The Truth Behind OFAC

Matt Milliken has spent seven years in the powersports industry, and eight in auto. And in that time, the current business director for a Honda dealership in Grapevine, Texas, has never had a hit.

In the auto industry, a dealership’s requirements set forth by the Office of Foreign Assets Control (OFAC), a federal agency, are clear. Run a customer’s name through the Specially Designated Nationals (SDN) List, a compilation of individuals and groups prohibited from conducting business in the United States, and move on with the F&I process. However, in the powersports industry, where dealers operate parts, accessories and clothing departments, compliance isn’t so clear.

For Milliken, whose store is situated in a well-to-do section of the greater Dallas-Fort Worth area, it’s better to be safe than sorry. That’s why he runs an OFAC check on every deal totaling more than $10,000, regardless of whether he’s dealing with a cash or finance customer. Still, even he isn’t sure if that’s the right way to go.

“I don’t know if it’s an accepted practice in the industry,” he said.

Milliken verifies each customer by entering his or her first and last names into an online search tool controlled by the Financial Industry Regulatory Authority, the largest non-governmental regulator for all securities firms operating in the United States. The search tool cross-checks a customer’s name against the SDN List.

The significance of this list is pretty simple. “If your customer is on the list, you cannot sell, lease or otherwise deliver the vehicle,” said Jim Ganther, president of Mosaic Compliance Services. “How the vehicle is paid for — cash, credit or lease — is irrelevant.”

Who Needs an OFAC Check?

The OFAC regulation applies to all dealer business transactions for all sales, regardless of the price of the item, according to Terry O’Loughlin, director of compliance for Reynolds and Reynolds. And although he says the OFAC requirement can even be applied to items selling for as little as a few cents, O’Loughlin said it’s important to understand the purpose of the rule.

“Vehicles, certain parts, and other materials may be employed for terrorist actions. Consequently, such purchases would be of concern to the federal government … But dealers should understand where the emphasis should be placed,” O’Loughlin said.

Since the OFAC regulation does not specify a dollar amount needed before a check is conducted, the responsibility falls on the dealership’s management team to set limits.

Cindy Wallace, a finance manager for a Honda dealership in Seattle, said her dealership’s minimum dollar amount for an OFAC check is $3,000. Typical motorcycle deals at her store range between $20,000 and $25,000.

“I only worry about it when I’m doing a deal for a bike or scooter,” she said. “When people buy parts, I don’t think it’s necessary.”

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Verifying a Hit

Figuring out where to limit OFAC checks is one thing, knowing what to do when one gets a full or partial hit is another.

The OFAC office advises business owners who think they have a hit to contact the government agency’s 800-number to verify their customer’s personal information. An agency representative will ask for a customer’s first and last name. If there is not an exact match, then the dealer is free to conduct business with the customer. If there is a match, then the representative will ask for more of the customer’s personal information, such as address, nationality, passport, tax ID or cedula number, date of birth, place of birth, former names and aliases.

The process is straightforward and low-tech, which is the reason some dealers question why the OFAC does not take a more rigorous approach to verifying customer information. Aside from asking a series of questions, the department does not employ any other method for validating an individual’s identity. To the agency’s credit, its staff is well versed on compliance issues involving financial institutions and other businesses, but only provides limited service to dealers with questions.

The agency fields thousands of calls each year from businesses nationwide, but has no record of which industries the calls originate from, said John Rankin, a former spokesperson for the OFAC.

In addition, the OFAC does not mandate that dealers use a specific compliance process to conform to its regulation. “We recognize that all businesses are different,” Rankin said. “What works for a huge operation might not work for a smaller outfit.”

Rankin also said hits recorded by a dealership’s compliance solution may be related to another list, such as the FBI’s Most Wanted List or the State Department’s Debarred Parties List. That’s because lists from various government and international organizations are often lumped into one database, and used by compliance solution providers. So, if a dealer runs a credit bureau report on a customer, it’s possible his or her name will be screened against all of these records.

“It’s important that businesses understand the list and think about what processes they have to make sure a hit is a false positive or if it’s actually a real name,” Rankin said.

Origins of OFAC And the SDN List

The OFAC became actively involved in scrutinizing retail transactions with foreign nationals under the USA Patriot Act, which went into effect after the Sept. 11, 2001, terrorist attacks. Since then, the agency has monitored powersports and auto dealerships, as well as other retail businesses.

The OFAC was originally created in 1950 during the Korean War in response to President Truman’s order to block all Chinese and North Korean assets subject to U.S. jurisdiction. The agency operates under the jurisdiction of the U.S. Department of the Treasury, and continues to be responsible for the administration and enforcement of the federal government’s economic and trade sanctions.

The agency’s SDN List is a 400-page document that contains more than 6,000 names of individuals and groups who are “owned or controlled by, or acting for or on behalf of, targeted countries.”

