We provide this alert in light of the recent $1.72 million penalty imposed against IMG Academy by the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) for violations of U.S. sanctions laws. This alert provides an overview of OFAC regulations, their applicability to U.S. independent schools, especially boarding schools, and recommended steps schools should take to ensure compliance.
Overview. U.S. sanctions are measures imposed by the U.S. government for foreign policy and national security purposes through statutes, regulations, executive orders, and related restrictions, including economic embargoes and restricted party lists. The U.S. sanctions regime includes comprehensive embargoes that broadly prohibit dealings involving Cuba, Iran, North Korea, and certain regions of Ukraine, as well as prohibitions on transactions involving specific individuals and entities—for example, certain government parties and officials (e.g., Venezuela, Afghanistan), organizations (e.g., Houthis, Hezbollah), individuals (e.g., terrorists, drug traffickers, Russian oligarchs, cyber criminals, human rights abusers), and other entities (e.g., businesses engaged in illicit activities). These restrictions may apply even when the sanctioned party is not directly involved in a transaction but benefits from it.
U.S. sanctions are administered by OFAC, which sets forth regulations on dealings with embargoed countries and maintains and regularly updates the Specially Designated Nationals and Blocked Persons List (SDN List), which identifies individuals and entities with whom U.S. persons are generally prohibited from engaging in transactions. All U.S. persons, including U.S. citizens, lawful permanent residents, nonprofit entities, and entities organized under U.S. law (including their foreign branches), must comply with U.S. sanctions laws, regardless of where they are located.
Applicability to U.S. Schools. The IMG Academy enforcement action illustrates how U.S. independent schools without a formal sanctions compliance program may inadvertently violate U.S. law. In that matter, IMG Academy enrolled the children of two individuals listed on the SDN List for providing financial support and services to a sanctioned Mexican drug trafficking organization. Although the children themselves were not listed on the SDN List, tuition payments were made by or on behalf of the designated parents through non-designated third parties in Mexico. Because U.S. financial institutions are required to block funds involving sanctioned persons, routing of payments through third parties was presumably intended to avoid detection. Notably, IMG Academy entered into tuition agreements directly with the designated parents. Basic screening of parents and payors against the SDN List, or conducting routine due diligence, would likely have identified the sanctions risk.
As OFAC stated in its enforcement release, "Even for entities operating largely domestically, the presence of international touchpoints creates opportunities for impermissible dealings with sanctioned actors, inadvertently or otherwise." Independent schools frequently have international touchpoints that may create sanctions exposure, including enrollment of international students, hosting visiting faculty from other countries, engaging in international exchange programs, funding student research trips or projects in international jurisdictions, collaboration with foreign institutions, international research and commercial ties, student trips abroad, investments in companies located abroad, operating global campuses, donations from non-U.S. persons or entities, or charitable contributions to non-U.S. non-governmental organizations and charities.
Compliance Recommendations. OFAC expects all U.S. entities to implement and maintain a risk-based sanctions compliance program. For independent schools, some key components of an effective sanctions compliance program may include:
- Conducting a comprehensive sanctions risk assessment to identify the international touchpoints and risk associated with each
- Implementing screening protocols to screen students, parents, guardians, tuition counterparties, donors, vendors, and payors against the SDN List and other applicable restricted party lists
- Performing risk-based due diligence on international students, families, and counterparties to determine whether they are located in, or have ties to, comprehensively sanctioned jurisdictions or sanctioned persons
- Reviewing payment structures that involve third parties or complex routing arrangements
- Establishing procedures to escalate and review potential sanctions issues prior to accepting funds or entering into agreements
- Conducting compliance reviews of collaborations with entities in or trips to high-risk jurisdictions
- Providing targeted training to relevant admissions, finance, development, and senior leadership personnel
- Conducting periodic independent testing or audits of sanctions compliance controls