Treasury Updates Sanctions Reporting Guidance for Banks Handling Blocked and Rejected Payments

The U.S. Treasury Department on Monday revised 11 sanctions-related FAQs that financial institutions use to decide when to freeze funds, return a prohibited payment and report either action to OFAC. The October 26 update from the Office of Foreign Assets Control (OFAC) addresses operational decisions in payment processing, including whether a customer’s question amounts to an instruction to move money and how blocked property must be recorded.

OFAC said the amendments are part of its continuing review of public guidance. They cover FAQs 10, 32, 33, 34, 35, 36, 41, 42, 49, 50 and 53, touching both the treatment of restricted payments and the reports filed afterward. The announcement did not introduce a new sanctions program or change the underlying 10-business-day reporting periods.

For banks, the distinction between blocked property and rejected payments determines more than the outcome of one wire. It affects whether the institution must retain the money in a restricted account or return it to the sender, as well as the type of report it files. The updated OFAC FAQs address each of those outcomes rather than treating every sanctions alert as the same problem.

When a bank must block funds rather than reject a payment

OFAC draws a line between a prohibited transfer involving a blocked person’s property interest and one that violates a sanctions restriction without such an interest. If the applicable rules require blocking, a bank receiving instructions to transfer money to a blocked person must freeze the relevant funds rather than send them onward. A prohibited payment with no blockable interest is instead rejected and returned to the originator; it must not be forwarded to the beneficiary.

That distinction is particularly important in country-related sanctions. In one example, OFAC describes a payment headed to an Iranian bank owned by Iran’s government. Because the bank is blocked under the cited Iran sanctions rules, the U.S. institution must block the payment. Another example involves a nonblocked company in Tehran receiving funds through a nonblocked bank in a third country. Processing that payment would facilitate prohibited trade and services, but there is no blockable interest, so the U.S. bank must reject it.

OFAC also uses a proposed wire to a nonblocked individual in the Crimea region of Ukraine to illustrate a rejection based on restrictions on exporting services. Those examples should not be read as a universal rule for every payment involving a particular country or region. Sanctions programs impose different prohibitions, and an institution must assess the specific parties, property interests and any applicable authorizations or exemptions.

A name match on a screening system does not complete that assessment. The revised guidance says institutions should establish whether a prospective customer or counterparty is actually the listed person, or is otherwise blocked under rules such as OFAC’s 50 Percent Rule. Similar names can produce false positives. A bank may need additional identifying details to distinguish an innocent match from property that is legally required to be frozen.

Account openings provide another example. A U.S. bank generally cannot open an account for someone who is blocked. If that applicant has already handed over an initial deposit, however, the bank is required to block the deposit rather than simply decline the application and return the money. Likewise, an actual instruction to send funds to a blocked financial institution can require blocking even if the customer would have received only a verbal refusal before issuing that instruction.

Ten business days to report, with supporting records

Blocked-property and rejected-payment reports each have a 10-business-day deadline. For the first, the clock starts when the property becomes blocked; for the second, it runs from the date the payment was rejected. The requirements are established in 31 CFR sections 501.603 and 501.604. OFAC’s October update reiterates how they operate and should not be mistaken for the start of a new reporting deadline.

Both reports must be submitted through the OFAC Reporting System (ORS). The filing needs to identify what happened, the relevant participants, the property or payment, the date of the action and the legal basis for it. Initial blocked-property reports must describe the blocked interest and the institution holding the property. Rejection reports also identify relevant account or reference information to the extent available when the payment is turned away.

Evidence supporting the filing is part of the requirement, not merely paperwork a bank can produce later if asked. OFAC lists payment or transfer instructions, checks, letters of credit, bills of lading and invoices among documents that may accompany the report. The federal rule governing rejected-payment reports calls for copies of relevant records and details of the parties involved, making the link between a screening decision and its underlying payment instruction important.

The online system is the standard filing route. OFAC instructs reporting institutions to arrange ORS access through the agency, providing the institution’s name and contact information for authorized filers. A person unable to use ORS may seek permission to submit reports in another way only under unique and extraordinary circumstances. OFAC says such requests are presumed to be denied unless it grants written approval; emailing to register does not replace filing the required report.

An annual blocked-property report is a separate obligation. U.S. persons holding blocked property as of June 30 must report those holdings by September 30 of the same year, using OFAC’s TD F 90-22.50 spreadsheet through ORS. The annual return covers the holdings on a fixed reporting date. It does not replace the initial 10-business-day report when property is first blocked, and the October 26 FAQ revisions did not reset the September deadline.

Frozen balances and customer instructions need separate treatment

Once money is blocked, the institution generally must place it in a segregated, interest-bearing account on the books of a U.S. financial institution. Only authorized debits may be made. Some banks maintain a separate account for each blocked item; others use blocked omnibus accounts. OFAC accepts either approach if the records create a clear audit trail that identifies individual funds and allows the appropriate principal and interest to be released if permission is later granted.

The records matter at the annual reporting stage as well. Banks using an omnibus account must supply a disaggregated list of the individual blocked assets, not merely one aggregate balance. OFAC also states that interest on blocked funds must be commercially reasonable when compared with deposits or instruments of similar size and maturity. Normal account service charges can generally be deducted when authorized by the relevant sanctions regulations, but they are not an unrestricted right to draw down frozen funds.

A conversation with a customer is treated differently from an actual payment order. Under FAQ 53, a customer who asks whether money can be sent to a sanctioned destination can receive an answer without the bank having to file a report about a transfer that never occurred. Once the customer provides instructions to make a prohibited payment, however, the bank must decide whether the funds contain a blocked person’s interest and should be frozen, or whether the payment must be rejected. A mere inquiry does not itself create a rejected-payment report.

A bank may notify a customer that funds have been blocked and explain the relevant sanctions program. Certain OFAC orders or directives can impose a separate disclosure obligation. If a customer seeks to have properly blocked money released, the agency’s guidance points to its specific-license process under 31 CFR section 501.801. A request from the customer alone does not authorize the bank to transfer the funds.