But I’m Not a Terrorist!: Some Precautions on Prohibited Persons

Client Alerts · December 19, 2017

Have you been asked to certify in your real estate contracts that you are not a “prohibited” or “blocked” person?  Have you wondered why you need to make this certification even though you insist that you are not a terrorist?

As you enter into real estate transactions, it is extremely important to remember that individuals and companies in the United States are prohibited from transacting business with individuals and companies that are blocked pursuant to sanctions programs administered by the Office of Foreign Assets Control (OFAC) of the Treasury Department.

Less than three weeks after the 9/11 attacks, President George W. Bush issued Executive Order No. 13224, which directs OFAC to block the transfer of property owned by foreign persons who have committed, or who pose a significant risk of committing, an act of terrorism against the United States. Executive Order No. 13224 further prohibits U.S. citizens and entities, and any other person or entity located within the United States, from participating in business transactions involving such blocked property.  Under Executive Order No. 13224 and its regulations, blocked property in the custody or control of a person or entity in the United States must be frozen and reported to OFAC.

OFAC maintains a record of individuals and companies that are owned or controlled by, or acting for or on behalf of, sanctioned countries, as well as individuals, groups, and entities, such as terrorists and narcotics traffickers, who are designated under programs that are not country-specific.  Collectively, these individuals and companies are called “Specially Designated Nationals” or “SDNs” and the record maintained by OFAC is called the “Specially Designated Nationals and Blocked Persons List” or “SDN List.”  OFAC regularly updates the SDN List, which is available on the Treasury Department’s website here.

Unless exempted by statute or authorized by OFAC in the form of a license, it is a violation of federal law for persons and businesses in the United States to enter into business transactions with sanctioned countries, individuals, or companies on the SDN List.  Commercial transactions regulated by OFAC include the buying, selling, and leasing of property in the United States.

Failing to comply with Executive Order No. 13224 may result in substantial criminal and civil sanctions.  In many cases, civil and criminal penalties can exceed several million dollars.  So far this year, OFAC has levied more than $118 million dollars in fines and penalties against businesses and persons in the United States who knowingly or unknowingly violated laws and regulations restricting commercial transactions with SDNs.

It is also important to understand that an entity is considered “blocked” by OFAC if one or more SDNs owns, either directly or indirectly, 50% or more in the aggregate of the property of that entity, regardless of whether the entity itself appears on the SDN List.  This “50% rule” does not extend to companies that are controlled, but not 50% owned, by one or more SDNs.

OFAC urges caution when considering a transaction with an entity that is not an SDN, but may have a significant ownership interest by SDNs that is less than 50%, or one in which SDNs may control the entity by means other than a majority ownership interest.  Such nonblocked entities may become the subject of future designations or enforcement actions by OFAC.

In addition, persons should be cautious in dealings with such nonblocked entities to ensure that they are not dealing with an SDN representing the nonblocked entity, by, for example, entering into a contract that is signed by an SDN.

So, what can you do to reduce the likelihood of violating OFAC requirements?

  1. Screen for SDNs at the initial stages of a potential transaction involving the acquisition, disposition, or leasing of property.
  2. Require an OFAC representation and indemnity in the contract.  Such representation and indemnity are not required by law, but the inclusion of such a provision serves to mitigate a party’s liability for unknowingly entering into a contract with an SDN.
  3. Prohibit a contract assignment or lease or sublease of property to SDNs.
  4. Periodically re-run searches for SDNs during the contract term to ensure ongoing compliance and document such searches for the permanent lease file.  Persons and entities are encouraged to voluntarily disclose a past undetected violation, as self-disclosure is considered a mitigating factor by OFAC in civil penalty proceedings.

If you have any questions about the information presented here, or would like to know more about how you can ensure OFAC compliance in all your real estate transactions, please contact Stephanie Haughey, the author of this alert, at shaughey@princelobel.com or 617.456.8053, or Rob Schlein, the chair of Prince Lobel’s Real Estate Practice Group, at rschlein@princelobel.com, or 617.456.8098.