OFAC sanctions pose unique compliance risks for independent schools

Background

The OFAC advances US foreign policy and national security objectives by administering and enforcing US economic and trade sanctions. Among other activities, these sanctions generally restrict dealings by US persons (including any entities organized under US law and any individuals who are US citizens, legal permanent residents, or physically located in the US) with embargoed jurisdictions and designated entities and individuals, such as those listed on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) List.

For example, US persons generally are prohibited from engaging in virtually all transactions involving Cuba, Iran, North Korea, and certain regions of Ukraine, as well as organizations and individuals targeted under the SDN List (which includes terrorists, narcotraffickers, humans rights abusers, and other persons acting contrary to US policy interests). Importantly, these measures are enforced on a strict liability basis, meaning an institution’s lack of knowledge or intent of a violation is not a cognizable defense.

The case of IMG

IMG’s liability stemmed from its acceptance of tuition and fees from two individuals listed on the OFAC’s SDN List for having ties to a Mexican-based drug cartel. IMG and the individuals entered into yearly contracts for the provision of tuition, lodging, and other expenses in connection with the enrollment of the SDNs’ children in the school. Payments by the SDNs were made through non-sanctioned third-party individuals and entities, credit cards on file for each of the students, and crediting positive tuition balances at the end of an academic school year towards subsequent years.

As a result of these transactions, OFAC determined that IMG dealt with the “property or interests in property” of the Specifically Designated Nationals (the parents of the enrolled students) on 89 different occasions in violation of the Foreign Narcotics Kingpin Sanctions Regulations. OFAC also determined that IMG “demonstrated reckless disregard for U.S. sanctions requirements” given the absence of adequate sanction-screening checks and other due diligence. Notably, there was no allegation that IMG intended any violation or even that IMG had knowledge of the prohibited status of the individuals involved.

OFAC noted that IMG did not voluntarily self-disclose the violations, though IMG did inform OFAC of the violations once it became aware of them (by which point OFAC already had initiated its own investigation). IMG therefore did not receive full mitigation credit typically provided for voluntary disclosures. OFAC also noted that IMG demonstrated reckless disregard for US sanctions requirements as it failed to conduct sanctions screening checks on its counterparties despite the fact that the SDNs had provided full name details that matched their entries on the SDN List during the application process, enrollment, and in annual tuition enrollment agreements. IMG did, however, receive mitigation credit for taking immediate remedial steps upon learning of the violations (including hiring a new chief legal officer who conducted a comprehensive lookback and implemented a risk-based sanctions compliance program) and for cooperating with OFAC during OFAC’s investigation.

Next steps

The Release highlights that US academic institutions, including independent schools, are subject to US sanctions laws and face significant penalties for accepting funds from sanctioned individuals or entities. OFAC specifically noted that “[a]cademic institutions are not immune.” In fact, OFAC acknowledged that “[a]cademic institutions face some unique risks given the variety of parties who may satisfy financial obligations for a student.” In addition, OFAC warned that “[s]anctioned persons, like many others, may wish to avail themselves or their families of the opportunities available in the United States, including potentially to distance their children from their own illicit activities. Consequently, academic institutions should be on the lookout for payment arrangements that may involve sanctioned persons.”

Given this, all schools should implement a risk-based sanctions-compliance program consistent with OFAC guidance if one is not already in place, and existing compliance programs should be reviewed for strict compliance. Compliance programs should be tailored to a specific school’s risk profile based on geography, student population, payment forms and methods, and other factors. An effective sanctions compliance program should include, without limitation, the following measures:

• Screening individuals involved with the school (students, parents, donors, payors, etc.) against the OFAC’s SDN List;
• Using available information to understand and conduct a risk assessment to determine any ties to embargoed areas, entities, and/or individuals;
• Implementing training for staff, especially those involved in admissions and finance, to facilitate ongoing compliance; and
• Conducting regular independent testing/auditing to ensure controls are effective.

Establishing and maintaining an effective sanctions compliance program that includes the above elements may, in the words of OFAC, “substantially reduce the chances of violating U.S. sanctions” and will show a commitment to compliance that should reduce potential penalties if violations occur despite the existence of a compliance program.

McDermott Will & Schulte lawyers are available to help you establish and/or review and revise existing processes.

If you have any questions concerning this alert, please contact your McDermott Will & Schulte lawyer or one of the authors.

Daniela Ordoñez, a law clerk in the New York office, contributed to this client alert.