[Federal Register Volume 71, Number 8 (Thursday, January 12, 2006)]
[Rules and Regulations]
[Pages 1971-1976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-278]


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DEPARTMENT OF THE TREASURY

Office of Foreign Assets Control

31 CFR Part 501


Economic Sanctions Enforcement Procedures for Banking 
Institutions

AGENCY: Office of Foreign Assets Control, Treasury.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Office of Foreign Assets Control (``OFAC'') of the U.S. 
Department of the Treasury is issuing this interim final rule, 
``Economic Sanctions Enforcement Procedures for Banking Institutions,'' 
along with a request for comments. This interim final rule supercedes 
OFAC's proposed rule of January 29, 2003,\1\ to the extent that the 
proposed rule applies to ``banking institutions,'' as defined below. 
These administrative procedures are published as an appendix to the 
Reporting, Procedures and Penalties Regulations, 31 CFR Part 501.
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    \1\ 68 FR 4422-4429 (2003).

DATES: The interim final rule is effective for enforcement cases 
involving banking institutions commencing on or after February 13, 
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2006. Written comments may be submitted on or before March 13, 2006.

ADDRESSES: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Agency Web site: http://www.treas.gov/offices/enforcement/ofac/comment.html.
     Fax: Assistant Director of Records, (202) 622-1657.
     Mail: Assistant Director of Records, ATTN: Request for 
Comments (Enforcement Procedures), Office of Foreign Assets Control, 
Department of the Treasury, 1500 Pennsylvania Avenue, NW., Washington, 
DC 20220.

[[Page 1972]]

    Instructions: All submissions received must include the agency name 
and the FR Doc. number that appears at the end of this document. 
Comments received will be posted without change to http://www.treas.gov/ofac, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Assistant Director of Records, (202) 
622-2500 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Electronic Availability

    This document and additional information concerning OFAC are 
available from OFAC's Web site (http://www.treas.gov/ofac) or via 
facsimile through a 24-hour fax-on-demand service, tel.: 202/622-0077.

Procedural Requirements

    Because this interim final rule imposes no obligations on any 
person, but instead simply explains OFAC's enforcement practices based 
on existing substantive and procedural rules, prior notice and public 
procedure are not required pursuant to 5 U.S.C. 553(b)(A). Because no 
notice of proposed rulemaking is required, the provisions of the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Finally, 
this interim final rule is not a significant regulatory action for 
purposes of Executive Order 12866.
    Although a prior notice of proposed rulemaking is not required, 
OFAC is soliciting comments on this interim final rule in order to 
consider how it might make improvements in its enforcement procedures 
in the future. Comments must be submitted in writing. The addresses and 
deadline for submitting comments appear near the beginning of this 
notice. OFAC will not accept comments accompanied by a request that all 
or part of the submission be treated confidentially because of its 
business proprietary nature or for any other reason. All comments 
received by the deadline will be a matter of public record and will be 
made available on OFAC's Web site: http://www.treas.gov/offices/enforcement/ofac/index.html.

