A Primer on Anti-Terrorism Requirements in Leasing Transactions: Complying with Executive Order 13224

The Order seeks to implement its goals by establishing mechanisms intended to (i) deny financing and financial services to terrorists, and (ii) develop and share intelligence about funding activities that may directly or indirectly support terrorism. These mechanisms are as follows:

• the Order blocks (ie, “freezes” activity and access to) all property and interests in property (i) of “specially designated nationals” and “blocked persons” (whether such property is held directly by those persons or indirectly on their behalf by their agents and affiliates), and (ii) that are in the United States or that come within the United States or within the possession or control of any U.S. person; and;
• the Order prohibits any transaction or dealing by any U.S. person or within the United States in such blocked property (including the making or receiving of any contribution of funds, goods or services to or for the benefit of any specially designated national or blocked person).

For purposes of the Order, the term “U.S. person” includes any U.S. citizen, permanent resident alien, entity organized under U.S. law and individual or entity in the United States.

Administration and Enforcement

The U.S. Department of the Treasury administers and enforces the Order. This duty is carried out by the Treasury Department's Office of Foreign Assets Control, which is commonly referred to as “OFAC.” OFAC maintains and updates from time to time a list of the specially designated nationals and blocked persons. In this article, that list is referred to as the “OFAC List.”

The Order was issued pursuant to the International Emergency Economic Powers Act. Under this Act, civil and criminal penalties can be imposed for violations of an order issued pursuant to the Act. Civil penalties for violating the Order can range as high as $10,000 for each violation. A willful violation of the Order can be criminally punished with penalties ranging up to $50,000, imprisonment for up to 10 years, or both. In addition, any officer, director or agent of an entity who knowingly participates in any such violation may be punished by a like fine, imprisonment or both.

Compliance Requirements

There are three fundamental steps required for compliance with the Order. For convenience, this article refers to a party that seeks to comply with the Order as the “Complying Party.” First, the Complying Party to a lease or other transaction must endeavor to confirm that no other party to the transaction (or any of such party's agents or affiliates) is on the OFAC List. Second, if the Complying Party determines that another party (or any of its agents or affiliates) is on the OFAC List, then the Complying Party must reject the transaction and block assets of the party in question to the extent possible. Third, the Complying Party must file a report to inform OFAC of the transaction rejection and asset blockage.

The actions described below are recommended for purposes of implementing compliance actions.

• Obtain the names of transaction parties and their agents and affiliates. Obtain the names of all parties to a transaction as well as any agents and affiliates of these parties. This includes all owners, tenants, guarantors and other parties involved in the transaction and their respective agents and affiliates. Ideally, this action should be taken at the outset of a proposed transaction before any commitment is made. If a transaction has commenced, this should be done immediately before proceeding further with the transaction.
• Check these names against the OFAC List. Promptly after obtaining these names, check them against the most current OFAC List, which is located at http://www.ustreas.gov/offices/enforcement/ofac/sdn/index.html (this shows the date on which OFAC last updated the list). A searchable version of the OFAC List is located at http://www.nasdr.com/ofac/. In addition, name-checking software has become commercially available and some service companies provide name-checking reports concerning the OFAC List. For example, Equifax and Compliance Data Center provide e-mail notification of potential OFAC List matches.
• Recheck these names. Because the OFAC List is periodically updated, a Complying Party should recheck each updated OFAC List for the names of the parties with whom or which the Complying Party is dealing or has dealt since the inception of the Order. As an alternative to name-checking software or services, update information can be obtained by subscribing to OFAC's e-mail service, as described at http://www.ustreas.gov/offices/enforcement/ofac/automation/index.html.
• Verify name matches. If the name of a party or any of its agents or affiliates appears to match a name on the OFAC List, a Complying Party should evaluate the quality of the match. Additional information may be needed to determine whether there is an exact match. For this purpose, general information concerning any prospective transaction party should be gathered when contact is first initiated. This information should include the prospective party's address, and, in the case of an entity, its organizational jurisdiction. A prospective party should also be requested to identify its agents and affiliates. If an OFAC List review reveals any exact matches or similar entries, the Complying Party may wish to contact OFAC's hotline at 800-540-6322 to verify the match.
• Matches. If there is an OFAC List entry match between a party or any of its agents or affiliates, the Complying Party must:

(a) refuse to enter into any transaction with the party or any of its agents or affiliates, or, if the transaction has been commenced, refuse to proceed further with the transaction;

(b) block any assets of the party, agent or affiliate in question that are in the Complying Party's possession or control, including, for example, earnest money;

(c) report the transaction rejection or blockage of assets to OFAC in writing within 10 days (there is no standardized form for this report, but the authors recommend submitting the report in the form of a letter sent both by fax transmission and by certified mail, return receipt requested); and

(d) not later than September 30 of each year in question, file a report with OFAC on Form TDF 90-22.50 (titled “Annual Report of Blocked Property”) regarding each transaction rejection or blockage of assets during the 12-month period ending as of June 30 of that year.

