In June of 2019, OFAC amended its Reporting, Procedures and Penalties Regulations (RPPR), apparently effecting a radical expansion of the obligation of non-financial institutions in the U.S. to report “rejected” transactions involving U.S.-sanctioned persons. OFAC has long required financial institutions to report rejected financial transactions involving sanctioned persons. (“Rejected” transactions involve persons who are not Specially Designated Nationals (SDNs) or other persons whose property within U.S. jurisdiction is blocked, but with whom transactions are nevertheless prohibited, such as private individuals and companies resident in Iran and not explicitly designated for sanctions. U.S. persons may not execute these transactions but are not required to block and report any related assets that come within their control; to take the historical example of funds transfers, the payment is returned to the sender rather than being frozen in a blocked account.) The amended reporting guidelines expanded that obligation from financial institutions to all U.S. persons and persons within the United States, defined the relevant transactions to include “transactions related to wire transfers, trade finance, securities, checks, foreign exchange, and goods or services,” and (as before) did not define “reject” at all. If any person subject to U.S. jurisdiction does reject a transaction for goods or services (financial or otherwise) for sanctions reasons, it is now legally required to report that rejection within ten days.
OFAC received a number of comments on the RPPR amendments (which were issued as interim final rules subject to comment). The comments overwhelmingly focused on the ambiguity and apparently expansive scope of the reporting obligation for rejected transactions. OFAC indicated in previous guidance—in the context of financial transfers—that merely responding to an inquiry as to whether a transaction is permissible is not a “rejection” and “[t]here is not technically a ‘reject’ item until the bank receives instructions from its customer to debit its account and send the funds.” It is not entirely clear, however, how that guidance applies to an attempt to order goods or a request to provide non-financial services.
OFAC has for some time informally indicated that clarification of these rules was pending, and anecdotally we believe that many U.S. actors—to the extent they are even aware of the reporting regulations—have been waiting for that clarification before implementing extensive internal reporting procedures. Unfortunately, new frequently asked questions on the amended RPPR, issued on February 20, provide little additional guidance.
FAQ 819 reiterates OFAC’s requirement that all U.S. persons and persons otherwise subject to U.S. jurisdiction must comply with the expanded RPPR reporting requirements, confirming that the new rules are indeed intended to extend broadly beyond their traditional application to financial institutions. FAQ 820 gives a minor clarification that the requirements in the RPPR to provide specific information on a rejected transaction only apply to the extent that the information is in the possession of the U.S. person filing a report, and there is no obligation to seek additional information from the counterparty. The triggering event for an obligation to report, though, remains undefined.
OFAC has explicitly stated that it welcomes further feedback on the amended RPPR requirements, their impact, and any difficulties in implementation, but the rules have been in force since last summer and the absence of clarification does not delay their effectiveness. All U.S. persons, and persons operating in the United States, should be aware of the requirement to report transactions rejected for sanctions reasons to OFAC within ten days of rejection and consider whether a request to enter into a prohibited transaction was sufficiently definite to create a risk of giving rise to a reportable “rejection.”