Background

    On January 29, 2003, OFAC published, as a proposed rule, Economic 
Sanctions Enforcement Guidelines. Though this proposed rule has not 
been finalized, OFAC has used the Guidelines as a general framework for 
its enforcement actions. OFAC has decided that the enforcement 
procedures with respect to banking institutions should be modified and 
is publishing enforcement procedures for these entities as an interim 
final rule. OFAC is also requesting comments on this interim final 
rule.
    In conjunction with issuing this interim final rule, OFAC is 
withdrawing the January 29, 2003 proposed rule to the extent it applies 
to banking institutions, as defined herein. For purposes of this 
interim rule, ``banking institutions'' means depository institutions 
regulated or supervised by one of the regulators that belongs to the 
Federal Financial Institutions Examination Council (``FFIEC''), i.e., 
the Board of Governors of the Federal Reserve System, the Federal 
Deposit Insurance Corporation, the National Credit Union 
Administration, the Office of the Comptroller of the Currency, and the 
Office of Thrift Supervision. Please note that a depository institution 
may be a ``banking institution,'' as that term is defined in OFAC 
regulations, see, e.g., 31 CFR 500.314, 515.314, but not a ``banking 
institution'' for purposes of these enforcement procedures. Because 
this interim final rule only applies to enforcement procedures for 
banking institutions, as defined herein, OFAC plans to issue guidance 
on its enforcement procedures for other types of institutions and other 
sectors in the future.
    OFAC is publishing enforcement procedures for banking institutions 
because of their unique role in the implementation of OFAC sanctions 
programs and the nature of the transactions in which such institutions 
engage. The new enforcement procedures take into account that each 
banking institution's situation is different and that its compliance 
program should be tailored to its unique circumstances. This includes 
an analysis of its size, business volume, customer base, and product 
lines.
    In order to implement this new approach, OFAC has been working and 
will continue to work in partnership with the federal banking 
regulators. OFAC worked with FFIEC members to develop standards to 
evaluate compliance programs at banking institutions. In June 2005, the 
FFIEC released its Bank Secrecy Act Anti-Money Laundering Examination 
Manual. Portions of this manual relate to compliance with various OFAC 
sanctions programs. In addition, working with FFIEC members, OFAC has 
developed risk matrices, which may be used by depository institutions 
as ``best practices.'' \2\ The matrices provide a guide for evaluating 
a banking institution's risk of encountering accounts or transactions 
subject to OFAC regulations and for determining the quality of an 
institution's compliance program. As indicated in the FFIEC examination 
manual, the banking regulators evaluate a banking institution's overall 
OFAC compliance program using a similar methodology.
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    \2\ These matrices can be found in Annex A to the interim final 
rule and can be accessed online at http://www.treas.gov/offices/enforcement/ofac/faq/matrix.pdf.
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    Also, in administering its enforcement authority with respect to 
various sanctions statutes, Executive orders, and regulations, OFAC 
will provide the federal banking regulators with information related to 
apparent violations or compliance concerns as it becomes aware of them. 
In turn, OFAC will receive information from the banking regulators, 
including, for those institutions with apparent violations, evaluations 
of the sufficiency of each such institution's implementation of 
policies, procedures, and systems for ensuring OFAC compliance.
    Prior to taking enforcement actions, OFAC generally will review 
apparent violations by a particular institution over a period of time, 
rather than evaluating each apparent violation independently. However, 
in regard to what appears to be a particularly egregious violation, 
OFAC may evaluate the situation as it presents itself and take prompt 
enforcement action.
    Under the revised procedures, OFAC will periodically evaluate a 
banking institution's apparent OFAC-related violations in the context 
of the institution's overall OFAC compliance program and specific OFAC 
compliance record. OFAC will not conduct such a review if there are no 
apparent violations. The information reviewed will include but not 
necessarily be limited to: the evaluation of the banking institution's 
OFAC compliance program by its primary federal banking regulator; the 
institution's history of OFAC compliance; the circumstances surrounding 
any apparent violation, including what appear to be patterns or 
weaknesses in an institution's compliance program and whether they 
indicate negligence or a fundamental flaw in the compliance effort or 
system and whether they were voluntarily disclosed; enforcement 
information provided by the institution to OFAC; the number of 
transactions or accounts that the institution handled improperly during 
the period under review and its responses to any administrative 
subpoenas that OFAC sent with regard to those transactions or accounts; 
the number of transactions successfully blocked or rejected by the 
banking institution during the period; the actions taken by the banking 
institution to correct any violations and to ensure

[[Page 1973]]

