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OFAC Trade Sanctions as a Compliance Tool

Late last month Treasury Secretary Steven Mnuchin announced what he said was one of the largest sanctions actions every taken by Treasury's Office of Foreign Assets Control (OFAC).

The sanctions are aimed at 271 employees of the agency of the Syrian government believed to have been involved in chemical weapons attacks. These individuals are now blocked from financial transactions involving U.S. citizens, permanent residents or companies.

It remains to be seen how impactful these sanctions will be in putting pressure on the brutal Assad regime in Syria. In this post, we will take note of another aspect of OFAC sanctions: their role in international tax compliance.

The prospect of OFAC sanctions is one of the tools the U.S. has to encourage foreign individuals and entities to comply with U.S. anti-money laundering (AML) and anti-corruption laws. Through its Specially Designated Nationals (SDN) list, OFAC can bar individuals from U.S. commercial chains.

Given the importance of the U.S. market in the world economy, being placed on OFAC's sanctions list can be tantamount to commercial death for affected companies.

An example of this came a year ago, not long after the Panama Papers scandal broke. That scandal involved a massive leak of data from a Panamanian law firm alleged to have facilitated tax evasion and money laundering by wealthy people through shell companies and offshore accounts.

The Panama Papers and OFAC Actions

On May 5, 2016, while the Panama Papers story was still unfolding, OFAC imposed sanctions on numerous Panamanian entities and individuals involved in duty-free transactions. These sanctions put pressure on the Panamanians to pay stricter scrutiny to compliance with AML and anti-corruption laws such as the Foreign Corrupt Practices Act (FCPA).

In short, OFAC is part of a larger global compliance structure that also includes tax laws like the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) for international tax transparency that is being developed by the Organization for Cooperation and Development.

Trend Toward More Transparency

As we noted in a post last summer, the connection between FATCA and the emerging CRS is still somewhat uncertain. Clearly, however, they are both, along with OFAC and other tools, aimed at increased global compliance with more transparent standards for international financial transactions.

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