The past few months have provided the compliance professional with two very useful releases of information from the Department of Justice (DOJ) around compliance programs. April saw the release of the Evaluation of Corporate Compliance Programs, 2019 Guidance, from the Criminal Division. In July, the Antitrust Division released its Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations. Obviously, they had different foci but they provided the anti-trust/anti-bribery (ABC) compliance practitioner with solid information about not only what the DOJ is thinking about when it comes to its expectations around a compliance program but also benchmarks for best practices compliance programs in both ABC and anti-trust.

However, these releases bookended the release of the Office of Foreign Asset Control’s (OFAC) Framework for OFAC Compliance Commitments (Framework), which was released in June. It is guidance for those entities seeking to comply with sanctions through a sanctions compliance program (SCP). Mike Volkov, one not normally associated with hyperbole, has called this “a game-changer”. Over the next few days, I will be reviewing the OFAC Framework and exploring how it informs the ABC compliance practitioner.

OFAC itself said the Framework “strongly encourages” companies subject to its jurisdiction to take a “risk-based approach to sanctions compliance by developing, implementing, and routinely updating a sanctions compliance program (SCP).” OFAC recognizes that all businesses are different in “size and sophistication, products and services, customers and counterparties, and geographic locations”. To this end each compliance program should not be a cookie cutter, off the shelf solution.

OFAC related that each corporate compliance program should be predicated on and incorporate at least five essential components of compliance, which I will be exploring in greater depth over the next several days:

1. management commitment;
2. risk assessment;
3. internal controls;
4. testing and auditing; and
5. training

However, OFAC stated that it would consider the robustness and implementation of these five prongs after conducting an investigation and in consideration of a civil penalty. Equally important, OFAC’s Office of Compliance and Enforcement (OCE) will also make a determination as to any of the five elements that should be incorporated into a corporate compliance program going forward as a part of any formal settlement agreement. The Framework goes on to state, “OFAC will evaluate a subject person’s SCP in a manner consistent with the Economic Sanctions Enforcement Guidelines (the “Guidelines”).”

Moreover, as OFAC applies the Framework to each specific fact pattern, it will favorably consider companies that have an effective compliance program. The Framework listed the following example, “under General Factor E (compliance program), OFAC may consider the existence, nature, and adequacy of an SCP, and when appropriate, may mitigate a CMP on that basis.” OFAC reiterated that its analysis is based on the five essential components of compliance listed above. Additionally, a company “may also benefit from further mitigation of a CMP pursuant to General Factor F (remedial response) when the SCP results in remedial steps being taken.”

With the increased sanctions program, most notably against Cuba, Iran and Venezuela, OFAC has demonstrated an aggressive policy of enforcement this year in particular. In this new era of forceful OFAC sanctions enforcement, companies subject to OFAC jurisdiction need to be aware of the requirements for an effective SCP. As Volkov noted, “Companies that are in the process of implementing or updating their OFAC sanctions compliance program should review these documents and should incorporate these compliance expectations and elements into their own analysis.”

Finally, OFAC will most likely consider the existence of an effective SCP at the time of an apparent violation as a factor in its analysis as to whether a case is deemed “egregious.” The Framework provides companies with a structure for OFAC’s belief of the five essential components of a risk-based SCP. If a company under OFAC investigation has an “effective SCP” at the time of the violation, or if the subject implements remedial compliance measures at the time of the resolution, OFAC may reduce a penalty and/or deem the penalty non-egregious. This is what every compliance practitioner and compliance program needs to hear.

Element 1 – Management Commitment
Under Management Commitment, a company must ensure that senior management demonstrates its commitment to, and support of, the organization’s SCP. This commitment is critical to ensure that the compliance program receives “adequate resources and is fully integrated into the day-to-day operations,” and helps “legitimize the program, empower its personnel, and foster a culture of compliance throughout the organization.” Effective management support includes the provision of adequate resources to the compliance unit(s) and support for compliance personnel’s authority within an organization. The term senior management itself is expansive including “senior leadership, executives, and/or the board of directors.”