that similar violations do not happen again; and other relevant 
information available to OFAC at the time of the evaluation.
    After a review of apparent violations, OFAC will contact the 
banking institution, either by phone, in-person, or in writing, 
regarding OFAC's preliminary assessment of the appropriate action with 
respect to the institution. OFAC's staff will discuss the results of 
its review with the institution, including any patterns or weaknesses 
in an institution's compliance program. With respect to particular 
transactions, the discussion will cover the actions taken by the 
banking institution to ensure that similar transactions do not take 
place in the future and the adequacy of responses to any administrative 
subpoenas OFAC has sent with regard to the transactions. OFAC will 
indicate the intended administrative action to be taken for each 
transaction or set of related transactions that appear to constitute 
violations of OFAC-administered sanctions programs.
    Once OFAC has reached a decision, it will notify the institution in 
writing as to its proposed action with regard to each apparent 
violation during the period under review. OFAC will provide a copy of 
this letter to the institution's primary federal banking regulator. In 
the event that OFAC has notified the institution of its intent to 
pursue a civil penalty with regard to any or all of the apparent 
violations, existing civil penalty procedures under OFAC regulations 
will be followed. These include the opportunity for informal settlement 
prior to formal initiation of penalty action through the issuance of a 
prepenalty notice.
    In subsequent periodic reviews relating to the institution's 
apparent violations, all prior actions and decisions taken by OFAC, 
including cases in which the decision is to take no action, will be 
considered in deciding what action to take.
    In addition to detailing these new procedures, the interim final 
rule clarifies that, for a banking institution, a voluntary disclosure, 
a factor that OFAC considers in its enforcement decisions, does not 
include a disclosure when another party is required to file a report 
concerning the same transaction. This is the case whether or not the 
other party actually files a report. However, OFAC considers reporting 
of violations important for its compliance and enforcement programs and 
will consider such reports by a banking institution a mitigating factor 
in its enforcement decisions even if they do not meet the definition of 
``voluntary disclosure'' contained in these enforcement procedures. 
While reports that are not voluntary disclosures will generally not be 
accorded the same importance as voluntary disclosures, OFAC will give 
such cooperation due consideration.
    Though this interim final rule becomes effective in 30 days, OFAC 
is soliciting comments for a 60-day period with a view to improving its 
enforcement procedures.
    In particular, commenters are invited to address how much 
significance, separately or collectively, OFAC should attribute in its 
enforcement decisions to such factors as a banking regulator's 
assessments of a banking institution's compliance program, a banking 
institution's historical OFAC compliance record, and a comparison of 
that record to similarly situated banking institutions.
    Also, this interim final rule does not apply to entities regulated 
by the Securities and Exchange Commission (``SEC'') and the Commodity 
Futures Trading Commission (``CFTC''), such as broker-dealers, mutual 
funds, investment advisers, hedge fund advisers, futures commission 
merchants, commodity trading advisers, and commodity pool operators, 
even if such legal entities are affiliated with a banking institution. 
OFAC plans to issue separate enforcement procedures for SEC- and CFTC-
regulated entities in recognition that the regulatory regimes 
administered by the SEC and the CFTC are significantly different from 
the regime administered by federal banking regulators. Commenters are 
asked to address whether there is current information about the 
compliance programs of SEC- and CFTC-regulated entities that OFAC could 
use in a similar manner to the way compliance information will be used 
for making enforcement decisions for banks. Commenters are also 
requested to provide any suggestions concerning how the enforcement 
procedures described in this interim final rule should be modified for 
entities regulated by the SEC or CFTC.
    OFAC also plans to issue enforcement procedures for certain 
financial sector entities regulated by state government agencies but 
not by federal financial regulators. This sector includes entities that 
are similar to federally-regulated banking institutions, such as 
certain credit unions and banks not insured by an agency of the U.S. 
Government, and it includes some money service businesses. Commenters 
are asked for suggestions concerning how the enforcement procedures in 
the interim final rule should be modified for the purpose of providing 
separate enforcement procedures for these entities.
    The interim final rule does not apply to other financial sector 
entities, such as insurance companies (including property and casualty, 
life, and reinsurance lines of business), pension funds, finance 
companies, mortgage bankers, and government-sponsored enterprises. 
Commenters are asked for their suggestions on how enforcement 
procedures should be modified to apply to these other financial sector 
entities and whether and how enforcement procedures for financial 
sector firms should vary depending on the regulatory regime, if any, to 
which various financial sector firms are subject.
    Commenters are also requested to provide suggestions concerning 
appropriate enforcement procedures for non-financial sectors, such as 
import-export businesses, the computer and software industries, and e-
commerce.
    These procedures apply to banking institutions that may be part of 
a larger corporate structure, with a parent holding company. Commenters 
are asked how OFAC should consider for enforcement purposes complex 
corporate structures, which may include entities regulated by the Board 
of Governors of the Federal Reserve System, the Office of the 
Comptroller of the Currency, the Office of Thrift Supervision, the SEC, 
and the CFTC. Other affiliates, such as insurance companies, may be 
regulated by state regulators; some affiliates may be subject to the 
jurisdiction of foreign regulators; and some entities may not have a 
functional regulator. Such complicated structures pose challenges for 
assessing compliance programs and making determinations about 
enforcement actions when there are violations. Commenters are invited 
to address the proper enforcement approach for complicated holding 
company structures.

