# OFAC — Sanctions Screening

## What It Is

The Office of Foreign Assets Control (OFAC) is a division of the US Treasury Department that administers and enforces economic and trade sanctions. OFAC sanctions apply to all US persons (including US entities like a California LLC) and prohibit transactions with sanctioned countries, entities, and individuals.

Violations are strict liability — no intent is required. Civil penalties can reach over $300,000 per violation or twice the transaction value, whichever is greater. Criminal penalties can include up to $1 million in fines and 20 years imprisonment.

## Key Sanctions Lists

### Specially Designated Nationals (SDN) List

The primary list. Includes individuals and entities owned or controlled by, or acting for or on behalf of, sanctioned countries. Also includes terrorists, narcotics traffickers, and others designated under various sanctions programs. All US persons must block transactions involving SDN-listed parties.

### Consolidated Sanctions List

Combines multiple OFAC lists into one searchable database:
- SDN List
- Sectoral Sanctions Identifications (SSI) List
- Foreign Sanctions Evaders (FSE) List
- Non-SDN Palestinian Legislative Council List
- Other program-specific lists

### Country-Based Sanctions Programs

Comprehensive sanctions (broadly prohibited): Cuba, Iran, North Korea, Syria, and the Crimea/Donetsk/Luhansk regions of Ukraine.

Targeted sanctions (specific restrictions): Russia, Venezuela, Myanmar, and others.

## How It Applies to Palace Fund

### Screening Obligations

As a US entity, Palace Fund LLC must:

1. **Screen all investors** against OFAC sanctions lists before accepting capital
2. **Screen ongoing transactions**: Wire transfer counterparties, service providers
3. **Block prohibited transactions**: If a match is found, the transaction must be blocked and reported to OFAC within 10 business days

### Korean Investor Considerations

- **South Korea** is not a sanctioned country. Korean investors are not inherently restricted.
- **North Korea** is comprehensively sanctioned. Any connection to North Korean persons, entities, or the North Korean government is prohibited.
- **Korean entities with North Korean exposure**: Screen for any beneficial owners or business connections that could involve North Korean interests.
- **Dual nationals**: A Korean investor who also holds citizenship in a sanctioned country requires careful review.

### What to Screen

- Investor legal name (individual or entity)
- Beneficial owners (25%+ owners and controlling persons)
- Entity officers and directors
- Wire transfer originating banks and intermediary banks
- Counterparties in fund transactions

## Screening Tools

### Free

- **OFAC SDN Search**: https://sanctionssearch.ofac.treas.gov/ — Official OFAC search tool. Manual, one name at a time.
- **Consolidated Screening List (CSL)**: https://www.trade.gov/consolidated-screening-list — Includes OFAC and other agency lists.

### Paid Services

- **Dow Jones Risk & Compliance**
- **Refinitiv World-Check**
- **LexisNexis Bridger Insight**
- **ComplyAdvantage**

For a small fund, the free OFAC search tool is sufficient for initial screening. Consider a paid service as the investor base grows.

## Matching and False Positives

OFAC uses a "50% Rule": if a sanctioned person owns 50% or more of an entity, that entity is also blocked, even if the entity itself is not on the SDN list.

When screening returns a potential match:
1. Investigate further (compare dates of birth, addresses, ID numbers)
2. If it is a false positive, document the analysis and retain records
3. If it is a true match, block the transaction and file a report with OFAC within 10 business days
4. Do not proceed with the transaction while investigating

## Action Items

1. **Screen every investor before accepting capital**: Run full legal names and entity names through the OFAC SDN search tool. Screen beneficial owners as well.
2. **Screen at onboarding and periodically**: Re-screen existing investors at least annually, or when OFAC updates its lists (updates are frequent).
3. **Include OFAC representations in subscription documents**: Require investors to represent that they are not SDN-listed, not acting on behalf of sanctioned persons, and not located in sanctioned countries.
4. **Document all screening**: Keep records of every screening performed, including date, names searched, results, and any false positive analysis. Retain for at least 5 years.
5. **Establish a blocking procedure**: Know how to block a transaction and report to OFAC if a match is found.
6. **Subscribe to OFAC updates**: Sign up for OFAC email notifications at https://ofac.treasury.gov to receive list updates.

## Key Takeaway

OFAC screening is non-negotiable for any US fund. Screen every investor and beneficial owner before accepting money. South Korean investors are not restricted, but thorough screening is still required. Use the free OFAC search tool, document everything, and include OFAC representations in subscription documents. Violations are strict liability with severe penalties.