OFAC, an agency of the U.S. Department of the Treasury, administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals. When a SWIFT payment (wire transfer) is blocked by OFAC, it means that the transaction involves parties, entities, or jurisdictions that are subject to U.S. sanctions. Consequently, the funds are frozen and cannot proceed until OFAC issues a license.
Blocking a payment typically involves the following scenarios:
- The involvement of sanctioned entities or individuals: If the payment involves parties listed on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List), it will be blocked.
- Export control violations: Transactions can also be blocked if there is an attempt to export goods subject to licensing requirements. For instance, exporting crypto or semiconductor chips to China may require specific licenses, and without proper authorization, such transactions will be blocked by OFAC.
- Jurisdictional sanctions: Transactions involving countries or regions under comprehensive sanctions, such as North Korea, Iran, or Syria, could be automatically flagged and blocked.
One of the most frequent recent scenarios of OFAC blocking payments occurs when a USD payment is initiated from a bank that becomes subject to sanctions before the payment is credited to the beneficiary. Although the sender and the beneficiary are engaged in an innocent transaction, banks are required to block the payment and withhold it until an OFAC license is issued. We have seen those cases often in relations to E.O. 14024 for sanctions against Russia.
How Is It Different from a General Stuck Cross-Border Payment?
While a blocked SWIFT payment by OFAC is due to regulatory compliance and sanctions, a general stuck cross-border payment can occur for various other reasons:
- Banking errors or discrepancies: Mistakes in account numbers, incorrect SWIFT codes, or mismatched information can cause delays.
- Compliance checks: Banks perform their own due diligence and may delay payments for additional checks, even if no sanctions are involved.
- Technical issues: System errors, network downtime, or mismatches in transaction protocols between correspondent banks can also lead to stuck payments.
The key difference lies in the cause and resolution process. A blocked payment by OFAC requires regulatory clearance (general or individual license), while a general stuck payment often requires rectifying errors or providing additional information to the banks involved.
Unless you receive a direct confirmation from the sender’s or beneficiary’s bank that the payment was blocked by OFAC, or you find any of the parties on the SDN list, you shouldn’t be worried about OFAC. Instead, request a payment investigation initiated by the sender’s bank.
What to Do if Your SWIFT Payment is Blocked by OFAC?
If your SWIFT funds transfer is blocked by OFAC, you need to consider the following steps to address the issue:
- Identify the reason by checking if the involved parties are on the SDN List or if the transaction pertains to a sanctioned country.
- Understand the jurisdictions required to obtain the license. If the payment was in USD but blocked by an EU bank, you may need to apply for both EU and US licenses. The same applies to the UK, where sanctions are administered by OFSI.
- Check if there is a general OFAC license which covers your case.
- Seek professional consultation to prepare the case for an individual license application or find a US lawyer.
How Long Does It Take to Obtain an individual OFAC License?
The time it takes to obtain an OFAC license can vary significantly depending on the complexity of the case and the completeness of the application. Generally, the process can take several months to one year. OFAC reviews each application thoroughly to ensure compliance with U.S. sanctions regulations. It is crucial to provide all necessary documentation and detailed information about the transaction to avoid delays. In some cases, additional information or clarification may be requested by OFAC, which can extend the processing time. Therefore, it is advisable to submit a well-prepared application and stay in regular contact with OFAC for updates on the status of your license request.
What Are the Chances of Obtaining an Individual OFAC License?
The likelihood of obtaining an individual OFAC license depends on several factors, including the specific circumstances of the transaction, the parties involved, and the reasons for the block. Applications that demonstrate a clear, legitimate purpose and comply with U.S. foreign policy and national security goals are more likely to be approved. However, if the transaction involves entities or individuals with significant sanctions concerns, the chances of obtaining a license may be lower.
From our experience obtaining OFAC license for an individual who transferred there funds to another country, but faced with situation when one of the banks in the chain went under US sanctions is on average 1 year and the probability is pretty high when the case is well-prepared. Below is the example of license which our consultant got for one of our clients.
The situation with commercial transactions (payment for goods and services) is usually more complicated. Often, OFAC can issue a rejection letter initially, even if the transaction was initiated from a non-sanctioned bank and was absolutely legitimate at the moment of payment initiation. However, our team recently achieved a successful result, which gives us hope that it is possible to convince the U.S. regulator.
What is the Cost of OFAC License?
OFAC doesn’t charge for specific (individual) license applications, however, if you involve consultants their fees could start from $300 per application. U.S. lawyers will charge $8,000 or more. If the process involves court proceedings, the case typically costs from $50,000. If the blocked party is a U.S. person, there is a possibility to pay legal fees from the blocked funds, subject to OFAC regulations.
What Transactions are Subject to OFAC Regulations?
Formally, transactions subject to OFAC regulations include any financial dealings involving parties or jurisdictions listed on OFAC's sanctions programs, such as individuals, entities, and countries on the Specially Designated Nationals (SDN) list, as well as certain transactions related to export control and specific economic sectors like defense and energy. These regulations apply to U.S. persons, including businesses and financial institutions, regardless of their location.
In the real life the two most common scenarios are:
1. Transaction is in USD. In this case it normally routed via US Correspondent Banks (like JP Morgan Chase, BNY, Bank of America, Citi). Those banks will immediately block the transaction and report to OFAC if there is a SDN party involved.
2. Transactions are processed by U.S. banks. For example, if your CNY payment is routed via Citi, it will be blocked if an SDN party is involved. Sometimes, following multiple legal jurisdictions causes additional problems – Standard Chartered, headquartered in the UK, will ask for both OFAC and OFSI licenses if they block a USD payment.
For expert assistance and consultation on SWIFT payments and OFAC regulations, contact us today. Our team of professionals is here to help you navigate these complex issues and ensure your international transactions proceed smoothly.