List of Subjects in 31 CFR Part 501

    Administrative practice and procedure, Banks, banking, Reporting 
and recordkeeping requirements.

0
For the reasons set forth in the preamble, 31 CFR part 501 is amended 
as follows:

PART 501--REPORTING, PROCEDURES AND PENALTIES REGULATIONS

0
1. The authority citation for Part 501 continues to read as follows:

    Authority: 18 U.S.C. 2332d; 21 U.S.C. 1901-1908; 22 U.S.C. 287c; 
22 U.S.C. 2370(a); 31 U.S.C. 321(b); 50 U.S.C. 1701-

[[Page 1974]]

1706; 50 U.S.C. App. 1-44; Pub. L. 101-410, 104 Stat. 890 (28 U.S.C. 
2461 note); E.O. 9193, 7 FR 5205, 3 CFR, 1938-1943 Comp., p. 1174; 
E.O. 9989, 13 FR 4891, 3 CFR, 1943-1948 Comp., p. 748; E.O. 12854, 
58 FR 36587, 3 CFR, 1993 Comp., p. 614.


0
2. Part 501 is amended by adding the following appendix A, with 
annexes, to read as follows:

Appendix A to Part 501--Economic Sanctions Enforcement Procedures for 
Banking Institutions

    Note: This appendix provides a general procedural framework for 
the enforcement of all economic sanctions programs administered by 
the Office of Foreign Assets Control (``OFAC'') only as they relate 
to banking institutions, as defined herein.

I. Definitions

    A. Banking regulator means the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the 
National Credit Union Administration, the Office of the Comptroller 
of the Currency, or the Office of Thrift Supervision.
    B. Banking institution, for purposes of this appendix to Part 
501, means a depository institution supervised or regulated by a 
banking regulator.
    C. OFAC means the Department of the Treasury's Office of Foreign 
Assets Control.
    D. Voluntary disclosure means notification to OFAC of an 
apparent sanctions violation by the banking institution that has 
committed it. However, such notification to OFAC is not deemed a 
voluntary disclosure if OFAC has previously received information 
concerning the conduct from another source, including, but not 
limited to, a regulatory or law enforcement agency or another 
person's blocking or funds transfer rejection report.
    Notification by a banking institution is also not a voluntary 
disclosure if another person's blocking or funds transfer rejection 
report is required to be filed, whether or not this required filing 
is made. Responding to an administrative subpoena or other inquiry 
from OFAC is not a voluntary disclosure. The submission of a license 
request is not a voluntary disclosure unless it is accompanied by a 
separate disclosure.

