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 Specially Designated Nationals ListA list maintained by OFAC of individuals and entities whose assets are blocked and with whom U.S. persons are prohibited from dealing. 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 Sectoral Sanctions Identification ListOFAC list of entities subject to sectoral sanctions that restrict certain activities but do not block assets. 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 Foreign Sanctions Evaders (FSE) ListOFAC list of individuals and entities that have violated, attempted to violate, or assisted in the violation of sanctions, particularly those related to Iran. targets parties that try to circumvent Iran sanctions. The Correspondent Account or Payable-Through Account Sanctions (CAPTA) ListOFAC list restricting U.S. financial institutions from providing correspondent banking services to designated foreign financial institutions. restricts banking relationships. The Non-SDN Menu-Based Sanctions (NS-MBS) ListOFAC list of individuals and entities subject to specific sectoral sanctions rather than comprehensive asset blocking. applies targeted sectoral restrictions. The Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) ListOFAC list of Chinese companies that support the Chinese military-industrial complex and are subject to investment prohibitions. 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 due diligenceThe comprehensive investigation and evaluation process conducted before making an investment or business decision. 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 anti-money laundering (AML) Anti-money laundering (AML) Anti-money laundering (AML) refers to the set of laws, regulations, and procedures designed to prevent the conversion of illegally obtained funds into legitimate assets, requiring financial institutions to implement monitoring systems, customer due diligence, and suspicious activity reporting. 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 beneficial ownership BOI reporting Beneficial ownership information (BOI) reporting refers to disclosure requirements under the Corporate Transparency Act that require certain foreign entities registered to do business in the United States to identify and report the natural persons who ultimately own or control the entity to FinCEN. As of March 26, 2025, U.S. hedge funds and other domestic entities are exempt from these requirements. . Funds typically screen not only the direct investor but also the ultimate beneficial ownersThe natural persons who ultimately own or control a legal entity through direct or indirect ownership or other means of control.. 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. Executive ordersPresidential directives that manage operations of the federal government and have the force of law, often used to implement sanctions programs. 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 sovereign debtDebt securities issued by national governments, including bonds, notes, and other obligations backed by the full faith and credit of the issuing country. 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 structured transactionsComplex financial arrangements involving multiple parties, instruments, or jurisdictions that require enhanced due diligence for compliance purposes. 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 monetary instrumentsFinancial instruments that can be used as payment or to store value, including money orders, traveler's checks, and cashier's checks. 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.