Understanding OFAC’s Specially Designated Nationals (SDN) List
Article Summary
The SDN List identifies individuals, entities, and vessels with which U.S. persons are generally prohibited from doing business.
It includes individuals and entities involved in terrorism, narcotics trafficking, cybercrime, human rights abuses, and other sanctioned activities.
U.S. persons must block all property and interests in property of SDNs within U.S. jurisdiction and avoid any transactions with them.
Entities owned 50% or more by one or more SDNs are also considered blocked, even if not explicitly listed.
Companies can be held liable for violations even without intent or knowledge, with penalties reaching hundreds of thousands of dollars per violation.
The SDN List is frequently updated, requiring continuous screening to avoid compliance risks with existing customers or vendors.
The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) administers and enforces economic and trade sanctions that advance U.S. foreign policy and national security objectives. One of OFAC’s most powerful enforcement tools is the Specially Designated Nationals and Blocked Persons (SDN) List. The SDN List identifies individuals, entities, and vessels with which U.S. persons are generally prohibited from doing business. For companies engaged in international trade, finance, or cross-border services, understanding the SDN List is essential to maintaining sanctions compliance and avoiding significant legal exposure.
Designation on the SDN List is not limited to government officials or terrorist organizations. It can apply to private companies, financial institutions, shipping firms, and even aircraft or vessels. Because sanctions programs are largely implemented under the International Emergency Economic Powers Act (IEEPA), the SDN List has wide-reaching implications across industries and jurisdictions.
Below are key aspects of the SDN List that every compliance program should understand.
1. Who Is Included on the SDN List
The SDN List includes individuals and entities designated under a wide range of sanctions authorities, including country-based, programmatic, and conduct-based sanctions. Common bases for designation include terrorism, narcotics trafficking, cybercrime, human rights abuses, weapons proliferation, and corruption.
Designations may target foreign governments and their instrumentalities, as well as private actors that materially support sanctioned activities. Importantly, designation does not require a criminal conviction, as SDN listings are administrative actions based on national security and foreign policy considerations.
2. Blocking Requirement and Prohibited Transactions
When a person or entity is added to the SDN List, all property and interests in property of that SDN that are within U.S. jurisdiction must be “blocked” (frozen). U.S. persons are generally prohibited from engaging in any transactions or dealings with SDNs unless authorized by OFAC.
This prohibition applies broadly to financial transfers, goods and services, and indirect dealings. Even facilitating or approving a transaction involving an SDN—such as processing a payment or providing technical assistance—can constitute a violation.
3. The 50 Percent Rule
OFAC’s “50 Percent Rule” significantly expands the reach of the SDN List. Under this rule, any entity that is owned, directly or indirectly, 50 percent or more in the aggregate by one or more SDNs is itself considered blocked—even if it does not appear by name on the SDN List.
This rule creates compliance challenges, particularly in jurisdictions with opaque ownership structures. Companies must conduct ownership due diligence, not just name screening, to ensure they are not dealing with a blocked party.
4. Strict Liability and Enforcement Risk
OFAC sanctions operate largely on a strict liability basis, meaning that a company can be held liable even if it did not know or intend to violate sanctions. Civil penalties can reach hundreds of thousands of dollars per violation, and enforcement actions often cite failures in screening, internal controls, or escalation procedures.
While OFAC considers mitigating factors—such as voluntary self-disclosure and cooperation—compliance failures involving SDNs can lead to substantial penalties and reputational harm.
5. Ongoing Monitoring and List Updates
The SDN List is dynamic and frequently updated. Names can be added, removed, or modified with little advance notice. Companies that screen only at onboarding risk missing new designations affecting existing customers, vendors, or counterparties.
Effective compliance programs therefore require continuous or periodic rescreening, employee training, and clear procedures for handling potential matches.
Conclusion
OFAC’s Specially Designated Nationals List is a central pillar of U.S. sanctions enforcement and a critical compliance consideration for any organization engaged in international activity. Its broad scope, strict prohibitions, and expansive ownership rules mean that even indirect dealings can create significant legal risk. By understanding who is included on the SDN List, how blocking requirements operate, and the importance of ongoing monitoring and due diligence, organizations can better protect themselves from enforcement actions and ensure alignment with U.S. sanctions policy.
Key Points
What is OFAC’s Specially Designated Nationals (SDN) List?
- Definition: The SDN List is a tool used by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) to enforce economic and trade sanctions.
- Purpose: It identifies individuals, entities, and vessels with which U.S. persons are generally prohibited from conducting business.
- Scope: The list applies to a wide range of industries, including finance, shipping, and international trade.
- Legal Basis: Sanctions programs are implemented under the International Emergency Economic Powers Act (IEEPA), giving the SDN List broad jurisdictional reach.
Who is included on the SDN List?
- Designated Parties: The list includes individuals and entities involved in terrorism, narcotics trafficking, cybercrime, human rights abuses, weapons proliferation, and corruption.
- Private and Public Entities: Designations can apply to foreign governments, private companies, financial institutions, and even vessels or aircraft.
- No Criminal Conviction Required: SDN designations are administrative actions based on national security and foreign policy considerations, not criminal convictions.
- Material Support: Entities or individuals that materially support sanctioned activities may also be added to the list.
What is the blocking requirement for SDNs?
- Property Blocking: All property and interests in property of SDNs within U.S. jurisdiction must be frozen (blocked).
- Prohibited Transactions: U.S. persons are prohibited from engaging in transactions or dealings with SDNs unless explicitly authorized by OFAC.
- Broad Application: This includes financial transfers, goods and services, and even indirect dealings, such as facilitating or approving a transaction involving an SDN.
- Compliance Risk: Violations can occur even through inadvertent dealings, emphasizing the need for robust screening processes.
What is OFAC’s 50 Percent Rule, and why is it significant?
- Definition: The 50 Percent Rule states that any entity owned 50% or more, directly or indirectly, by one or more SDNs is also considered blocked, even if not explicitly listed on the SDN List.
- Compliance Challenges: This rule requires companies to conduct ownership due diligence, especially in jurisdictions with opaque ownership structures.
- Expanded Risk: Simply screening names against the SDN List is insufficient; companies must also verify ownership structures to avoid dealing with blocked entities.
- Example: A company owned 51% by an SDN would be considered blocked, even if its name does not appear on the SDN List.
How does strict liability apply to OFAC sanctions?
- Strict Liability Standard: Companies can be held liable for sanctions violations even if they did not know or intend to violate the rules.
- Penalties: Civil penalties can reach hundreds of thousands of dollars per violation, depending on the severity and circumstances.
- Common Failures: Enforcement actions often cite inadequate screening, weak internal controls, or failure to escalate potential matches.
- Mitigating Factors: Voluntary self-disclosure, cooperation with OFAC, and strong compliance programs can reduce penalties.
- Reputational Risk: Beyond financial penalties, violations can damage a company’s reputation and relationships with trade partners.
Why is ongoing monitoring of the SDN List important?
- Dynamic Updates: The SDN List is frequently updated, with names added, removed, or modified without advance notice.
- Continuous Screening: Companies must rescreen existing customers, vendors, and counterparties to identify new risks.
- Employee Training: Regular training ensures employees understand how to handle potential matches and escalate issues appropriately.
- Clear Procedures: Effective compliance programs include clear protocols for handling potential SDN matches and conducting due diligence.
- Proactive Compliance: Ongoing monitoring reduces the risk of inadvertent violations and ensures alignment with U.S. sanctions policy.
