OFAC sanctions

OFAC sanctions are the main tool the United States uses to apply economic pressure as part of its foreign policy. The Office of Foreign Assets Control operates within the Treasury Department. It manages comprehensive sanctions programs that target countries, individuals, and entities that pose threats to national security, engage in terrorism, traffic illegal drugs, or spread weapons of mass destruction.

These sanctions create legally binding obligations for all U.S. persons. This includes hedge fund managers and their investment vehicles. The regulatory framework includes both broad programs targeting entire countries and more focused sanctions against specific individuals and entities. This creates multiple layers of compliance requirements that hedge funds must carefully navigate.

As of 2025, OFAC maintains six distinct sanctions lists, each serving different regulatory purposes. The is the most important for enforcement. It identifies individuals and entities whose assets must be frozen and with whom U.S. persons cannot conduct business. The targets specific economic sectors, particularly in Russia. It prohibits new debt and equity financing for designated entities.

OFAC also maintains several additional specialized lists. The targets parties that try to circumvent Iran sanctions. The restricts banking relationships. The applies targeted sectoral restrictions. The addresses national security concerns related to Chinese military companies.

The 50 percent ownership rule extends sanctions coverage beyond directly listed entities. If sanctioned parties own 50 percent or more of an entity in the aggregate, that entity is also subject to sanctions—even if it doesn't appear directly on any OFAC list. This creates complex requirements for hedge funds when they evaluate potential investments or business relationships.

Hedge funds must implement strong screening procedures to prevent accepting investments from sanctioned parties. This requires screening both when investors first join and ongoing monitoring as OFAC updates its lists. Many funds use specialized service providers to conduct this screening. However, the investment adviser remains ultimately responsible for compliance.

The screening process must go beyond simple name matching. It must include variant spellings, aliases, and analysis of . Funds typically screen not only the direct investor but also the . This is particularly important for entities organized in jurisdictions with limited transparency requirements.

Periodic rescreening is essential because OFAC regularly updates its sanctions lists. Geopolitical situations change rapidly, and new designations can occur with minimal advance notice. This requires hedge funds to maintain current screening capabilities and respond quickly to new restrictions.

Recent sanctions developments have significantly expanded investment restrictions affecting hedge fund portfolios. have prohibited U.S. persons from investing in securities of designated Chinese companies and derivative instruments that provide exposure to such companies. These restrictions extend to secondary market transactions and create ongoing monitoring obligations for existing positions.

Prohibited investments now include a broad range of securities. These include of targeted countries such as Cuba, Iran, and Syria. They also include new equity or debt issued by certain Russian companies, Venezuelan government bonds, and securities registered in the names of Cuban nationals. The scope continues to evolve with changing geopolitical circumstances.

Private investment strategies require particular attention to OFAC compliance. Hedge funds that engage in direct investments, private equity, or complex must conduct enhanced due diligence. They need to ensure that counterparties and underlying assets do not involve sanctioned parties or prohibited activities.

Effective OFAC compliance extends beyond automated screening to include comprehensive due diligence procedures. Hedge funds implement enhanced scrutiny for investments in higher-risk jurisdictions, transactions involving complex ownership structures, and dealings with entities in sectors frequently targeted by sanctions.

Documentation requirements mandate maintaining detailed records of all screening activities, due diligence procedures, and compliance decisions. These records must demonstrate the fund's reasonable efforts to identify and prevent sanctioned transactions. This is particularly important because OFAC considers compliance program adequacy when taking enforcement actions.

Many hedge funds establish clear prohibitions on certain transaction types that present elevated OFAC risks. These typically include restrictions on cash transactions, personal checks, and such as money orders, traveler's checks, and cashier's checks. Such practices help minimize exposure to potential sanctions violations while supporting broader AML compliance objectives.

The regulatory landscape requires ongoing attention to emerging sanctions programs and enforcement priorities. OFAC's focus areas continue evolving with global developments. This requires hedge funds to maintain flexible compliance frameworks that can adapt to new requirements and expanding restrictions.