To meet this requirement, there are five specific elements:

1. Senior management has reviewed and approved the organization’s compliance program. This means that the overall SCP should be reviewed, discussed and approved at the highest level of an organization. You should also be prepared to document those steps so be sure there are Board meeting minutes and other notations that all levels of senior management has actually performed this review and approval.
2. Senior management ensures that its compliance unit(s) have been delegated sufficient authority and autonomy to deploy the policies and procedures in a manner that effectively controls its OFAC risks. Senior management has to ensure the existence of direct reporting lines between compliance program functions and senior management, including routine and periodic meetings between these two elements of the organization.

This element requires two considerations. First, does the Chief Compliance Officer (CCO) or whoever heads up the SCP, have access to senior management about the status of the company’s sanctions compliance risk management program? More than simply access, are there actual meetings where there is substantive discussion on issues around the SCP? This means more than simply quarterly, semi-annually or annually making a 15-minute presentation to the Board of Directors. Further, the prong of this element requires senior management to sit up and pay attention to trade sanction risk management.

3. Senior management has taken and will continue to take steps to ensure that the compliance unit(s) receive adequate resources – including in the form of human capital, expertise, information technology and other resources, as appropriate – that are relative to the organization’s breadth of operations, target and secondary markets, and other factors affective its overall risk profile. Under this element, OFAC outlined the following criteria: (a) The organization has appointed a dedicated OFAC sanctions compliance officer (who can also be responsible for other compliance programs); (b) The quality and experience of the compliance program personnel, including their technical knowledge and expertise, the ability of the personnel to understand complex financial and commercial activities, apply their OFAC knowledge, and identify OFAC-related issues, risks and prohibited activities; (c) The efforts to ensure that personnel dedicated to the compliance program have sufficient experience and appropriate “position” within the organization; and (d) Sufficient control functions exist to support the SCP, including but not limited to information technology software and systems.

This prong has multiple elements as well. First, does the person in charge of trade sanctions have real knowledge in the area or are those resources available to them? This is more than simply technical expertise, which is now simply table stakes. Do your trade compliance resource(s) understand the business well enough to understand both the trade compliance and business side? Put another way, can they read a spreadsheet in addition to understanding OFAC regulations. Next, are there sufficient resources put into a company’s trade sanctions risk management program, both from a budgetary perspective and a head count perspective? Finally, do you have an appropriate level of technological solutions delivered to and for the trade sanctions compliance program? If you are still using spreadsheets, you probably do not meet this requirement.

4. Senior management promotes a “culture of compliance” through the organization. Under this element, OFAC outlined the following criterial: (a) The ability of personnel to report sanctions related misconduct by the organization or its personnel to senior management without fear of reprisal; (b) Senior management messages and takes actions that discourage misconduct and prohibited activities, and highlight the potential repercussions of non-compliance with OFAC sanctions; and (c) The ability of the compliance program to have oversight over the actions of the entire organization, including but not limited to senior management, for the purposes of compliance with OFAC sanctions.

Both the Department of Justice’s (DOJ) Criminal Division’s Evaluation of Corporate Compliance Programs, 2019 Guidance, and the Antitrust Division’s Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations focused on corporate culture as a key element of any best practices compliance program in their respective disciplines. It is therefore no surprise to see OFAC focus on it also, since it is now well-recognized of the need for a culture respecting and doing compliance in every organization. This prong requires senior management to fully embrace and support an internal reporting system for trade compliance issues and makes clear the repercussions for the failure to comply with a corporate trade SCP. Finally, does your trade SCP apply equally to everyone in the organization, literally from the shop floor up to the Boardroom.

5. Senior management demonstrates recognition of the seriousness of apparent violations of the laws and regulations administered by OFAC, or malfunctions, deficiencies, or failures by the organization and its personnel to comply with the SCP’s policies and procedures and implements necessary measures to reduce the occurrence of apparent violations in the future. Such measures should address the root causes of past violations and represent systemic solutions whenever possible.

This this final prong of Element 1, demonstrates that OFAC has moved aggressively to remediate any trade sanction program violation, including discipling those involved. But more than simply personnel disciplines, OFAC mandates a root cause analysis (RCA) to understand the structural failures which may have led to, caused or allowed the violation(s) to occur. The final step is did senior management take what was learned in the RCA and use it to remediate the system?