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The SDN List is updated frequently, but not according to a predetermined timetable. The OFAC makes the list available to the public in a PDF or text document format through the agency’s Website. Users can search the list manually or use the “find” feature in the Adobe Acrobat Reader program to locate a name. Another option is to employ compliance software solutions to automatically screen a customer’s name against the list.

Getting OFAC Compliant

There are a slew of free Websites and software solutions dealers can employ, such as those offered by Patriot Dealer, DealerTrack and ADP Lightspeed. These software solutions often include instructions on how to verify a customer’s information, and how to contact the OFAC office.

While the outcome of most inquiries can be anticlimactic, the agency’s SDN List is a good first line of defense for some dealers against potential criminals. However, legal experts warn not to rely on technology alone to verify customer information, as most criminals or terrorists on the SDN List won’t get caught using real forms of identity. That’s why it never hurts for an F&I manager to do some extra legwork and ask his or her customer additional questions about his or her background.

Legal experts also advise that dealerships implement policies and procedures for maintaining compliance with the OFAC regulation. “The weak link is having a consistent policy for dealing with OFAC regulations and a verifiable training program to support it,” Ganther said.

Some dealers may only rely on their lenders to conduct the OFAC check. However, this is not a recommended practice because it automatically excludes all cash deals, Ganther said.

“That’s a policy of consistent violation — not a good idea,” he said.

He advises dealers to tie their OFAC and Red Flags Rule obligations — the new identity-verification regulations set to go into effect on May 1 — into one coherent, uniform policy.

Legal experts add that while the OFAC requirement may seem tedious, it’s a rule that must be followed considering the nation’s precarious financial condition, said Mark Thaw, a certified public accountant and partner of Morrison Brown Argiz & Farra LLP, an accounting firm that specializes in dealership business.

“We are in some form of a financial crisis in the country. [F&I managers] are trying to make deals fly at all costs,” Thaw said. “It’ll be more difficult for businesses to turn away customers, which leaves the doors open for potential problems.”

Wallace doesn’t doubt the benefit of compliance. Like Milliken, she also uses an online search tool to cross-check customers’ names. “If it comes down to covering your rear or going to jail, it’s an easy decision,” she said.

Morrison’s Thaw added, “As much as you detest or hate this, you don’t have a choice, because it’s a threat that can put you out of business in a worst-case scenario. At a minimum it’ll cost you money just with the lawyer, and dealerships don’t have money to do that right now.”

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What is OFAC?

The Office of Foreign Assets Control administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets and trade restrictions to accomplish foreign policy and national security goals.

How long has OFAC been around?

The OFAC is the successor to the Office of Foreign Funds Control (the “FFC’’), which was established after the German invasion of Norway in 1940. The FFC program was administered by the Secretary of the Treasury throughout the war. The FFC’s initial purpose was to prevent Nazi use of the occupied countries’ holdings of foreign exchange and securities, and to prevent forced repatriation of funds belonging to nationals of those countries.

The OFAC itself was created in December 1950 after the entry of China into the Korean War, as President Truman blocked all Chinese and North Korean assets subject to U.S. jurisdiction.

How do I determine if I have a valid OFAC match?

• Is the “hit” or “match” against OFAC’s SDN List or targeted countries, or is it “hitting” for some other reason (e.g. “Control List” or “PEP,” “CIA,” “Non-Cooperative Countries and Territories,” “Canadian Consolidated List,” “World Bank Debarred Parties,” “Blocked Officials File,” or “government official of a designated country”)?

• Now that you’ve established that the hit is against OFAC’s SDN List or targeted countries, evaluate the quality of the hit. Compare the name in your transactions with the name on the SDN List. Is the name in your transaction an individual while the name on the SDN List is a vessel, organization or company (or vice versa)? If yes, you do not have a valid match.

• How much of the SDN’s name is matching against the name in your transaction? Is just one of two or more names matching (i.e., just the last name)? If yes, you do not have a valid match.

• Compare the complete SDN entry with all of the information you have on the matching name in your transaction. An SDN entry often will have, for example, a full name, address, nationality, passport, tax ID or cedula number, place of birth, date of birth, former names and aliases.

• Are there a number of similarities or exact matches? If yes, you are instructed to call the hotline at (800) 540-6322. If no, you do not have a valid match.

What are the penalties for non-compliance?

Criminal penalties related to OFAC violations can include fines ranging from $50,000 to $10 million and 10 to 30 years of imprisonment for willful violations. Civil penalties range from $250,000, or twice the amount of each underlying transaction, to $1,075,000 for each violation.

Where can I find the OFAC list?

OFAC’s list is available online at www.treas.gov/offices/enforcement/ofac. The agency also provides a starter kit comprised of the SDN List, an industry-specific brochure and articles.

To conduct an OFAC check, screen the customer’s name manually or by using software. Then answer the following question: Is the name an exact match, or very close? Is your customer located in the same general area as the SDN listed? If the answer is “no” to either question, you may have a “false hit.” If there are many similarities, contact OFAC at (800) 540-6322 for verification.