II. Enforcement of Economic Sanctions in General

    A. OFAC Civil Investigation and Enforcement Action. OFAC is 
responsible for civil investigation and enforcement with respect to 
economic sanctions violations committed by banking institutions. In 
these efforts, OFAC may coordinate with banking regulators. OFAC 
investigations may lead to one or more of the following: an 
administrative subpoena, an order to cease and desist, a blocking 
order, an evaluative letter summarizing concerns, or a civil penalty 
proceeding. In addition to or instead of such actions, if the 
banking institution involved is currently acting pursuant to an OFAC 
license, that license may be suspended or revoked.
    B. OFAC's Evaluation of Violative Conduct. The level of 
enforcement action undertaken by OFAC involving a banking 
institution depends on the nature of the apparent violation, the 
enforcement objectives, and the foreign policy goals of the 
particular sanctions program involved. In evaluating whether to 
initiate a civil penalty action, OFAC determines whether there is 
reason to believe that a violation of the relevant regulations, 
statutes, or Executive orders has occurred. In making determinations 
about the disposition of apparent violations by banking 
institutions, including evaluative letters and civil penalties, OFAC 
will consider information provided by the banking institution and 
its banking regulator concerning the institution's compliance 
program and the adequacy of that program based on its OFAC risk 
profile. Further information about the evaluation of compliance 
programs commensurate with the risk profile of a banking institution 
and a description of a sound OFAC compliance program are provided in 
Annexes A and B.
    C. Criminal Investigations and Prosecutions. If the evidence 
suggests that a banking institution has committed a willful 
violation of a substantive prohibition or requirement, OFAC may 
refer those cases to other federal law enforcement agencies for 
criminal investigation. Cases that an investigative agency has 
referred to the Department of Justice for criminal prosecution also 
may be subject to OFAC civil penalty action.

III. Periodic Institutional Review

    A. Except for those significant violations for which prompt 
action, such as a civil penalty proceeding or referral to other 
federal law enforcement agencies, is appropriate, OFAC will review 
institutions with violations or suspected violations on a periodic 
basis. OFAC will review each such institution's apparent violations 
over a period of time deemed appropriate in light of the number and 
severity of apparent violations and the institution's OFAC 
compliance history.
    B. Upon completing this review, OFAC will preliminarily 
determine the type of enforcement action it will pursue for each 
apparent violation or related apparent violations. OFAC will then 
seek comment from the banking institution and ask it to provide 
additional information with regard to the apparent violation or 
violations. OFAC also will ask the institution to explain what 
actions led to the apparent violation or violations and what 
actions, if any, it has taken to overcome the deficiencies in its 
systems that led to the apparent improper handling of the 
transactions or accounts. Depending on the number and complexity of 
the apparent violations, OFAC may grant up to 30 days for a banking 
institution to respond and may grant further extensions at its sole 
discretion where it determines this is appropriate. Upon receipt of 
the institution's response, OFAC will decide whether to pursue the 
intended administrative action or whether some other action would 
serve the same purpose.
    C. OFAC will subsequently send the banking institution a letter 
detailing its findings and further actions, if any, concerning the 
apparent violations. OFAC will provide the banking institution's 
primary banking regulator with a copy of this letter.

IV. Factors Affecting Administrative Action

    In making its decision as to administrative action, if any, OFAC 
will consider a number of factors, including, but not limited to, 
the following:
    A. The institution's history of sanctions violations.
    B. The size of the institution and the number of OFAC-related 
transactions handled correctly compared to the number and nature of 
transactions handled incorrectly.
    C. The quality and effectiveness of the banking institution's 
overall OFAC compliance program, as determined by the institution's 
primary banking regulator and by its history of compliance with OFAC 
regulations.
    D. Whether the apparent violation or violations in question are 
the result of systemic failures at the banking institution or are 
atypical in nature.
    E. The voluntary disclosure to OFAC of the apparent violation or 
violations by the banking institution.
    F. Providing OFAC a report of, or useful enforcement information 
concerning, the apparent violation or violations. Providing a 
report, but not a voluntary disclosure, of the apparent violation or 
violations will generally be accorded less weight as a mitigating 
factor than would provision of a voluntary disclosure.
    G. The deliberate effort to hide or conceal from OFAC or to 
mislead OFAC concerning an apparent violation or violations or its 
OFAC compliance program.
    H. An analysis of current or potential sanctions harm as a 
result of a violation or series of related violations. This analysis 
will focus both on the specifics of the apparent violation or 
violations and the institution's compliance effort.
    I. Technical, computer, or human error.
    J. Applicability of a statute of limitations and any waivers 
thereof.
    K. Actions taken by the banking institution to correct the 
problems that led to the apparent violation or violations.
    L. The level of OFAC action that will best lead to enhanced 
compliance by the banking institution.
    M. The level of OFAC action that will best serve to encourage 
enhanced compliance by others.
    N. Evidence that a transaction or transactions could have been 
licensed by OFAC under an existing licensing policy.
    O. Whether other U.S. government agencies have taken enforcement 
action.
    P. Qualification of the banking institution as a small business 
or organization for the purposes of the Small Business Regulatory 
Enforcement Fairness Act, as determined by reference to the 
applicable regulations of the Small Business Administration.