Element 2 - Risk Assessment

Every compliance professional of any stripe needs to read, understand and implement some of the key concepts of the Framework into your corporate compliance program. It does not matter if its trade controls, anti-corruption or anti-money laundering (AML). This Framework has much to offer that you should consider.

In any compliance regime, the starting point is a risk assessment. That is no different and certainly no surprise in the Framework. OFAC itself “recommends that organizations conduct a routine and ongoing risk assessment to inform its compliance program policies, procedures, internal controls and training.” In this respect, OFAC explained that such a risk assessment should consist of a “holistic review of the organization from top-to-bottom and asses its touchpoints to the outside world.”

Further, as you would expect, the Framework has a slightly different focus on risk than that articulated in Hallmark IV of the Ten Hallmarks of an Effective Compliance Program as initially formulated in the 2012 FCPA Resource Guide. Under the Framework, your compliance regime should assess the five following prongs: “(i) customers, supply chain, intermediaries, and counter-parties; (ii) the products and services it offers, including how and where such items fit into other financial or commercial products, services, networks or systems; (iii) the geographic locations of the organization, as well as its customers, supply chain, intermediaries and counter-parties; and (iv) potential merger and acquisitions, especially those involving non-U.S. companies or corporations.”

Under Prong 1, you need to consider not so much how you do business but with whom you do business. This is a slightly different focus on risk than under a Foreign Corrupt Practices Act (FCPA) risk assessment where the question is usually more focused on the use of third-party agents, distributors or others to sell to foreign officials or state-owned enterprises (SOEs). Yet the Framework focus is one that every compliance practitioner should consider as many bribery schemes now actively involve the customers and companies which enter into a relationship with your company through the supply chain.

Under Prong 2, you need to take a much more holistic view of your products and services than you would under a FCPA compliance program risk assessment. It is far beyond selling to foreign governments or SOEs. This Prong mandates you assess what you sell, where you sell it and how you sell it. However, from an overall business impact, this is certainly a much more business impactful manner to assess risk.

Prong 3 asks you to once again consider your “customers, supply chain, intermediaries and counter-parties” but this time from their home domicile or where they are providing goods or services to you. In this era of increasing transparency around extractive and other minerals, knowing where your products and services derive has moved from a nice piece of information to a mandatory inquiry.

Finally, under Prong 4, you should risk assess all merger and acquisition (M&A) candidates. Not only should you look at them from the ethics and compliance perspective but also from the trade sanctions perspective. Obviously, non-US companies will probably not have followed US export control or trade sanctions laws so you will need to be prepared to remediate as quickly as possible.

The next step is that an entity conducts, or will conduct, an OFAC risk assessment in a manner and with a frequency that adequately accounts for the potential risks. You should update your risk assessment to account for the root causes of any apparent violations or systemic deficiencies identified by the organization during the routine course of business. In addition to the M&A component, there should be a similar exercise for third parties. The Framework noted, “On-boarding: The organization develops a sanctions risk rating for customers, customer groups, or account relationships, as appropriate, by leveraging information provided by the customer [ for example, through a Know Your Customer or Customer Due Diligence process] and independent research conducted by the organization at the initiation of the customer relationship. This information will guide the timing and scope of future due diligence efforts.” This means you should develop a protocol for the risk rating of customers, vendors, or other relationships based on the due diligence process and independent research conducted by the organization at the initiation of the relationship. This information will guide the timing and scope of future due diligence efforts.

Finally, each organization should develop a “methodology to identify, analyze, and address the particular risks it identifies. As appropriate, the risk assessment will be updated to account for the conduct and root causes of any apparent violations or systemic deficiencies identified by the organization during the routine course of business, for example, through a testing or audit function.” In other words, you cannot sit or stand still. Just as your business is ever evolving your Framework risk assessment should evolve to meet business opportunities and challenges.

