What are the three types of OFAC sanctions?

The Office of Foreign Assets Control (OFAC) implements its policy through three fundamental mechanisms of restrictions. These include blocking sanctions (SDN sanctions), sectoral sanctions (SSI), and comprehensive sanctions against countries or regions. The differences between these tools determine the scale of consequences: from targeted prohibitions on lending to complete isolation from the global financial system and the blocking of all assets.

This is the most severe and frequently used tool of pressure. When a physical or legal entity is included in the Specially Designated Nationals and Blocked Persons (SDN List), it finds itself under a complete financial blockade. American citizens and companies (US persons) are strictly prohibited from conducting any business with such entities, providing them with services, or entering into contractual relationships.

Inclusion in the SDN List entails the immediate freezing of assets. Any property of the individual in question, located in the United States or under the control of American persons, is blocked. This applies not only to real estate but also to bank accounts, securities, and corporate rights. In practice, the consequences extend far beyond American jurisdiction. Foreign financial institutions, fearing secondary sanctions, cease servicing individuals on the SDN list. Banks cut off access to the SWIFT system, block cards, and close accounts to avoid losing access to correspondent accounts in US dollars.

This type of restriction is personal. It is aimed at specific officials, oligarchs, terrorists, or companies caught in illegal activities. Exiting this regime requires a complex legal delisting procedure, as the restrictions are indefinite until a special order from the regulator.

The second type of restrictions often causes confusion among businesses and compliance officers. Sectoral sanctions, regulated through the Sectoral Sanctions Identifications List (SSI List), do not imply automatic asset freezes or a total ban on cooperation. Their aim is to restrict access for specific sectors of the economy to financing and technologies.

The targets of such measures are most often the energy sector, the defence industry, and the financial sector. OFAC sanctions in this case prohibit American persons from conducting strictly defined transactions. Most often, this involves a ban on operations with new debt obligations (debt) or shares (equity). For example, companies on the SSI list can freely conduct current commercial activities, sell goods, and receive payments. However, they are prohibited from obtaining long-term loans from American banks or issuing new bonds on Western markets.

The complexity lies in the details of the directives. Different Directives within a single programme can set different terms for permissible crediting — from 14 to 90 days. If a transaction exceeds this limit, it becomes a violation. Banks are forced to conduct thorough screening of each operation to ensure that it is not covert financing of a sanctioned person.

The third level of restrictions covers entire states. OFAC sanctioned countries are jurisdictions subject to a complete trade and financial embargo. Such countries traditionally include Iran, North Korea, Cuba, Syria, as well as certain occupied territories.

The peculiarity of this regime lies in the geographical principle of operation. Restrictions apply to all individuals located in this country, regardless of their political views or type of activity. Almost any export and import of goods, technologies, and services is prohibited. American banks block any transactions if there is a mention of the embargoed country in the payment chain.

An individual may not be on any personal blacklist, but their payment will be declined simply because the sender’s IP address belongs to a sanctioned jurisdiction. The risks here are highest for logistics companies and exporters. Violation of the embargo regime entails the most severe fines from the regulator, as it is considered a threat to the national security of the USA.

Banks rarely inform the client of the details of a blockage, limiting themselves to the wording “compliance policy”. However, the method of action allows one to determine the nature of the problem with high accuracy. If the account is completely frozen and funds are inaccessible, there is a 99% probability that it triggered a match with the SDN List or the 50% rule. OFAC regulations state that a company 50% or more owned by a person from the SDN is automatically considered blocked.

If payments are processed, but the bank refuses credit, factoring, or requires confirmation of the absence of dual-use equipment supplies, this concerns sectoral restrictions. In this case, the check is conducted not by the owner’s name but by the HS codes of the goods and the nature of the transaction.

When transactions related to certain ports or regions are declined, geographic filters of comprehensive programs are triggered. Monitoring systems track not only the recipient but also the route of movement of funds and goods.

Erroneous interpretation of OFAC rules often leads to fatal consequences for business.

There are a number of persistent myths that need to be dispelled:

If you encounter a freeze of funds or a refusal to process a transaction, it is necessary to immediately conduct a thorough OFAC check in all three directions. Attempts to bypass restrictions through changing jurisdiction or using front persons may be qualified as deliberate sanctions violations, which could lead to criminal prosecution. To unblock assets or obtain a special licence, you should contact specialised lawyers who focus on US sanctions law.