V. License Suspension and Revocation

    In addition to or in lieu of other administrative actions, OFAC 
authorization to engage in a transaction or transactions pursuant to 
a general or specific license may

[[Page 1975]]

be suspended or revoked with respect to a banking institution for 
reasons including, but not limited to, the following:
    A. The banking institution has made or caused to be made in any 
license application, or in any report required pursuant to a 
license, any statement that was, at the time and in light of the 
circumstances under which it was made, false or misleading with 
respect to any material fact, or it has omitted to state in any 
application or report any material fact that was required;
    B. The banking institution has failed to file timely reports or 
comply with the recordkeeping requirements of a general or specific 
license;
    C. The banking institution has violated any provision of the 
statutes enforced by OFAC or the rules or regulations issued under 
any such provision or relevant Executive orders and such violation 
or violations are significant and merited civil penalty or other 
enforcement action;
    D. The banking institution is reasonably believed to have 
counseled, commanded, induced, procured, or knowingly aided or 
abetted the violation of any provision of any legal authority 
referred to in paragraph C;
    E. Based on the information available to it, OFAC considers the 
banking institution's compliance program inadequate; or
    F. The banking institution has committed any other act or 
omission that demonstrates unfitness to conduct the transactions 
authorized by the general or specific license.

VI. Civil Penalties

    The procedures for addressing the actions of banking 
institutions that OFAC decides merit civil penalty treatment are 
provided in the regulations governing the particular sanctions 
program involved, or, in the case of sanctions regulations issued 
pursuant to the Trading with the Enemy Act, in this Part. The 
factors listed in Section IV will be considerations in the civil 
penalty process.