Element 2 - Internal Controls

Not surprisingly under the Framework, it is necessary that an effective compliance program have internal controls, including policies and procedures, to prevent, detect, escalate and report compliance program compliance activity. Much to warm my heart, OFAC also specifies a key reason is to Document, Document, and Document these actions in any compliance regime. Internal controls are designed to define procedures and processes regarding trade sanction compliance and minimize the risks identified in your risk assessments.

The Framework recognizes the dynamic nature of compliance programs. It mandates that “policies and procedures should be enforced, weaknesses should be identified and remediated, and internal and/or external audits and assessments of the program should be conducted on a periodic basis.” In other words, your compliance program should have the ability to adjust rapidly to changes.

Under the Framework, Internal controls are systematic measures, such as reviews, checks and balances, methods and procedures, instituted by an organization that performs several different functions. These functions include allowing a company to conduct its business in an orderly and efficient manner; to assist an organization ensuring the accuracy and completeness of its trade sanction information and data; to enable a business to produce reliable and timely management information; and to help an entity to ensure there is adherence to its policies and plans by its employees, applicable third parties and others. They should be entity wide. For compliance purposes, controls are measures specifically to provide reasonable assurance that any assets or resources of a company are not sold to any prohibited party or shipped out to a designated country.

To implement effective internal controls, the Framework lays out seven prongs which should be met. They include:

1. Written policies and procedure. Design and implement written policies and procedures outlining the compliance program. These policies and procedures should be relevant to the organization, capture your organization’s day-to-day operations and procedures and are set out in plain English and not legalese. It is interesting to see OFAC view policies and procedures as internal controls. This is analogous to the Securities and Exchange Commission (SEC) view that a Code of Conduct is an internal control in its enforcement action involving United Airlines and its former Chief Executive Officer (CEO) Jeff Smisek.

2. Controls follow your risk assessment. Implement internal controls which sufficiently address the results of your organization’s risk assessment. In other words, your internal controls should enable prevent, detect, escalate and report compliance program compliance activity. It also requires calibration of the controls “in a manner that is appropriate to address its risk profile and compliance needs”. It is incumbent to consider not only the most obvious risk areas for your internal controls but also the universe of potential transactions within the operations of a company. There is a clear need for rigor in your internal controls protocols and adherence to that rigor can increase operationalization around the internal controls a company should consider including gifts, travel and entertainment expenses. Finally, you should routinely test your controls to ensure effectiveness.

3. Testing of your controls. The effectiveness and adherence to your policies and procedures should be tested through both internal and external audits. This process should allow you to compare the internal controls current or actual performance to its expected performance to determine whether it is meeting its objectives and using its resources effectively. Moreover, it is a technique that businesses use to determine what steps need to be taken to move from their current state to their desired future state.

4. Document, Document, and Document. Ensure that you document your policy, both design and retention, and adequately document your compliance program. You need to report your findings with the appropriate data and analysis presented, showing the strategic objectives, current standing, deficiencies, and whether the current situation is acceptable. Finally, all your analysis will be backed up with the data gathered during the analysis.

5. Root Cause Analysis. When you learn of a lack of or the existence of a control weakness relating to trade compliance, take immediate and effective action, to the extent possible, to identify and implement controls until the root cause of the weakness can be determined and remediated. If the situation is unacceptable, you should present a course of action for improvement.

6. Communicate. You should clearly communicate your policies and procedures to all relevant staff, including compliance personnel, gatekeepers and business units operating in high-risk areas and to external parties performing compliance program responsibilities on behalf of your organization.

7. Responsible Personnel. You must have personnel to integrate these policies and procedures into the operations of the organization. This includes relevant business units and you must work to make sure that the employees in any high-risk areas understand your organizations policies and procedures.

The internal control requirement under the Framework is not something new to the compliance practitioner. However, the seven prongs OFAC has laid out is a good way to think through the design, creation and implementation of your internal controls around trade sanctions.

Element 4 - Testing and Auditing

OFAC requires companies to assess the effectiveness of current processes and check for inconsistencies between these and day-to-day operations. A comprehensive and objective testing or audit function within the compliance program ensures that a company has identified program weaknesses and deficiencies and it is the company’s responsibility to enhance its program, including all program-related software, systems, and other technology, to remediate any identified compliance gaps. Such enhancements might include updating, improving, or recalibrating compliance program elements to account for a changing risk assessment or sanctions environment. Testing and auditing can be conducted on a specific element of the compliance program or at the enterprise-wide level.

