The Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury, enforces economic and trade sanctions in line with U.S. foreign policy and national security goals.
A key area of enforcement concerns real estate transactions, where unwitting participation can result in severe civil and criminal penalties. Understanding which activities are prohibited is essential for anyone involved in the property market.
Real estate transactions involving blocked persons or entities can result in OFAC penalties. Activities like buying, selling, mortgaging, leasing, or renovating property owned by sanctioned individuals (such as Russian oligarchs) are forbidden.
These actions require a freeze or block on assets. Violations usually occur due to intentional misconduct, concealment, or inadequate compliance, such as using LLCs or trusts to hide ownership.
Such breaches can result in substantial fines for investors and companies. These regulations apply to all U.S. persons, including citizens, residents, and companies organized under U.S. law.
Violating OFAC sanctions can result in substantial fines and, in some cases, criminal prosecution.
Key Takeaways
- Financial institutions, including banks and other entities handling financial transactions, are required to refrain from processing transactions that breach Office of Foreign Assets Control (OFAC) sanctions.
- In most cases, prohibited transactions are 'blocked,' but occasionally, financial institutions are required to 'reject' transactions instead.
- Blocking and rejecting prohibited transactions, along with reporting these actions to OFAC, are key steps that give financial institutions a sense of control and reassurance in their compliance responsibilities.
- Financial institutions and real estate professionals should establish comprehensive policies, procedures, and systems-such as screening tools and regular training identify blocked parties and assets. These measures are vital to prevent processing prohibited transactions and to maintain OFAC compliance.
- Banks and businesses engaged in transactions with foreign entities and individuals must prioritize compliance with OFAC regulations. This includes equipping them with the necessary tools to identify prohibited transactions, prevent their processing, and swiftly report their compliance activities to OFAC.
OFAC regulations are broad and complex, but certain real estate activities-such as purchasing property from or selling to a sanctioned individual consistently scrutinized.
Understanding these specific scenarios helps real estate professionals identify risky transactions and avoid violations. Let's look at some of the most common real estate transactions that can result in OFAC penalties.
Transactions Involving SDNs
OFAC maintains a list of Specially Designated Nationals and Blocked Persons (SDN List). This list includes individuals, groups, and entities such as terrorists, narcotics traffickers, and those connected to sanctioned regimes. U.S. persons are strictly prohibited from conducting any business with anyone on this list.
In a real estate context, this means you cannot buy, sell, lease, or even finance property for an SDN. The prohibition extends to providing services like property management, brokerage, or legal counsel related to a real estate deal involving a listed individual or entity.
Transactions Involving Property Owned by Blocked Persons
The "50 Percent Rule" is a critical component of OFAC regulations. This rule states that any property or interest in property that is 50 percent or more owned, directly or indirectly, by one or more blocked persons is itself considered blocked.
This applies even if the property-holding entity is not explicitly named on the SDN List.
For example, if a U.S. person engages in a real estate transaction with a company that is 60 percent owned by an SDN, that transaction is prohibited. Due diligence is crucial to uncover the ultimate beneficial ownership of any entity involved in a property deal to ensure compliance.
Circumventing Sanctions Through Intermediaries
OFAC regulations also forbid any action that evades, avoids, or attempts to violate sanctions. Using intermediaries, shell companies, or complex ownership structures to obscure a blocked person's involvement in a real estate transaction is a direct violation.
An example would be a U.S. real estate agent knowingly facilitating the sale of a property from an SDN to a non-blocked third party, who then transfers the property back to the SDN or a related entity.
This facilitation and attempt to circumvent the law carry the same penalties as direct engagement with the blocked person.
Potential Criminal Charges
Willful violations of OFAC sanctions can lead to criminal charges under statutes like the International Emergency Economic Powers Act (IEEPA).
A conviction under IEEPA can result in imprisonment for up to 20 years and criminal fines up to $1 million per violation. Corporations may face even higher financial penalties.
Federal prosecutors must prove that the defendant acted "willfully," meaning they knew their conduct was unlawful. This is a high standard, but evidence of deliberate ignorance or a conscious effort to avoid learning the facts can be used to establish willfulness.
Defense Strategies in OFAC Violation Cases
If you are facing allegations of an OFAC violation related to a real estate transaction, your best chance of obtaining a favorable outcome is with the help of a skilled federal criminal defense attorney with experience in OFAC matters.
The specific strategy will depend on the facts of your case, but common approaches include:
- Challenging the Evidence: The prosecution bears the burden of proving every element of the crime beyond a reasonable doubt. A defense attorney can scrutinize the government's evidence, looking for weaknesses, inconsistencies, or procedural violations in its collection.
- Proving Lack of Intent: Since criminal charges require a "willful" violation, a primary defense is to demonstrate a lack of intent. This could involve showing that you were unaware of the party's status as an SDN or that you were misled about the ownership structure of a property. Evidence of a simple mistake or negligence, without the intent to break the law, may defeat a criminal charge.
- Demonstrating Compliance Efforts: A strong defense can be built by showing that you had a robust compliance program in place. If you can prove that you conducted reasonable due diligence, screened parties against the SDN list, and made a good-faith effort to comply with OFAC regulations, it can serve as powerful evidence against the allegation of a willful violation.
For more information, contact our federal criminal defense law firm at Eisner Gorin LLP.
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