New OFAC National Security Rules:

New OFAC National Security Rules: What Does It Mean for Dealers?

NADA reports that dealer associations and individual dealers have received vendor solicitations for products that are designed to assist dealers in complying with laws and regulations administered by the Department of the Treasuryês Office of Foreign Assets Control (OFAC). The solicitations have generated many questions about the nature of these legal requirements and their application to automobile dealers. In order to respond to these queries, NADA recently met with the OFAC Compliance Office and obtained the following general information:

à OFACês mission is to administer and enforce U.S. economic sanctions to accomplish foreign policy and national security goals. These are primarily directed against countries and groups of individuals, such as terrorists and narcotics traffickers.

à The OFAC restrictions are separate from the new requirements contained in the USA PATRIOT Act, which became law on October 26, 2001. The OFAC restrictions have existed for many years. OFAC administers the sanctions programs, whereas the Department of the Treasuryês Financial Crimes Enforcement Network (“FinCEN”) is primarily responsible for the relevant sections of the USA PATRIOT Act.

à The three provisions in the USA PATRIOT Act that Treasury Department attorneys have identified as applying to dealers (cash reporting, information sharing and anti-money laundering) do not alter or change the existing OFAC restrictions. Therefore, FinCENês temporary exemption of automobile dealers from the anti-money laundering requirement does not affect the OFAC-implemented sanctions.

à The OFAC restrictions are extremely broad. They prohibit all U.S. persons from engaging in transactions with certain sanctioned countries, governments, or specially designated organizations or individuals (collectively referred to as prohibited persons). In the case of individuals and entities identified as terrorists or supporters of terrorism, the sanctions prohibit all U.S. persons from transacting or dealing in any property (or interest in property) of the designated party. There is no minimum dollar threshold. Therefore, the restrictions prohibit dealers from entering into a contract with a prohibited person for an oil change just as they prohibit dealers from entering into a contract with a prohibited person for the purchase of a high-end vehicle.

à The prohibition on transacting or dealing in property or interests in property with a prohibited person is not dealer-specific. Although it is more likely to arise in the context of importers/exporters, banks, the securities industry and others that frequently transact business with foreign entities, the prohibitions apply to all U.S. persons (including all U.S. retailers). Thus, the OFAC restrictions prohibit a fast-food restaurant from selling a hamburger to a prohibited person, a department store from selling an appliance to a prohibited person and a gas station from selling a gallon of gas to a prohibited person.

à OFAC maintains a List of Specially Designated Nationals and Blocked Persons (•SDN Listê) on its web site (www.treas.gov/offices/enforcement/ofac/sdn/t11sdn.pdf). This is an alphabetical list of over 3,500 prohibited persons located throughout the world. OFAC periodically updates the SDN List as names are added or deleted. The updates may occur weekly or they may only occur once every six months. Only a few of these prohibited persons are known by OFAC to be presently in the United States.

à The SDN List does not include the names or descriptions of everyone with whom U.S. persons are prohibited from entering into a transaction. OFAC administers a number of other economic sanctions programs, which include, among other things, prohibitions on transacting in property of Cuban nationals who are not lawful residents of the United States or with the governments of Cuba, Iran, Iraq, Libya or Sudan or any person working for or on behalf of those governments. Dealers can find information about these programs on OFACês web site (www.treas.gov/offices/enforcement/ofac/).

à The penalties for noncompliance can be severe. Depending on the program, criminal penalties can include fines from $50,000 to $10 million while imprisonment can range from 10 to 30 years for willful violations. Civil penalties can range from $11,000 to $1 million for each violation.

à OFAC does not require U.S. businesses to develop and implement an OFAC compliance program, although a compliance program may be considered a mitigating factor by OFAC in a civil penalty proceeding. OFAC does not provide guidance to retailers on what constitutes an adequate compliance program. One component of compliance programs that companies in some industries employ is the use of name-recognition software that matches the names of prospective customers with the names of prohibited persons identified on OFACês SDN List. Such programs obviously do not screen prohibited persons who are not identified on the SDN List (e.g., Cuban nationals who are not lawful residents of the U.S.).

à The OFAC web site states that U.S. persons are expected to exercise due diligence in determining whether prohibited persons are involved in a proposed transaction. The appropriate degree of diligence will depend on the facts and circumstances, and it is recognized that retail operations in the U.S. are not where the primary focus of terrorist financing rest. Nevertheless, the legal obligations apply to all U.S. persons and cannot be dismissed simply because the risk is low.

The foregoing only highlights certain aspects of the OFAC restrictions. Additional information is available on OFACês web site, including OFACês recently-posted Frequently Asked Questions (www.treas.gov/offices/enforcement/ofac/faq/index.html). The above information is also posted on www.nada.org, click on government affairs, then regulation.