OFAC and the SDN List
The final piece of the Anti-Money Laundering (AML) puzzle is OFAC: a separate Treasury bureau focused on economic sanctions rather than financial crime reporting. Broker-dealers must comply with both Financial Crimes Enforcement Network (FinCEN) and OFAC requirements.
What Is OFAC?
- OFAC (Office of Foreign Assets Control) is a division of the U.S. Department of the Treasury
- Administers and enforces economic and trade sanctions against:
- Targeted foreign countries and regimes
- Terrorists and terrorist organizations
- International narcotics traffickers
- Proliferators of weapons of mass destruction
- OFAC's authority comes from presidential executive orders and congressional legislation, not the Bank Secrecy Act (BSA)
The SDN List
- OFAC maintains the Specially Designated Nationals and Blocked Persons (SDN) List
- The SDN List includes individuals and entities whose assets must be blocked (frozen)
- U.S. persons are generally prohibited from dealing with anyone on the SDN List
- The list is updated regularly and is publicly available on OFAC's website
Think of it this way: The SDN List works like a "no-fly list" for finance. Just as airlines must check passengers against the no-fly list before boarding, broker-dealers must check customers and counterparties against the SDN List before processing transactions. If there is a match, the transaction is grounded.
Broker-Dealer OFAC Obligations
Broker-dealers must take three specific actions:
| Obligation | Details |
|---|---|
| Screen | Check all new accounts and transactions against the SDN List |
| Block (freeze) | Immediately block any accounts or transactions involving persons on the SDN List |
| Report | Report blocked transactions to OFAC within 10 business days |
- Screening must be ongoing; not just at account opening
- Blocking means the assets are frozen and cannot be moved, withdrawn, or traded
- Violations of OFAC sanctions can result in severe civil and criminal penalties
Exam Tip: Gotchas
Transactions with SDN-listed entities must be blocked immediately; not just reported. The firm cannot process the transaction and then file a report afterward. Block first, report within 10 business days.
OFAC vs. FinCEN
Both are under the Treasury Department, but they serve different functions:
| Feature | OFAC | FinCEN |
|---|---|---|
| Focus | Economic sanctions | Financial crime reporting |
| Primary tool | SDN List (block transactions) | Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) |
| Action required | Block/freeze assets | File reports |
| Report deadline | 10 business days | 15 days (CTR) or 30 days (SAR) |
| Legal basis | Executive orders, sanctions laws | Bank Secrecy Act |
- OFAC compliance is separate from AML compliance; a firm must comply with both
- A transaction can trigger both an OFAC block and a SAR filing simultaneously
- OFAC violations are strict liability; intent is not required for civil penalties
Exam Tip: Gotchas
OFAC is about sanctions and the SDN list; FinCEN is about financial crime reporting (SARs, CTRs). They are both under the Treasury Department but serve different functions. A firm must comply with BOTH.
Putting It All Together
Here is the complete AML compliance framework that broker-dealers must follow:
| Requirement | Rule/Law | Administered By |
|---|---|---|
| AML compliance program | FINRA Rule 3310 | FINRA |
| Customer Identification Program (CIP) | USA PATRIOT Act Section 326 | FinCEN |
| AML program establishment | USA PATRIOT Act Section 352 | FinCEN |
| Suspicious Activity Reports | Bank Secrecy Act | FinCEN |
| Currency Transaction Reports | Bank Secrecy Act | FinCEN |
| Information sharing (law enforcement) | USA PATRIOT Act Section 314(a) | FinCEN |
| Information sharing (institutions) | USA PATRIOT Act Section 314(b) | FinCEN |
| Sanctions screening and blocking | Executive orders, International Emergency Economic Powers Act (IEEPA) | OFAC |
Exam Tip: Gotchas
Remember the full compliance chain: Customer opens account, CIP verifies identity, firm screens against the SDN List, ongoing monitoring flags suspicious activity, Suspicious Activity Reports (SARs) or Currency Transaction Reports (CTRs) go to FinCEN if triggered, and OFAC blocks any sanctioned transactions. A firm needs BOTH an AML program (FinCEN/FINRA) AND an OFAC sanctions program.