Sanctions compliance is all about understanding the difference between blocking and rejecting a transaction. People often use the terms interchangeably, but they carry very different implications. Both the UK OFSI and US OFAC require financial institutions to stop sanctioned transactions from entering the system. That's the essence of sanctions compliance, and it's fundamental to averting regulatory, legal, or reputational risk.
Regulatory Regimes
The guidance documents and statutes establish the rules for blocking and rejecting transactions. In the US, under 31 C.F.R. §§ 501.603 and 501.604, all property and interests of any person or entity listed on the OFAC SDN List must be blocked. Blocking entails freezing the assets and reporting to OFAC within 10 business days. A rejection occurs when there is a blocked party but no blockable property. In that situation, the transaction is rejected, the funds are returned to the sender, and the rejection is reported to OFAC within 10 business days (Office of Foreign Assets Control, n.d.).
In the UK, OFSI enforces financial sanctions through asset freezes and bans on providing funds or resources to persons or entities on the list. Banks are expected to comply with these rules by identifying the relevant persons and either freezing or blocking the transaction or rejecting it where appropriate and reporting to OFSI. It's important to keep up to date with OFSI guidance (Office of Financial Sanctions Implementation, n.d.).
Operational Implications
From an operational point of view, it's absolutely vital to separate the blocking and the rejecting transactions if you're to have any hope of getting compliance right.
A step-by-step process for blocking transactions:
1. Screening systems flag up a potential match with a sanctioned party.
2. The compliance group then assess and confirms the match.
3. Once it's confirmed, the institution will immediately freeze the assets.
4. Complete records of the blocked property and the transaction are created.
5. The transaction is reported to OFAC within ten (10) business days.
6. The assets in question are placed in an interest-bearing account.
7. If there is any requirement to access or use the funds, the institution will apply to OFAC for a licence before releasing or using the assets.
A step-by-step process for rejecting transactions:
1. Screening systems identify a potential match with a sanctioned party, but there is no blockable property.
2. The compliance group check the situation and confirms that a rejection is warranted.
3. The institution will reject the transaction and return the funds to the sender.
4. Documentation of the rejected transaction is produced and kept for our internal files.
5. The rejection is reported to OFAC within 10 business days.
Automated sanctions screening systems will help to differentiate between blocking and rejecting, reduce human error, and enable timely reporting.
Real-Life Examples
Case studies show how the various institutions put these procedures into practice. One example is an American bank which identified a wire transfer to an entity on OFAC's SDN List. It immediately froze the funds, notified OFAC within the required timeframes, and held the assets in an interest-bearing account. By complying with the blocking rules, it effectively avoided sanctions and protected its regulatory standing.
For example, a bank declined a payment to a sanctioned individual where there was no blockable property. They declined the payment, refunded the payor and reported the denial to OFAC. By separating the denial from the blocking, the bank avoided operational risk and stayed in line with its regulatory obligations.
Best Practices for Sanctions Compliance Professionals
Sanctions compliance professionals can follow best practices to manage compliance effectively. Keeping your screening systems up to date and fully automated will obviously improve your ability to identify and categorise the sanctioned parties. You need to record in full all blocked and rejected transactions for audit and regulatory reporting purposes. Ongoing staff training is necessary to ensure they stay up to date with the relevant rules and their changing nature. Timely reporting, strong internal controls, and legal advice where appropriate are vital to avoid risk and ensure compliance.
There should also be clear escalation criteria for cases of ambiguity, possible breaches, and the like. Cases should be escalated to legal/regulatory where there is any doubt as to whether a transaction is definitively blockable or rejectable, where the internal policy is unclear, where there is any uncertainty as to the applicable sanctions or where there is any suggestion of evasion. Clear standards for when and how to escalate will enable compliance to handle complex cases effectively and at the appropriate level.
Recent trends clearly point to increased enforcement by OFAC and OFSI and a much greater emphasis on compliance. FIs need to be thinking about sanctions that are global in nature. The new generation of technologies (AI and machine learning in particular) is helping to make transaction monitoring and operations more efficient. To get the most from these technologies, start by identifying the specific compliance tasks you can automate (e.g., real-time screening, alert prioritisation). You then need to work with your technology teams to ensure that the systems are built to meet your own sanctions risk profile. Keep your AI/ML models up to date with the latest sanctions lists and typologies, invest in training staff to interpret model outputs, and maintain clear governance around the use of the technology. The compliance function is increasingly expected to have both regulatory and technical skill sets.
Conclusion
Blocking and rejecting transactions are fundamental skills for any financial institution under global sanctions regimes. Blocking is the act of holding the funds of a sanctioned party; rejecting is the act of refusing to deal with non-blockable property. Using automated systems, good record keeping, and staff training all go a long way toward ensuring compliance with OFAC and OFSI. Supervising these activities is a key way to reduce the risk of financial crime, protect your operations, and ensure you meet your international compliance obligations.