OFAC Revamps Reporting Requirements

Key Points

• On May 10, 2024, OFAC issued an IFR that would amend its Reporting, Procedures and Penalties Regulations (RPPR) at 31 C.F.R. Part 501 to, among other things, modify certain reporting requirements pertaining to blocked property and rejected transactions. Subject to any changes OFAC may make following a 30-day comment period, the proposed changes will become effective on August 8, 2024.
• Notably, the IFR would:
  • Narrow the definition of “transactions” for purposes of the rejected transactions reporting requirement under § 501.604(a) such that rejected “sales or purchases of goods or services” must be reported to OFAC, as opposed to all transactions “related to…goods or services.”
  • Limit the information that must be reported for such rejected transactions under § 501.604(b) to solely information available to the filer at the time the transaction was rejected.
  • Add a requirement to report to OFAC within 10 business days of when any blocked property is unblocked or transferred, including pursuant to a valid order issued by a U.S. government agency or U.S. court.
  • Modify and expand the procedure for requests to OFAC to release property blocked due to mistaken identity, typographical or other similar error.
• OFAC’s latest changes concerning reports of rejected transactions are in part a response to public comments it received to its June 21, 2019 IFR amending the RPPR, many of which sought greater clarity regarding the rule’s scope.
• OFAC is accepting public comments until June 10, 2024.

Highlights of the Interim Final Rule

With respect to rejected transactions, OFAC proposes revising § 501.604 to clarify the scope of “transactions” that are reportable by nonfinancial institutions, but the recent interim final rule (IFR) does not change existing reporting requirements applicable to financial institutions. These changes appear to come in response to nonfinancial institution commenters’ earlier requests for greater clarity of the meaning of such “transactions.” Now, OFAC’s revisions to § 501.604(a) clarify that for the purpose of that section, in-scope “transactions” would include those “relating to wire transfers, trade finance, transactions related to securities, checks, or foreign exchange, and sales or purchases of goods or services.” In doing so, OFAC is seeking to clarify for nonfinancial institutions that securities, checks, foreign exchange, and goods and services are not themselves “transactions,” unless they are provided as part of a transaction. However, it remains unclear exactly what OFAC would consider to be “provided as part of the transaction.”

The revisions appear to make it such that “sales or purchases of goods or services” must be reported to OFAC, as opposed to all transactions “related to…goods or services.” Under the previous proposed formulation of § 501.604, the term “transaction” appeared to cover all transactions “related to…goods or services,” which could be read as covering a great deal of activities. In contrast, under the new proposed formulation, the context of “goods and services” is limited to “sales or purchases” of goods and services. We would expect this to mean that if, for example, a U.S. person app store operator blocked attempted downloads of free apps that could not otherwise be downloaded absent specific authorization, this would have been reportable under the previous version of § 501.604 as “related to….goods or services,” but this would not be reportable under the proposed version, since there was a “rejection” but not of a “sale or purchase” of “goods or services.”

Relatedly, the IFR provides for an amendment to § 501.604(b) to specify that the standard for reporting information for rejected transactions would be limited to just the information that is actually available to the filer at the time the transaction was rejected. This change also comes in response to commenters’ earlier concerns that a higher reporting standard would be too burdensome and impractical for many filers.

With respect to blocked property, OFAC is revising § 501.603(b)(3) to require reports within 10 days of the unblocking or transfer of blocked property. Previously, this rule only required unblocking reports when specified by OFAC, such as when they were made a condition of a general or specific license. This change is part of an effort to increase OFAC’s ability to track the status of blocked property.

Additionally, OFAC proposes revising the procedures in § 501.806 for requesting the release of “funds” blocked and reported in error due to “mistaken identity” to more broadly include any “property” blocked and reported in error due to mistaken identity or “typographical or similar errors.” Accordingly, a person who mistakenly reports property as “blocked” would require OFAC’s authorization to release that “blocked” property, a requirement which potentially exceeds the scope of OFAC’s authority. At the same time, OFAC proposes limiting who may request such a “Compliance Release” to only the person who mistakenly blocked the property. All others who wish to request the unblocking of property are advised to submit license applications to OFAC’s Licensing Division.

Under the IFR, OFAC would generally require filers to use the electronic OFAC Reporting System (ORS) for submission of initial and annual reports of blocked property pursuant to § 501.603(d) as well as reports of rejected transactions pursuant to § 501.604(d). Previously, filers could submit such reports via ORS on a voluntary basis.

In addition, OFAC proposes broadening its delisting petition procedures in § 501.807 to allow certain specified persons to submit a petition seeking removal of a person or property from not only the List of Specially Designated Nationals and Blocked Persons, but also any other list of sanctioned persons that OFAC maintains (e.g., the Non-Specially Designated Nationals (SDN) Menu-Based Sanctions List or the Non-SDN Chinese Military Industrial Complex Companies List). OFAC requires all such petitions for administrative reconsideration to be submitted electronically to OFAC.Reconsideration@treasury.gov.

Implications and Open Questions

Once implemented, OFAC’s proposed changes would have a number of important implications for the compliance community and for filers of such reports, in particular. Most significantly, the changes would make it important for compliance professionals to update the compliance programs and procedures they administer to reflect the modified reporting requirements.

Notwithstanding the clarifications that OFAC has provided to address many comments that the agency previously received, the proposed rule does not address all commenters’ concerns and raises additional questions that OFAC has yet to address. For example, OFAC’s changes concerning requests to “release” property blocked and reported in error do not clearly distinguish between blockings reported as a result of factual error versus legal error (e.g., mistakenly submitting a blocking report instead of a rejected transaction report), and whether OFAC may adjudicate these requests differently. Furthermore, these changes combined with OFAC’s broad discretion to adjudicate such requests on a case-by-case basis could have an inadvertent chilling effect that causes some to be more reluctant to default to reporting in cases where they are uncertain if that is required, which could reduce the volume of reports that OFAC receives.

OFAC may address these and other open questions after the 30-day public comment period closes on June 10, 2024, after which the proposed changes will become effective on August 8, 2024. We will continue to monitor and share related developments.