Under this element a company has to implement three specific prongs:

1. A company ensures that the testing or audit function is accountable to senior management, is independent of the audited activities and functions, and has sufficient authority, skills, expertise, resources, and authority within the organization. There are three general requirements under this prong. First, both the testing and audit functions for trade control must have a line of sight into senior management. Second, the testing and audit function is separate from design and application of the trade control functions (akin to auditor independence). Finally, the testing and audit function must not only have authority to do their job but they must be capable of doing so; both from an ability and staffing view.
2. A company employs testing or audit procedures appropriate to the level and sophistication of its compliance group and that this function, whether deployed internally or by an external party, reflects a comprehensive and objective assessment of the organization’s OFAC-related risk assessment and internal controls. The key under this prong is “comprehensive and objective”. Your audit team must be able to do a robust and thorough audit of your trade compliance program. Further, it must be truly objective.
3. A company ensures that upon learning of a confirmed negative testing result or audit finding pertaining to its compliance program, it will take immediate and effective action, to the extent possible, to identify and implement compensating controls until the root cause of the weakness can be determined and remediated. If you find a deficiency or a gap you must move forward to remedy it. But more than simply implementing a remedy, you perform a root cause analysis to understand the true cause of any failure.

Element 5 - Training

Under the Training element, a company must, at a minimum, annually conduct training for relevant employees and personnel. To meet this requirement, a company must satisfy five basic criteria:

1. A company must ensure that its OFAC-related training program provides adequate information and instruction to employees and other stakeholders, such as clients, suppliers, business partners, and counterparties. Such training should be further tailored to high-risk employees within the organization. This prong presents two requirements: (1) effective training and (2) tailored training. Obviously high-risk employees should have high risk training. But you need to find a way to ensure and then document that you have provided training that actually informs on not only trade compliance risks but the requirements of your trade compliance program. Finally, what training, if any, have you considered or put on for other stakeholders?
2. A company commits to provide OFAC-related training with a scope that is appropriate for the products and services it offers for customers, clients, and partner relationships it maintains in the geographic regions in which it operates. This requirement suggests that there must be a robust risk management system in place to continually assess the ever-changing trade sanctions risks for your company’s business model. Certainly, the US trade sanction policy is foremost and paramount but you should be cognizant of other countries as well. Moreover, you must have your finger on the pulse of the business to know and understand what risks are changing in your organization.
3. A company commits to providing OFAC-related training with a frequency that is appropriate based on its OFAC risk assessment and risk profile. Obviously, this will vary from company to company and even position to position. However, in this now daily landscape of changing trade sanctions by the current administration, there clearly needs to be both ongoing internal dialogue and internal training to fit the current political circumstances.
4. A company must ensure that when it becomes aware of a confirmed negative testing result or audit finding, or other deficiency pertaining to its compliance program, it will take immediate and effective action to provide training to or other corrective action with respect to relevant personnel. This makes clear not only the need for testing but also follow up on that testing to determine if the students actually passed or even if they might have some deficiency which needs to be remediated.
5. A company’s training program includes easily accessible resources and materials that are available to all applicable personnel. This means that the materials should be written in plain English and not legalese. It also means you must translate the training materials into the native language of your employee base. This is true even if your company has an English only policy for corporate communications, all your training materials need to be available and accessible in local languages.

I hope you have enjoyed and found useful this multipart exploration of the OFAC Framework. There is quite a bit in this Framework for the anti-trust/anti-bribery (ABC) compliance practitioner. In the future, I will be looking at the Framework, the Evaluation of Corporate Compliance Programs-2019 Guidance and the Antitrust Division’s Evaluation of Corporate Compliance Programs in Criminal Antitrust Investigations. While they each have different foci, they provide the ABC compliance practitioner with solid information about not only what the Department of Justice (DOJ) is thinking when it comes to its expectations around a compliance program but also benchmarks for best practices.