                      Annex A.--OFAC Risk Matrices
 [The following matrices can be used by banking institutions to evaluate
 their compliance programs. Matrix A is from the FFIEC Bank Secrecy Act
 Anti-Money Laundering Examination Manual published in 2005, Appendix M
             (``Quantity of Risk Matrix--OFAC Procedures'')]
------------------------------------------------------------------------
             Low                    Moderate                High
------------------------------------------------------------------------
                                Matrix A
------------------------------------------------------------------------
Stable, well-known customer   Customer base         A large, fluctuating
 base in a localized           changing due to       client base in an
 environment.                  branching, merger     international
                               or acquisition in     environment.
                               the domestic market.
Few high-risk customers;      A moderate number of  A large number of
 these may include             high-risk customers.  high-risk
 nonresident aliens, foreign                         customers.
 customers (including
 accounts with U.S. powers
 of attorney) and foreign
 commercial customers.
No overseas branches and no   Overseas branches or  Overseas branches or
 correspondent accounts with   correspondent         multiple
 foreign banks.                accounts with         correspondent
                               foreign banks.        accounts with
                                                     foreign banks.
No electronic banking (e-     The bank offers       The bank offers a
 banking) services offered,    limited e-banking     wide array of e-
 or products available are     products and          banking products
 purely informational or non-  services.             and services (i.e.,
 transactional.                                      account transfers,
                                                     e-bill payment, or
                                                     accounts opened via
                                                     the Internet).
Limited number of funds       A moderate number of  A high number of
 transfers for customers and   funds transfers,      customer and non-
 non-customers, limited        mostly for            customer funds
 third-party transactions,     customers.            transfers,
 and no international funds    Possibly, a few       including
 transfers.                    international funds   international funds
                               transfers from        transfers.
                               personal or
                               business accounts.
No other types of             Limited other types   A high number of
 international transactions,   of international      other types of
 such as trade finance,        transactions.         international
 cross-border ACH, and                               transactions.
 management of sovereign
 debt.
No history of OFAC actions.   A small number of     Multiple recent
 No evidence of apparent       recent actions        actions by OFAC,
 violation or circumstances    (i.e., actions        where the bank has
 that might lead to a          within the last       not addressed the
 violation.                    five years) by        issues, thus
                               OFAC, including       leading to an
                               notice letters, or    increased risk of
                               civil money           the bank
                               penalties, with       undertaking similar
                               evidence that the     violations in the
                               bank addressed the    future.
                               issues and is not
                               at risk of similar
                               violations in the
                               future.
-----------------------------
    Matrix B. This matrix consists of additional factors that may be
 considered by banking institutions in assessing compliance programs in
     addition to Appendix M of the FFIEC Bank Secrecy Act Anti-Money
                     Laundering Examination Manual.
------------------------------------------------------------------------
Management has fully          Management exhibits   Management does not
 assessed the bank's level     a reasonable          understand, or has
 of risk based on its          understanding of      chosen to ignore,
 customer base and product     the key aspects of    key aspects of OFAC
 lines. This understanding     OFAC compliance and   compliance risk.
 of risk and strong            its commitment is     The importance of
 commitment to OFAC            generally clear and   compliance is not
 compliance is                 satisfactorily        emphasized or
 satisfactorily communicated   communicated          communicated
 throughout the organization.  throughout the        throughout the
                               organization, but     organization.
                               it may lack a
                               program
                               appropriately
                               tailored to risk.
The board of directors, or    The board has         The board has not
 board committee, has          approved an OFAC      approved an OFAC
 approved an OFAC compliance   compliance program    compliance program,
 program that includes         that includes most    or policies,
 policies, procedures,         of the appropriate    procedures,
 controls, and information     policies,             controls, and
 systems that are adequate,    procedures,           information systems
 and consistent with the       controls, and         are significantly
 bank's OFAC risk profile.     information systems   deficient.
                               necessary to ensure
                               compliance, but
                               some weaknesses are
                               noted.
Staffing levels appear        Staffing levels       Management has
 adequate to properly          appear generally      failed to provide
 execute the OFAC to           adequate, but some    appropriate
 properly execute the OFAC     deficiencies are      staffing levels to
 compliance program.           noted.                handle workload.
Authority and accountability  Authority and         Authority and
 for OFAC compliance are       accountability are    accountability for
 clearly defined and           defined, but some     compliance have not
 enforced, including the       refinements are       been clearly
 designations of a qualified   needed. A qualified   established. No
 OFAC officer.                 OFAC officer has      OFAC compliance
                               been designated.      officer, or an
                                                     unqualified one,
                                                     has been appointed.
                                                     The role of the
                                                     OFAC officer is
                                                     unclear.

[[Page 1976]]

 
Training is appropriate and   Training is           Training is sporadic
 effective based on the        conducted and         and does not cover
 bank's risk profile, covers   management provides   important
 applicable personnel, and     adequate resources    regulatory and risk
 provides necessary up-to-     given the risk        areas.
 date information and          profile of the
 resources to ensure           organization;
 compliance.                   however, some ares
                               are not covered
                               within the training
                               program.
The institution employs       The institution       The institution does
 strong quality control        employs limited       not employ quality
 methods.                      quality control       control quality
                               methods.              control methods.
------------------------------------------------------------------------

