Voluntary Self-Disclosure (VSD) to OFAC
The discovery of a potential violation of U.S. sanctions puts any company on the edge of a precipice. At this moment, management faces a critical choice that determines not only the financial condition but also the very existence of the business. One option is to take a wait-and-see approach, hoping that the regulator will not notice anything. However, experience shows that such an approach almost always leads to catastrophic consequences. The Office of Foreign Assets Control (OFAC) has vast resources for detecting violations. There is also a second path — proactive, strategic, and the only correct one. This path is called Voluntary Self-Disclosure (VSD).
Filing a VSD is not a premature admission of guilt. It is a deliberate decision that allows taking control of the situation, minimizing inevitable damage, and demonstrating to the regulator a responsible approach to conducting business. Properly structured and timely submitted disclosure can transform a potential multimillion-dollar fine into a manageable legal process with a predictable outcome.
What is voluntary self-disclosure (VSD)?
Voluntary self-disclosure is an official written notification sent to OFAC, in which a company or individual provides detailed information to the agency about facts constituting a possible violation of economic or trade sanctions. The key element defining the essence of this mechanism lies in the word “voluntary.” Disclosure is recognized as such only if the initiative comes from the violator before OFAC receives information about the same violation from another source or begins its own investigation.
Receiving an administrative subpoena, an official request for information, or any other notification from OFAC automatically deprives you of the opportunity to take advantage of VSD. From that moment, you cease to be the initiator of the dialogue and become the subject of an investigation. It is important to understand this fine line. VSD is a tool for those who act proactively. It is not an act of repentance but the beginning of a complex negotiation process in which, with the help of qualified lawyers, you can set the tone and context of the discussion. You tell your own story, explaining the reasons and demonstrating the steps taken to rectify the situation, instead of passively answering investigators’ questions, who have already formed their own, often accusatory, opinion.
Why is VSD a powerful tool for mitigation?
The decision to submit a VSD is based not on emotions but on cold calculation and a deep understanding of OFAC methodology. The Enforcement Guidelines, published by the agency itself, directly point to the colossal advantages of voluntary disclosure. The main and most measurable incentive is financial benefit.
The submission of a qualified VSD is a powerful mitigating factor that allows for a 50% reduction in the base amount of a potential penalty. This is not a theoretical possibility but a provision enshrined in the rules. For violations that OFAC classifies as serious (“egregious”), this can mean the difference between a $5 million penalty and a $2.5 million penalty. For less serious (“non-egregious”) violations, proper disclosure often leads to OFAC refraining from imposing any penalties, opting instead to issue a Cautionary Letter or close the case with no further action (No Action Letter).
In addition to the direct financial effect, VSD provides other strategic advantages. You demonstrate to OFAC your commitment to compliance principles. This creates the image of a responsible organization that, having made a mistake, does not try to hide it but actively works on eliminating its causes and consequences. Such an approach fundamentally changes the dynamics of interaction with the regulator, shifting it from confrontational to constructive. You gain the opportunity to control the narrative by providing a complete picture of events with all mitigating circumstances, which is almost impossible to achieve while being under investigation.
The importance of internal investigation
You cannot disclose what you do not fully understand. A hasty or incomplete submission of a VSD can cause more harm than complete inaction. Before sending any notification to OFAC, it is necessary to conduct a thorough, comprehensive, and privileged internal investigation. Its goal is to establish a complete picture of what happened and gather the facts that will form the basis of your report.
At this stage, involving experienced external sanctions lawyers becomes absolutely necessary. Lawyers help structure the investigation in such a way that all collected information, including correspondence, reports, and employee survey results, is protected by attorney-client privilege. This means that OFAC cannot demand the disclosure of these materials. However, if the investigation is conducted by the internal compliance department or security service, no privilege arises, and all your findings, including the most unfavorable ones, may be requested by the regulator.
The investigation process includes several key stages:
- Definition of perimeter: Establishing time frames, geography, and the circle of individuals potentially involved in the violation.
- Collection and analysis of data: Study of bank statements, contracts, emails, transport invoices, and other relevant documentation.
- Employee surveys: Conducting confidential interviews with employees related to the alleged violation.
- Quantification of violation: Accurate calculation of the number and total amount of transactions that violated the sanctions regime.
- Root cause analysis: Determining why the violation became possible — due to a compliance system failure, insufficient staff awareness, intentional actions, or a technological error.
Only after completing this stage will you possess complete and objective information necessary for preparing a convincing and comprehensive report for OFAC.
What information needs to be provided to OFAC?
