics of the company’s business. This is definitely not a situation where “one size fits all.”

The following are some of the most common weaknesses our teams have observed when assessing corporate training programs:

—     Employee training is not conducted regularly or frequently enough.

—     Deadlines for completing or renewing training are not enforced.

—     Training content is not being updated.

—     Training is deployed, but without any test or questionnaire to verify knowledge retention.

—     When employees were found to have breached either U.S. export regulations or the company’s stated compliance policy, additional employee training was not conducted to remedy the situation and prevent repetition.

Independent Reviews and Risk Assessments

Regular compliance reviews and assessments, conducted by experienced outside auditors, consultants, or other qualified independent parties, are really the only reliable way to verify that your OFAC compliance program is operating as effectively as possible and is fully compliant with the law. It is imperative that these assessments be performed by an individual or team not directly tied to or responsible to the Compliance Department. In very large corporations, they could be conducted by the Internal Audit Department, if one exists, but only if Internal Audit has proper specific export compliance expertise. Otherwise, the company should hire experienced external consultants.

The frequency of these reviews should be commensurate with your company’s risk profile. Every 12 to 18 months is typical. Ask the reviewers to report their findings directly to the Board and/or senior management—not only to the compliance officer or department. And it’s always a good idea to ask that an Executive Summary be included in the written report. The report should aim at giving management practical insight into the programmatic strengths and weaknesses. It should also suggest specific remedial actions to bring the company back into full compliance. Those suggestions should not be ignored.