Annex B--Sound Banking Institution OFAC Compliance Programs

    A. Identification of High Risk Business Areas. A fundamental 
element of a sound OFAC compliance program rests on a banking 
institution's assessment of its specific product lines and 
identification of the high-risk areas for OFAC transactions. As OFAC 
sanctions reach into virtually all types of commercial and banking 
transactions, no single area will likely pass review without 
consideration of some type of OFAC compliance measure. Relevant 
areas to consider in a risk assessment include, but are not limited 
to, the following: retail operations, loans and other extensions of 
credit (open and closed-ended; on and off-balance sheet, including 
letters of credit), funds transfers, trust, private and 
correspondent banking, international, foreign offices, over-the-
counter derivatives, internet banking, safe deposit, payable through 
accounts, money service businesses, and merchant credit card 
processing.
    B. Internal Controls. An effective OFAC compliance program 
should include internal controls for identifying suspect accounts 
and transactions and reporting to OFAC. Internal controls should 
include the following elements:
    1. Flagging and Review of Suspect Transactions and Accounts. A 
banking institution's policies and procedures should address how it 
will flag and review transactions and accounts for possible OFAC 
violations, whether conducted manually, through interdiction 
software, or a combination of both methods. For screening purposes, 
a banking institution should clearly define procedures for comparing 
names provided on the OFAC list with the names in its files or on 
the transaction and for flagging transactions or accounts involving 
sanctioned countries. In high-risk and high-volume areas in 
particular, a banking institution's interdiction filter should be 
able to flag close name derivations for review. New accounts should 
be compared with the OFAC lists prior to allowing transactions. 
Established accounts, once scanned, should be compared regularly 
against OFAC updates.
    2. Updating the Compliance Program. A banking institution's 
compliance program should also include procedures for maintaining 
current lists of blocked countries, entities, and individuals and 
for disseminating such information throughout the institution's 
domestic operations and its offshore offices, branches and, for 
purposes of the sanctions programs under the Trading with the Enemy 
Act, foreign subsidiaries.
    3. Reporting. A compliance program should also include 
procedures for handling transactions that are validly blocked or 
rejected under the various sanctions programs. These procedures 
should cover the reporting of blocked and rejected items to OFAC as 
provided in Sec.  501.603 of this Part and the annual report of 
blocked property required by Sec.  501.604 of this Part.
    4. Management of blocked accounts. An audit trail should be 
maintained in order to reconcile all blocked funds. A banking 
institution is responsible for tracking the amount of blocked funds, 
the ownership of those funds, interest paid on those funds, and the 
release of blocked funds pursuant to license.
    5. Maintaining License Information. Sound compliance procedures 
dictate that a banking institution maintain copies of customers' 
OFAC specific licenses on file. This will allow a banking 
institution to verify whether a customer is initiating a legal 
transaction. If it is unclear whether a particular transaction is 
authorized by a license, a banking institution should confirm this 
with OFAC. Maintaining copies of licenses will also be useful if 
another banking institution in the payment chain requests 
verification of a license's validity. In the case of a transaction 
performed under general license (or, in some cases, a specific 
license), it is sound compliance for a banking institution to obtain 
a statement from the licensee that the transaction is in accordance 
with the terms of the license, assuming the banking institution does 
not know or have reason to know that the statement is false.
    C. Testing. Except for a banking institution with a very low 
OFAC risk profile, a banking institution should have a periodic test 
of its OFAC program performed by its internal audit department or by 
outside auditors, consultants, or other qualified independent 
parties. The frequency of the independent test should be consistent 
with the institution's OFAC risk profile; however, an in-depth audit 
of each department in the banking institution might reasonably be 
conducted at least once a year. The person(s) responsible for 
testing should conduct an objective, comprehensive evaluation of 
OFAC policies and procedures. The audit scope should be 
comprehensive and sufficient to assess OFAC compliance risks across 
the spectrum of all the institution's activities. If violations are 
discovered, they should be promptly reported to both OFAC and the 
banking institution's banking regulator.
    D. Responsible Individuals. It is sound compliance procedure for 
an institution to designate a qualified individual or individuals to 
be responsible for the day-to-day compliance of its OFAC program, 
including at least one individual responsible for the oversight of 
blocked funds. This individual or these individuals should be fully 
knowledgeable about OFAC statutes, regulations, and relevant 
Executive orders.
    E. Training. A banking institution should provide adequate 
training for all appropriate employees. The scope and frequency of 
the training should be consistent with the OFAC risk profile and the 
particular employee's responsibilities.

    Dated: December 22, 2005.
Robert W. Werner,
Director, Office of Foreign Assets Control.
    Approved: December 23, 2005.
Stuart A. Levey,
Under Secretary of the Treasury, Office of Terrorism and Financial 
Intelligence.
[FR Doc. 06-278 Filed 1-11-06; 8:45 am]
BILLING CODE 4810-35-P