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The Risk of Doing Business with Nefarious Scoundrels

by Allan Tiller

The title of this article is a bit dramatic and Victorian, but hopefully it gets the point across: there are risks in being involved in a transaction involving an individual who has been identified by the U.S. Federal Government as a bad guy. Recently the National Association of REALTORS® released an excellent overview of this issue at http://www.realtor.org/articles/anti-money-laundering-guidelines-for-real-estate-professionals; that article mentions a list called the “List of Specially Designated Nationals and Blocked Persons,” which is – or should be – of particular concern to real estate professionals working with foreign persons. Of course, the vast majority of foreign nationals buying real estate in the United States have no connection with “nefarious” activities, but the safeguards put in place by the Federal Government should be observed as a general rule of practice, just as every passenger boarding a flight at the airport must pass through security.

The List of Specially Designated Nationals and Blocked Persons, referred to here as “the SDN List” or “the List,” is maintained by a branch of the Federal Department of the Treasury called the “Office of Foreign Assets Control” (“OFAC”), which is charged with the responsibility of enforcing U.S. sanctions – restrictions on trade – with certain countries, groups, entities, and individuals who have been identified by the U.S. Government as involved with such activities as terrorism, drug trafficking, and money laundering, or otherwise are a threat to U.S. national security (interestingly, communism is no longer a serious concern). Some of these sanctions apply to an entire country, and its nationals, such as Syria, Iran, Cuba, and North Korea, while the SDN List applies to certain individuals and entities, regardless of their nationality. The List, which is updated periodically (most recently, as of the writing of this article, February 26, 2015), is accessed at www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx; put that on your “Favorites” list on your web browser.  The List is provided in various formats for use in various types of software programs, but the website also provides tools for a manual search online.

The significance of the SDN List is that U.S. persons, including individuals who are U.S. citizens or permanent residents (green card holders), are generally prohibited from doing business with any person who is on the List, and in fact are sometimes required to affirmatively block the transaction from going forward. If a U.S. person proceeds with a transaction with a listed person, and the Federal Government finds out about it, the U.S. person is potentially subject to very significant monetary and imprisonment penalties. The severity of the punishment essentially depends on the likelihood that the U.S. person knew or should have known that he was dealing with a listed person.

As might be expected, the greatest focus of enforcement is on banks and other large financial institutions and other large corporations and businesses. Such companies generally have sophisticated software and employee training programs to ensure compliance with the OFAC sanctions.  Nevertheless, individuals are also subject to the rules, including real estate brokers and agents, so they should also have some type of due diligence and “know your client” procedures to keep from running afoul of OFAC sanctions. As noted above, the OFAC SDN website provides an efficient means of checking on an individual; the search tool even gives a percentage of likelihood of a match – 100% means an exact match – of a name of a client (potential client) with a name on the List, and uses “fuzzy logic” to try to find other possible matches of a lower degree of a match. The program also lists “weak aliases” or “AKA” names (also known as) which, while not constituting a match, should prompt the U.S. person to do some further checking. If there is any doubt about a match, the broker or agent can always call OFAC at 1-800-540-6322 for further guidance. If there appears to be a match, the agent or broker may have to consider abandoning the transaction and even reporting the person to OFAC.

The SDN List is not limited to “foreign” persons or even to persons of a particular nationality, but not unexpectedly there are certain regions of the world that provide more than their fair share of names on the List, therefore there will be a temptation to do some impromptu “profiling” based on national origin as to when to check the SDN List online. Whether such profiling constitutes a violation of some other law is beyond the scope of this article (and the author’s knowledge), but a standardized procedure applicable to all clients is generally a better policy.

Allan Tiller is an attorney in Houston, Texas specializing in international tax matters. This article is for general informational purposes only and is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this article. Mr. Tiller is a 2015 HAR International Advisory Group appointed member.

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