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OFAC, indexing and the "axis of evil"*

OFAC, indexing and the "axis of evil"

By: Mat Lystra, Sr. Research Analyst

The OFAC is hardly a household acronym, and yet many of FTSE Russell’s clients have grown increasingly aware of this little-known division within the US Treasury Department. That’s because the Office of Foreign Asset Control, or “OFAC”, enforces trade and financial restrictions against “rogue” countries, groups, or individuals.[1],[2] And financial institutions that assist these entities—however unwittingly—can risk heavy fines and a reputational smudge. Recognizing its importance to our clients, FTSE Russell continuously monitors the OFAC’s sanction programs as a key consideration for our ever-evolving index inclusion criteria.

Since the September 11, 2001 terrorist attacks, the OFAC has flexed more muscle in its prosecution of Executive Branch policies targeting money laundering, the financial sponsorship of terrorism and support for oppressive governments. The most powerful weapon in the OFAC’s bullet-less arsenal may be its ability to block financial dealings between US companies and entities or individuals placed on one of OFAC’s restricted lists.

Countries such as Iran, Cuba and North Korea are all covered under OFAC’s financial transactions prohibitions; as are groups like Hamas, Al-Qaeda and thousands of individuals including Zimbabwe’s President Robert Mugabe.[3] Most recently, OFAC has expanded its tool kit to include sanctions against the financial services and oil producing sectors of the Russian economy.[4]

FTSE Russell’s clients need to be aware of these restrictions which can significantly affect the international finance environment. So it follows that many of the largest financial institutions in the world have grown understandably sensitive to the risks associated with crossing the OFAC. A violation for providing assistance, knowingly or unknowingly, to a named person, company or country, can carry significant fines as well as reputational risk for the offending firm. Global financial firms have been particularly vulnerable to slip ups based on the transaction-oriented nature of their businesses.[5]
 

Selected OFAC Sanctions Programs

Source: US Treasury Department as of February 8, 2016.


FTSE Russell has responded to clients’ concerns in a number of ways including leaving countries that are completely blocked off our list of eligible markets. Additionally, we have continued to monitor Russian-based sanctions and put new rules in place to clarify the treatment of companies that are named by the OFAC and are also index members.[6] Advancements in the abilities of both index providers and asset managers to identify sources of companies’ revenues will allow for further screening tools in the future.

We also continue to watch for developments out of the OFAC that could expand investors’ access; an example being the recent thaw in relations between the US and Iran that may eventually make Iran’s $90B stock market accessible to many more foreign investors.[7] As the US increasingly trades the threat of bombs for economic sanctions, index providers will need to remain vigilant against including countries and companies that can create their own sort of collateral damage.

 
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* The term “Axis of Evil” was coined by President George W. Bush in his 2002 State of the Union address in reference to Iran, Iraq and North Korea.

[1] For more information about the OFAC please visit: https://www.treasury.gov/about/organizational-structure/offices/Pages/Of...

[2] Strobel, W. & Yukhananov, A. (2014). After success on Iran, US Treasury’s sanctions team faces new challenges.  Reuters, accessed on February 6, 2016, at: http://www.reuters.com/article/us-usa-sanctions-insight-idUSBREA3D1O8201...

[3] Source: https://sanctionssearch.ofac.treas.gov/

[4] Source: https://www.treasury.gov/resource-center/sanctions/Programs/Pages/ukrain...

[5] Rubenfeld, S. (2016). Barclays Pays $2.5Million over Zimbabwe Sanctions Breaches. The Wall Street Journal, article accessed on February 6, 2016, at: http://blogs.wsj.com/riskandcompliance/2016/02/08/barclays-pays-2-5-mill...

[6] For more information about the FTSE response to Russian sanctions please read: http://www.ftse.com/products/index-notices/home/getnotice/?id=600061

[7] Motevalli, G., Nasseri, L. & Potter, S. (2016). What Investors Need to Know About Entering Iran’s Stock Market. Bloomberg, accessed on February 5, 2016, at: http://www.bloomberg.com/news/articles/2016-01-17/what-investors-need-to...

 

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