Workshop: Building a Sanctions Compliance Memo

Purpose and Audience of a Sanctions Compliance Memo

A sanctions compliance memo is the legal-operational document a financial institution, exporter, law firm, or corporate counsel produces to determine whether a proposed transaction, counterparty relationship, or course of conduct is permissible under applicable sanctions regimes. It is not an academic exercise: under 31 C.F.R. § 501.601, OFAC requires U.S. persons to maintain records of transactions subject to its regulations for five years, and the memo functions as the contemporaneous record demonstrating reasonable due diligence. In OFAC's 2019 Framework for OFAC Compliance Commitments, the agency explicitly identified "management commitment, risk assessment, internal controls, testing and auditing, and training" as the five pillars — the memo operationalizes pillars two and three for a specific matter.

The audience is layered. The immediate reader is a compliance officer or General Counsel making a go/no-go decision. The secondary reader is the regulator: OFAC's Enforcement Division, the EU national competent authority (e.g., HM Treasury's Office of Financial Sanctions Implementation in the UK, the Bundesbank's Servicezentrum Finanzsanktionen in Germany), or, in criminal matters, DOJ's National Security Division. The 2023 Tri-Seal Compliance Note issued jointly by Commerce BIS, Treasury OFAC, and DOJ on voluntary self-disclosures confirmed that contemporaneous written analysis weighs materially in penalty mitigation under the OFAC Economic Sanctions Enforcement Guidelines (31 C.F.R. Part 501, Appendix A).

The Five-Part Structure

A defensible memo follows a disciplined structure:

1. Facts. State the parties, the proposed transaction (goods, services, financial instrument, value, currency, routing), the jurisdictions touched, and the timing. Identify each counterparty's beneficial owners down to the 50 percent threshold required by OFAC's Revised Guidance of August 13, 2014 (the "50 Percent Rule"), and the equivalent EU aggregation rule articulated in the Council's EU Best Practices for the Effective Implementation of Restrictive Measures (most recently updated June 27, 2022).

2. Applicable Regimes. Identify every regime that could attach. For a transaction involving a Russian counterparty in 2024, that minimally includes: Executive Orders 14024 (April 15, 2021), 14065, 14066, 14068, and 14071; Council Regulation (EU) 833/2014 as amended through the 14th sanctions package (Regulation 2024/1745, June 24, 2024); UK Russia (Sanctions) (EU Exit) Regulations 2019; and UN Security Council measures where applicable. Cite the operative provision, not the regime generally.

3. Analysis. Apply law to fact. Distinguish primary sanctions (jurisdictional nexus through U.S. person, U.S.-origin goods, U.S. dollar clearing, or U.S. financial system) from secondary sanctions (e.g., CAATSA § 231 designations, or E.O. 14114's December 22, 2023 expansion of secondary sanctions on foreign financial institutions supporting Russia's military-industrial base). Address general licenses by number (e.g., Russia GL 8K for energy-related transactions) and determine whether their conditions are satisfied. Flag facilitation risk under 31 C.F.R. § 560.208 where a non-U.S. affiliate is involved.

4. Conclusion. State the recommendation: proceed, proceed with conditions, decline, or seek a specific license under 31 C.F.R. § 501.801. Conditions should be enumerated (e.g., contractual sanctions representations, wind-down within the GL period, KYC refresh).

5. Escalation and Record. Identify who must approve, whether a Suspicious Activity Report under 31 U.S.C. § 5318(g) or an OFAC blocking report under 31 C.F.R. § 501.603 is triggered, and the retention location. The 2019 ZTE settlement and the 2023 Binance settlement ($968 million OFAC component, November 21, 2023) both turned in part on the absence or falsification of such records.

Drafting Discipline: Precision Over Coverage

The most common failure mode in sanctions memos is breadth substituting for depth — citing every regime that might apply without resolving which one does. Three drafting disciplines counteract this.

Anchor to the operative prohibition. Every conclusion must trace to a specific prohibition. "This transaction is prohibited under Russia sanctions" is not analysis. "This transaction is prohibited under § 1(a)(i) of E.O. 14071 (April 6, 2022), which bars the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any category of services as may be determined by the Secretary of the Treasury, to any person located in the Russian Federation," is analysis. The April 2022, May 2022, September 2022, and June 2024 determinations under that section progressively expanded covered services (management consulting, accounting, trust and corporate formation, IT consulting, enterprise software).

Distinguish blocking from sectoral from list-based prohibitions. SDN designations under E.O. 13599 or E.O. 14024 trigger full blocking under 31 C.F.R. § 510.201 or § 587.201 — all property and interests in property in U.S. possession or control are frozen, and U.S. persons may not transact. Sectoral Sanctions Identifications List (SSI) designations under Directives 1–4 of E.O. 13662 impose narrower prohibitions (e.g., new debt of greater than 14 days for Directive 1 entities). Non-SDN Menu-Based Sanctions (NS-MBS) under CAATSA impose discretionary, menu-selected measures. Conflating these produces wrong answers.

Resolve ambiguity affirmatively. If a counterparty's ownership cannot be confirmed below the 50 percent threshold, the memo must say so and recommend either enhanced due diligence, a contractual representation, or declination — not silence. OFAC's August 2024 enforcement action against a U.S. software firm cited "reason to know" of blocked-party ownership as the basis for strict-liability violation; the firm's internal memo had flagged the ambiguity but not resolved it.

Working Through a Hypothetical

Assume a Delaware-incorporated logistics firm proposes to charter a Liberian-flagged tanker, owned through a Cypriot SPV, to lift Russian-origin Urals crude from Novorossiysk for delivery to a refinery in Gujarat, India, at $72 per barrel, paid in UAE dirham through an Emirates NBD correspondent.

The memo must address: (i) the Russian oil price cap under E.O. 14071 and the Price Cap Coalition's Updated Guidance on Implementation of February 3, 2025 — $72 is above the $60 cap as of this writing, breaching the safe harbor; (ii) the U.S. person prohibition on services (financing, brokering, insurance) related to Russian oil sold above the cap under OFAC Determination of November 22, 2022; (iii) beneficial ownership of the Cypriot SPV against the SDN List and the EU Consolidated List; (iv) whether Emirates NBD has been the subject of E.O. 14114 secondary-sanctions correspondence; (v) shipping-specific advisories, including the OFAC, BIS, State, and USCG Quintuple Advisory of October 12, 2023 on maritime petroleum-shipping risks; and (vi) flag-state and class-society exposure under the UK's Oil Price Cap regime (OFSI General License INT/2022/2470156).

The correct conclusion is decline absent restructuring to bring the price within the cap or removing the U.S. nexus entirely — and even then, facilitation risk under 31 C.F.R. § 560.208 must be analyzed for any U.S. parent involvement.