To Check or Not to Check: Complying With OFAC Regulations

After September 11, 2001, many grantmakers and other charitable organizations that were not previously familiar with the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), learned of its existence. As one of the key U.S. government agencies seeking to shut down terrorism funding around the world, OFAC has focused attention on charities as one mechanism for providing financial support to terrorists. As a result, grantmakers and others have dedicated more time and effort to OFAC compliance.

The Specially Designated Nationals (SDN) List

The Specially Designated Nationals or SDN list, now some 433 densely packed pages, contains the names and aliases of more than 3,100 individuals and organizations that the government believes are linked to terrorism. Executive Order 13224 allows the government to block the assets of any U.S. person—a term that includes foundations—that engages in transactions with a listed person. Both grants and technical assistance to a listed person would violate the Executive Order.

There’s good news and bad. The good news is that as the government has significant discretion in deciding when to block assets, it is unlikely to take action against a U.S. foundation based on a single inadvertent act. The bad news is that blocking can occur even if the foundation did not know that it engaged in a transaction with a listed person or that the person was a supporter of terrorism.

Although several pending lawsuits are challenging the listing process on constitutional grounds, as things stand, the government does not provide either notice or an opportunity for a hearing before adding a name to the SDN list or before blocking access to assets. Neither is there a clear process for listed persons who want to have their names removed from the list and regain access to their assets. Ultimately, the U.S. Supreme Court will need to decide whether this lack of due process, either before or after the fact, violates the U.S. Constitution.

The Issue

To help grantmakers and other charitable organizations comply, the Treasury Department initially issued its Anti-Terrorist Financing Guidelines: Voluntary Best Practices For U.S.-Based Charities in November 2002. In that document, Treasury recommends that grantmakers check their grantees against the SDN list and also against other publicly available lists of known or suspected terrorists. (An example is the Terrorist Exclusion List, which is maintained by the State Department.)

But many grantmakers are troubled by list checking. Some are concerned with the lack of due process for listed persons while others are worried about the presumption of guilt that arises from what may only be a suspicion that a listed person is connected to terrorism. Still others are concerned with the additional cost of running initial checks against the list and then in eliminating the many false positives that arise because many of the names are in common use in some countries and regions of the world.

Grantmakers—including those that have incorporated list checking into their standard due diligence—question whether this exercise adds any value in preventing the diversion of grant funds for unlawful purposes. Another reality: each dollar spent on list checking is a dollar less for grantmaking.

So, what should a grantmaker do? Here are some principles to keep in mind:

• U.S. grantmakers must obey the law and refrain from knowingly providing material support to persons that engage in acts of terrorism.
• Grantmakers should evaluate their existing due diligence procedures for vetting grantees and for ensuring that grant funds are used as the grantmaker intended and not diverted to any illegal or non-grant related purpose.
• Some grantmakers with ethical objections to list checking may decide that their standard due diligence gives them enough information about their grantees to obviate the need for list checking.
• Others may decide to incorporate a scan of the lists as a routine part of their decision process for all grants or in some situations.