A California business does not need overseas offices to encounter U.S. sanctions rules. A domestic sale, online order, vendor payment, or investment can involve a restricted person or prohibited transaction. This guide explains how sanctions screening works, why checking a name alone may not be enough, and what businesses and individuals should do when a possible match appears.
OFAC screening small business owners should understand
The Office of Foreign Assets Control, or OFAC, administers U.S. economic sanctions. These restrictions can target people, entities, governments, geographic areas, and particular activities. Their reach depends on the sanctions program and the transaction.
U.S. citizens and permanent residents, entities organized under U.S. law and their foreign branches, and people within the United States generally must comply. California businesses are not exempt because they are small, sell only online, or rely on a payment processor.
OFAC screening means checking relevant parties against applicable sanctions lists and evaluating transaction restrictions. The Specially Designated Nationals and Blocked Persons List, commonly called the SDN List, is a key resource. OFAC also maintains other lists whose restrictions differ; a listing does not always mean every transaction with that party is prohibited.
For sanctions imposed under the International Emergency Economic Powers Act, civil penalties may apply without proof that the business knew it violated the rules. See 50 U.S.C. § 1705 and OFAC’s Economic Sanctions Enforcement Guidelines, 31 C.F.R. part 501, appendix A. A compliance program can reduce risk, but it does not excuse a prohibited transaction.
Know which people and transactions to review
Start with the parties whose involvement could affect whether a transaction is permitted. Depending on your business, these may include customers, suppliers, investors, intermediaries, banks, and beneficial owners. Not every low-risk retail sale needs the same review as a cross-border equipment shipment.
Useful risk factors include:
- Location: Where the parties operate, where goods will go, and which banks will process payment.
- Ownership: Who owns the customer or supplier, including ownership through other companies.
- Products and services: What you are supplying and whether program-specific restrictions apply.
- Transaction structure: Unexplained third-party payments, unusual routing, or requests to remove identifying information.
A domestic address does not establish that a company is outside sanctions restrictions. Conversely, a foreign address does not automatically make a transaction prohibited. The facts and current rules matter.
Businesses entering foreign markets can incorporate these checks into their international business legal planning, rather than waiting until a payment or shipment raises questions.
Check ownership, not just the company name
Under OFAC’s 50 Percent Rule, an entity is generally considered blocked when one or more blocked persons own, directly or indirectly, 50 percent or more of it in the aggregate. The entity may be blocked even if its own name does not appear on the SDN List.
For example, if two blocked individuals each directly own 25 percent of a supplier, their combined ownership can make that supplier blocked. Indirect ownership requires additional analysis; do not assume a simple percentage calculation resolves a layered corporate structure.
Control without 50 percent ownership does not, by itself, automatically block an entity under this rule. Still, involvement by a blocked person can create separate restrictions, and some sanctions programs impose additional requirements.
For higher-risk counterparties, request ownership information and supporting records. A contractual statement that a supplier complies with sanctions is useful, but it does not replace checking available facts. If ownership remains unclear, resolve the uncertainty before proceeding.
Build a practical screening process
A written process helps employees make consistent decisions. OFAC’s Framework for OFAC Compliance Commitments describes five components: management commitment, risk assessment, internal controls, testing and auditing, and training. Apply those concepts proportionately to your business.
- Identify review points. Consider screening before onboarding, contracting, shipping, and paying, based on the risk involved.
- Use current information. Search OFAC’s official resources or use a screening service with regularly updated data. Understand which lists the tool checks.
- Gather identifying details. Names, addresses, dates of birth where appropriate, registration numbers, and ownership information can distinguish unrelated parties.
- Assign escalation responsibility. Employees should know who can pause a transaction and obtain legal review.
- Document decisions. Preserve search results, match analysis, approvals, and relevant correspondence under an appropriate retention policy.
Rescreen ongoing relationships when sanctions lists change or relevant facts change. Software is a tool, not a legal determination. Banks and payment platforms may perform their own checks, but their involvement does not remove your business’s obligations. Sanctions review also does not replace separate export-control analysis.
Respond carefully to a possible match
A similar name is a reason to investigate, not proof of a violation. Pause the affected transaction while comparing identifying details and reviewing the applicable sanctions program. Do not delete information or alter payment instructions to get around an alert.
If the transaction involves blocked property, the rules may require blocking rather than returning the funds. Other prohibited transactions may require rejection instead. Blocking and rejection have different consequences; neither should be improvised.
OFAC reporting duties generally require reports of blocked property and rejected transactions within 10 business days. See 31 C.F.R. §§ 501.603–501.604. Annual reporting and other obligations may also apply. Obtain prompt advice about the correct action, any available authorization, and reporting deadlines.
Talk to a California business attorney
Itkin Law offers a free consultation for businesses and individuals with questions about sanctions screening, ownership concerns, or a paused transaction. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
