On July 6, 2016, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) added North Korean leader Kim Jong Un and other officials to the list of Specially Designated Nationals and Blocked Persons (“SDN List”) for human rights abuses. While it should not be terribly surprising that a political leader alleged by the United States to have caused millions of his own people to endure cruel hardships ended up on the SDN List, this recent designation by OFAC serves to remind broker-dealers and investment advisers of the importance of regularly verifying that existing clients are not on the SDN List. The financial institution that checks the SDN list only at account opening assumes the risk that it will fail to recognize when an existing client is added to the SDN list.
Ongoing Monitoring of Clients and Third Parties
To render services to a client, a financial institution may enter into various formal or informal relationships with parties other than the client. Examples of third parties that may be involved in a transaction include counterparties, deal partners (e.g., private equity firms, venture capital funds), financial intermediaries (e.g., broker-dealers), transfer agents, fund administrators, syndicated loan lenders, trustees, and paying agents. As part of a risk-based AML program, a financial institution should perform regular OFAC screening not only on its clients but also certain third parties that facilitate or otherwise play a role in a securities transaction. Although it is typically not necessary to screen every third party involved in a transaction, it is a good practice to screen those parties that present OFAC risks or AML concerns.
OFAC’s Email Notification System
Some broker-dealers and investment advisers pay for software or services that automatically screen existing clients and other business relationships when there are updates to the SDN List. A potential alternative to using OFAC compliance software is subscribing to the OFAC’s email notification system. One can subscribe to this system to receive announcements of OFAC actions, including updates to the SDN List. There is no cost to subscribe.
Concluding Thoughts
We recognize that many broker-dealers and investment advisers do not have the budget for costly compliance software or services. However, budgetary constraints will not excuse the financial institution that fails to promptly identify an existing client or other business relationship that has been placed on the SDN List. Follow this link for information about OFAC’s Email Notification System.
