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Sanctions and SDNs –
What Does It Mean for the Real Estate Industry?
Introduction
Ready or not, the real estate industry has been
enlisted by the Office of Foreign Assets Control ("OFAC") to help fight
the war on terrorism.1 Confusion in the real estate industry regarding
its compliance obligations has been significant. OFAC reports that the
largest volume of new calls to its compliance hotline has come from the
real estate industry. Understanding compliance obligations is critical
in light of the severity of penalties for violating the Presidential
Executive Order described below: civil penalties up to $11,000 per
violation, and criminal penalties for willful violations up to $50,000,
imprisonment for up to 10 years or both. Officers, directors and agents
are also subject to such penalties.
Background
In the aftermath of September 11th, President Bush issued
Executive Order 13224 (the "Order") entitled "Blocking Property and
Prohibiting Transactions with Persons who Commit, Threaten to Commit, or
Support Terrorism." This Order applies to all real estate transactions
and obligates real property owners, tenants, guarantors, agents,
affiliates and other parties to real estate transactions to comply with
its terms. The Order blocks (or "freezes") all property and interests in
property of "Specially Designated Nationals" and "blocked persons"
(collectively, "SDNs") that are in the United States or that come within
the possession or control of U.S. persons (defined as any U.S. citizen,
permanent resident alien, entity organized under U.S. law – including
foreign branches – and any individual or entity in the United States).
The Order also prohibits any transaction or dealing by U.S. persons or
within the United States in property or interests in property blocked
pursuant to the Order, including but not limited to, the making or
receiving of any contribution of funds, goods or services to or for the
benefit of SDNs.
Complying with the Order
- Implement a formal compliance program and ensure that its steps are
followed, including:
- Obtain the names of all parties involved in the real estate transaction
- Check these names against OFAC's SDN List (consider software
compliance tools)
- Should there be an exact match or similar name, contact legal counsel
prior to proceeding with the real estate transaction.
- Depending on the situation, a party may need to refuse to enter into
the transaction, block certain assets of the parties involved, report
the transaction to OFAC and/or file an annual report with OFAC.
- Add protective provisions to real estate documents, i.e. specially
tailored representations and warranties, as well as indemnification
provisions.2
- Develop a record retention policy to maintain complete, accurate
records for a minimum of five years following the consummation of real
estate transactions.
Conclusion
Developing a compliance program is an effective way to
manage SDN and related risks associated with real estate transactions in
the post September 11th business environment. Strasburger's
International Trade Compliance Team can assist in developing a cost-effective,
practical compliance program customized to fit the risks associated with
various types of real estate transactions.
- OFAC is not involved in general anti-money laundering or
anti-fraud activities absent an interest of an SDN. For an overview of
Anti-Money Laundering Programs in the real estate context, see "What
Anti-Money Laundering Program?" in Strasburger's Real Estate News,
March 2003.
- This may provide some financial protection vis-à-vis the parties
involved in the real estate transaction in the event of a violation of
the Order, but such provisions will not prevent OFAC from pursuing all
parties involved. A compliance program should, however, be treated as
a mitigating factor in any OFAC determination to pursue an enforcement
action.
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