Chapter 3 of 3 · 4 min

Who must comply with OFAC sanctions and how are blocked transactions handled?

Find out which entities must comply with OFAC, how rejected and blocked transactions differ, and what reporting obligations arise when funds are frozen.

TL;DW

OFAC sanctions apply to all US persons, not just banks. Violations carry penalties of up to $20 million and 30 years in prison. Rejected transactions involve unconfirmed potential matches and require returning the funds. Blocked transactions involve confirmed SDN or sanctions matches: funds are frozen immediately, reported to OFAC within 10 business days, and disclosed in an annual report for as long as they are held.

Watch: An Easy Guide on OFAC and US Sanctions

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Lesson · 3 parts

OFAC sanctions apply to all US persons, a category that extends well beyond banks and financial institutions. It includes US citizens, permanent residents, and any company organized under US law regardless of its size or industry. If you work in retail, real estate, technology, or any other sector, your business must still screen customers and counterparties against OFAC lists and refrain from prohibited transactions. Your AML and CTF procedures should incorporate OFAC screening at onboarding and for each new commercial relationship, not only at the point of transaction processing.

The consequences of OFAC non-compliance are serious. Individuals found in violation face civil penalties up to $20 million and criminal sentences up to 30 years in prison, and entities face penalties of similar scale. You also need to understand the difference between rejected and blocked transactions. A rejected transaction arises when a potential link to a sanctioned entity exists but cannot be conclusively confirmed. In that situation, the funds are returned to origin: outbound payments go back to the customer's account and inbound payments return to the remitting institution.

When a true SDN or sanctions match is confirmed, the treatment differs entirely from a rejected transaction. Your institution must block the funds immediately: they are frozen and cannot be returned to either party. You then have 10 business days to file a report with OFAC describing the blocked transaction. If your institution holds blocked funds for any length of time, you must also file an annual report with OFAC for each year those assets remain frozen.

Study notes

Part 1 of 3 · 6:24 to 7:18

Who must comply with OFAC sanctions

Concept A US person under OFAC's rules includes US citizens and permanent residents wherever they are located, as well as all entities organized under US law: corporations, partnerships, LLCs, and non-profits. It also covers any person or entity physically within the United States at the time of a transaction, regardless of nationality. This broad scope means that a foreign national conducting a financial transaction while visiting the US is subject to OFAC jurisdiction for that transaction.

Pitfall Many compliance programs screen customers at onboarding but fail to re-screen them against updated OFAC lists as the relationship continues. A customer who was clean at account opening may be designated by OFAC three years later. Without ongoing monitoring, your institution will process transactions involving a newly sanctioned party without any alert. OFAC expects continuous compliance, not a one-time check. Build your processes to re-screen existing customers whenever the SDN list is updated.

Do this

Identify three business units in your organization outside of financial services and verify whether they conduct any cross-border transactions or supplier payments.
Confirm that each unit's onboarding process includes an OFAC screening step before engaging a new counterparty.

Part 2 of 3 · 7:18 to 8:40

Penalties for violations and how rejected transactions are handled

Why it matters Sanctions penalties are calibrated to eliminate the economic incentive to commit a violation. If the profit from a sanctions-breaching transaction were $500,000 and the maximum penalty were $1 million, a rational actor might decide the risk is worth taking. At $20 million per violation, with criminal imprisonment added, the calculation changes. The severity is a deliberate deterrence mechanism, and it is also why regulators expect documented, well-maintained compliance programs rather than ad hoc responses to alerts.

Example An example of a rejected transaction: a UK-based counterparty sends an inbound wire to your US bank. The name on the wire partially matches an SDN entry, but your investigation cannot definitively link the sender to the listed party. Under OFAC guidance, you reject the payment and return the funds to the UK correspondent bank, noting that you could not process the transaction. You do not block the funds because the match was not confirmed. Document your decision and reasoning in the case file for your records and for future examination review.

Part 3 of 3 · 8:40 to 9:17

Blocked transactions and OFAC reporting obligations

Concept The 10-business-day reporting clock for blocked transactions begins when the funds are first identified and blocked, not when your internal review is complete. Even if your legal team is still analyzing the situation, the initial blocking report must reach OFAC within 10 business days. Use OFAC's online reporting portal and retain copies of all submissions. Late filings are themselves potential violations and can increase penalty exposure for the underlying blocking event.

Try it Review your institution's policy for annual blocked-funds reporting. Identify who owns the process, which systems track blocked accounts and frozen assets, and when the annual OFAC report is submitted. If your institution has never held blocked funds, trace the hypothetical path: from a blocking event through the 10-day report to the annual report, and verify that each step has a named owner and a documented procedure. Gaps in process ownership are a common finding in sanctions program examinations.

Key terms

US person: Under OFAC's rules, a US citizen, permanent resident, entity organized under US law, or any person physically within the United States at the time of a transaction.
Rejected transaction: A payment that is stopped and returned because of a potential but unconfirmed link to a sanctioned party, after which the funds are sent back to the originating account or institution.
Blocked transaction: A payment or asset that is frozen because the financial institution has confirmed it belongs to or is controlled by a designated SDN or sanctioned party, and which cannot be released without OFAC authorization.
OFAC 10-day report: A mandatory filing that must be submitted to OFAC within 10 business days of blocking a transaction or asset, describing the circumstances of the blocking event.
Annual blocked-funds report: A yearly OFAC filing required of any entity holding blocked assets, submitted for every year those funds remain frozen.

Key takeaways

All US persons, including non-financial businesses and individuals, are required to comply with OFAC sanctions regardless of size or industry.
Blocked funds must be reported to OFAC within 10 business days of blocking and disclosed in an annual report for every year they remain frozen.

Watch out

Rejected and blocked transactions follow entirely different procedures. Rejected funds are returned to the sender. Blocked funds are frozen and cannot be returned to anyone without OFAC authorization.

Check your understanding

A counterparty has just been confirmed as an SDN match on an inbound wire. Walk through every step your institution must take, including the timing and nature of each required OFAC filing.

Block the funds immediately and do not return them to any party. Within 10 business days, file a blocking report with OFAC through the online reporting portal, describing the transaction and the basis for the blocking. Retain copies of all submissions. Each year that the blocked funds remain held, file an annual report with OFAC disclosing the continuing hold. Document every step internally for regulatory examination and potential penalty mitigation purposes.

Who must comply with OFAC sanctions and how are blocked transactions handled?

01 6:24 Concept Who must comply with OFAC sanctions ▾

02 7:18 Watch out Penalties for violations and how rejected transactions are handled ▾

03 8:40 Concept Blocked transactions and OFAC reporting obligations ▾