Dealing with the Office of Foreign Assets Control (#384)
/The Office of Foreign Assets Control
Accountants can become involved with the Office of Foreign Assets Control. This is very much a niche subject, because it’s primarily something that impacts nonprofit organizations within the United States that send money elsewhere. For example, when there’s a major earthquake in another country, or a hurricane, or a war, donors usually send their money to a nonprofit aid agency, which then turns around and sends the funds to the impacted areas. Seems simple enough, but it’s not.
At this point, a nonprofit runs into an issue that impacts both the accounting and finance functions. The Office of Foreign Assets Control, which is usually called OFAC, deals with sanctions and blocked persons. In addition, there’s the IRS Form W-8, which certifies the foreign status of the recipient of funds for tax purposes. We’ll get back to the W-8 in a minute.
Let’s start with OFAC. It’s part of the U.S. Treasury Department, and its job is to enforce economic and trade sanctions. In essence, it decides who American companies can do business with. That includes individuals, companies, banks, and even entire countries. The rules apply to every accountant who touches an international transaction.
Now, here’s where it gets tricky. OFAC defines “property” very broadly. It’s not just physical assets; it’s any financial interest or transaction that involves a sanctioned party. That means a single wire transfer or a loan repayment can become “blocked property” the moment it passes through a U.S. bank if it involves someone on the Specially Designated Nationals list, or even if a sanctioned party owns more than half of the entity receiving the funds.
For accountants working in nonprofits that have international operations, that’s a major concern. You might be trying to send money for food, medicine, or emergency shelters, but if any part of that transaction touches a blocked party, you could be required by law to freeze the funds and report the transaction to OFAC.
At the same time, there’s another layer to consider, which is the humanitarian exception. OFAC recognizes that sanctions can’t completely choke off aid that’s intended to save lives, so it includes specific authorizations called general licenses.
These allow certain types of humanitarian transfers, but the permissions are very narrow. The party sending the funds has to prove that the transaction really and truly fits the criteria. And if it doesn’t, a specific license has to be obtained before the funds can move.
In practice, this means that nonprofit accountants have to confirm that the recipient, its bank, and even its affiliates aren’t linked to sanctioned people. They have to verify that every payment is documented and justified within the scope of the license. This is boring as hell; it’s spreadsheets, and signatures, and a lot of discussions with compliance officers.
The Form W-8
Now, while all of that’s happening on the sanctions side, you also have to deal with the Form W-8. This is the IRS form that foreign parties have to submit so that they don’t automatically get hit with thirty-percent withholding on income coming from the U.S. There are several versions of the Form W-8 that I won’t get into, depending on the nature of the payment. Accountants see these forms all the time when paying foreign vendors, and consultants, or perhaps from someone receiving a grant.
The form is simple enough. It tells the IRS, “I’m not a U.S. taxpayer. Here’s where I reside. Here’s whether I’m entitled to treaty benefits.” Without it, the payer must withhold thirty percent and report the payment as if the recipient were unknown. So when a U.S. nonprofit pays a relief worker or a supplier who’s located abroad, that form determines whether the funds are fully available or reduced – a lot – by a withholding.
Documenting a Payment
The complication comes when both systems – OFAC and the IRS – overlap. Imagine that you’re the controller for an international relief organization based in Chicago. Your team is wiring half a million dollars to an NGO operating in a country that’s under partial sanctions. The NGO submits a Form W-8, claiming treaty benefits under its home country’s tax treaty with the United States. Everything seems routine, but your bank’s compliance department flags the transfer. It turns out that the NGO’s local banking partner is partially owned by a sanctioned government entity.
This is a problem. The W-8 tells you it’s a legitimate foreign entity for tax purposes. But OFAC says that, under the fifty-percent ownership rule, the banking chain could make this payment prohibited. You can’t process the wire until the situation is cleared. What began as a simple transfer to fund emergency medicine is now a complete mess.
If you’re that controller, you have to bring in an attorney to figure out whether the payment qualifies for a general license.
You document every step in your screening process. And, if necessary, you have to apply for a specific license from OFAC. Only when all of that work is done can you release the funds.
On the tax side, you’re not done yet. You have to verify that the Form W-8 is correctly filled out. This means verifying that the foreign tax identification number has been provided or marked as not legally required, and that the treaty claim matches the type of payment, and that the form was signed by someone with authority, and that it hasn’t expired yet. A W-8 is typically valid until the end of the third calendar year after it’s signed, unless there’s a change in circumstances. So if the foreign entity moves or changes ownership, you’ll need a new form within thirty days. So much fun.
When you think about it, both systems — OFAC and the IRS — are really about the same thing, which is verifiable integrity. They ask, “Who are you dealing with, and can you prove it?” OFAC wants to ensure that the money isn’t funding a prohibited activity. The IRS wants to ensure that tax obligations are properly allocated. Accountants operate right in the middle, which is a painful place to be. If these requirements become too onerous, I can see a lot of nonprofits deciding to not send money to any foreign entity that would be considered even remotely questionable. Not only is there a great deal of expensive bureaucracy involved, but a nonprofit could also be hit with fines that can reach into the millions – for just one violation. And, for that matter, a failure to collect or validate W-8s can make the payer liable for the taxes that should have been withheld.
In short, complying with sanctions and tax requirements is not easy, and it’s not going away. So, the next time you hear about an international organization rushing funds to a crisis zone, remember that there’s a team of accountants supporting the funds transfer. They’re verifying beneficiaries, confirming licensing, reconciling W-8s, and ensuring that no money ends up where it shouldn’t.
And a final thought. Why did I focus on just nonprofits in this episode? For-profit organizations have to deal with these issues too, but there’s one important difference. For-profits set up supply chains in other countries, and once they’re set up, there isn’t really a whole lot more to worry about. But nonprofits are always sending money into disaster areas, and that involves making payments to different players on the other end all the time. Which brings up the issues that I’ve noted in this episode.