The VSD report is not just a letter. It is a formal legal document, the structure and content of which must meet OFAC’s expectations. An incomplete or vague report will only raise additional questions and suspicions. For your disclosure to be recognized as valid and complete, it must contain comprehensive information on all aspects of the violation.
Based on the official recommendations of OFAC and our practical experience, we highlight the following mandatory components that each voluntary disclosure report must include:
- Full identification of the violator: It is necessary to specify the full legal name of the company (or full name of the individual), address, names of key executives and contact persons responsible for interaction with OFAC;
- Detailed description of the alleged violation: It is necessary to clearly and consistently state what exactly happened, including dates, amounts, the nature of transactions or services, as well as all known participants (counterparties, banks, intermediaries, ultimate recipients);
- Identification of the violated sanctions program: It is important to specify exactly which specific sanctions regime was affected (for example, Iranian Transactions and Sanctions Regulations (ITSR), Ukraine-Related Sanctions Regulations (URSR), etc.);
- Information about all involved parties: Providing the most complete information about each participant in suspicious transactions, including their legal addresses and banking details;
- Explanation of reasons and circumstances: It is necessary to honestly describe how and why the violation occurred, pointing out gaps in the internal control system that contributed to the incident;
- Information about the measures taken to correct the situation: This is one of the most important sections where you must demonstrate what you have already done to stop the violation and prevent it in the future (for example, halted all transactions, improved compliance procedures, conducted additional employee training);
- For legal entities: It is necessary to provide general information about the company, including the field of activity, annual turnover, number of employees, and ownership structure.
The preparation of such a document requires meticulousness and legal precision. Every word matters and can influence the regulator’s final decision.
Risks of inaction versus the advantages of disclosure
The choice between VSD submission and a wait-and-see position becomes obvious if a direct comparison of potential consequences is made. For clarity, we have summarized the key aspects in a table.
| Criterion | Consequences of inaction (if OFAC detects the violation first) | Advantages of submitting VSD |
|---|---|---|
| The size of the fine | The full basic amount of the fine is applied. For serious violations — up to several million dollars. | The base amount of the fine can be reduced by 50%. |
| Probable outcome | High probability of imposing a large monetary fine, inclusion in sanctions lists (SDN). | High likelihood of receiving a Cautionary Letter or closing the case without sanctions. |
| Reputational damage | Maximum. Publication of information about the fine on the US Treasury Department’s website, negative coverage in the media. | Minimal. The VSD process is generally confidential unless it reaches a public penalty agreement. |
| Control over the process | Completely absent. The company is in a reactive position, responding to requests and requirements from OFAC. | The company and its lawyers set the tone of the dialogue, control the presentation of information, and conduct negotiations. |
| Relations with the regulator | Perceived as antagonistic. The company is viewed as an unscrupulous entity that attempted to conceal the violation. | Formed as partnership-based and constructive. The company demonstrates responsibility and readiness for cooperation. |
| Costs for lawyers | Significantly higher due to the need to defend in a prolonged and aggressive investigation. | More predictable, as they are aimed at managing the process rather than defense. |
As can be seen from the table, inaction is a high-risk strategy with virtually guaranteed negative consequences. VSD, on the contrary, is a risk management tool that allows for significantly improving the final outcome.
Seek legal support
The process of voluntary self-disclosure is a complex legal maneuver requiring deep knowledge of sanctions legislation, an understanding of the internal workings of OFAC, and significant practical experience. Attempting to navigate this path independently or with the help of lawyers who do not have a narrow specialization in the field of sanctions is fraught with critical errors that can nullify all potential benefits of VSD.
Our team of lawyers specializes exclusively in sanctions compliance issues and representing clients before OFAC. We don’t just provide consultations; we become your strategic partner at every stage of this complex process. By reaching out to us, you receive:
- Privileged investigation: We will conduct a thorough internal investigation under the protection of attorney-client privilege, which will safeguard your most sensitive data.
- Expert analysis: We will accurately determine the nature and scale of the violation, assess potential risks, and develop an optimal strategy for submitting VSD.
- Professional report preparation: We will compile a comprehensive and persuasive report for OFAC that presents your situation in the most favorable light and meets all regulatory requirements.
- Negotiation: We will take on all communication with OFAC, professionally respond to their inquiries, and conduct negotiations to achieve the best possible outcome.
If you are faced with a situation that could be interpreted as a violation of U.S. sanctions, do not waste time. Every day of inaction increases the risks. Contact us for a confidential consultation, and we will help you develop an effective action plan to protect your business.