The Annual Report form can be reviewed at, and printed from, OFAC's forms Web site, address as follows: http://www.ustreas.gov/offices/eotffc/ofac/forms/index.html. All reports submitted to OFAC for purposes of complying with the Order should be filed with the Office of Foreign Assets Control, Compliance Programs Division, U.S. Treasury Department, 1500 Pennsylvania Ave., N.W.-Annex, Washington, DC 20220. A copy of each report, together with delivery confirmation evidence, should be retained by the Complying Party.

As is the case with certain other government-mandated transaction measures, such as for example the Anti-Boycott Compliance Regulations, OFAC encourages the voluntary disclosure of any past violation of the Order. This encouragement is provided by OFAC's willingness to consider self-disclosure to be a mitigating factor in OFAC civil penalty proceedings. Although a self-disclosure should be included in an OFAC Annual Report for the year in question, a Complying Party may also wish to report the matter more promptly. In any event, the authors recommend consultation with legal counsel, who may recommend submission of a detailed letter and other supporting documentation.

At present, self-disclosure reports should be submitted to R. Richard Newcomb, Director, Office of Foreign Assets Control, U.S. Department of the Treasury, 1500 Pennsylvania Ave., N.W., Washington, DC 20220.

Internal Procedures

In addition to the compliance steps described above, a Complying Party is urged to consider implementing the protective action described in the following subparagraphs.

• Adopt formal compliance measures. A Complying Party may find it advantageous to adopt a formal compliance policy and to create a compliance program. When assessing mitigating factors relating to a violation of the Order, OFAC reviews the totality of the circumstances surrounding any violation and takes into account the quality of a company's OFAC compliance program. As is the case with any other compliance policy and program, it will be very important for the Complying Party to ensure when devising its program that the procedures set forth are practicable and are followed.
• Inform, educate and train your employees. A Complying Party should provide compliance training to all of its employees having responsibilities that could bear upon compliance with the Order.
• Transactional Protection. A Complying Party should consider obtaining compliance-related representations and warranties in writing from all other parties to the lease or other transaction in question. Although reliance cannot be placed upon the representations and warranties in lieu of checking the OFAC List and fulfilling the other compliance steps described in this article, the representations and warranties may provide a desirable additional level of comfort in that they will cause the parties to focus upon the need for compliance. Ideally, liability for a breach of the warranties and representations given to the Complying Party should be joint and several among the other parties so that the Complying Party will have the benefit, by way of a “double-check,” of the additional due diligence activities that should be undertaken by the other parties concerning each other for purposes of making the representations and warranties.

The following comprises sample language for such representations and warranties to be given by a tenant in a lease:

Tenant and each Guarantor hereby jointly and severally warrant, represent and covenant to and for the benefit of Landlord as follows:

(a) Tenant and each of its subsidiaries, predecessors, agents, direct and indirect owners and their respective affiliates has at all applicable times been, is now and will in the future be, in compliance with U.S. Executive Order 13224 and no action, proceeding, investigation, charge, claim, report or notice has been filed, commenced or threatened against any of them alleging any failure to so comply;

(b) neither Tenant nor any Guarantor or any of their respective agents, subsidiaries or other affiliates has, after due investigation and inquiry, knowledge or notice of any fact, event, circumstance, situation or condition which could reasonably be expected to result in (i) any action, proceeding, investigation, charge, claim, report or notice being filed, commenced or threatened against any of them alleging any failure to comply with the Order, or (ii) the imposition of any civil or criminal penalty against any of them for any failure to so comply;

(c) the names, addresses and, in the case of entities, jurisdiction of formation or organization, as the case may be, of Tenant and each Guarantor and the predecessors, agents, subsidiaries, direct and indirect owners, and affiliates of each of them are set forth on the attached Schedule _____ (titled “Executive Order 13224 Compliance Information”), and none of the them are included in the OFAC List (as hereinafter defined); and

(d) prior to any changes in direct or indirect ownership of Tenant or any Guarantor, Tenant shall give a written notice to Landlord signed by Tenant and each Guarantor (i) advising Landlord in reasonable detail as to the proposed ownership change, and (ii) reaffirming that the representations and warranties herein contained will remain true and correct.

• Prepare and maintain written records. A Complying Party should prepare and maintain full and accurate written records of the due diligence steps taken with respect to each transaction. These records should among other things reflect the compliance procedures followed for purposes of the Order, including name checking, resolution of any possible or actual matches, and any communications with OFAC, including all reports filed with OFAC. These records should be retained for at least five years following the consummation of a transaction. In the case of a lease, the authors are of the view that it is advisable to treat the end of the lease, rather than its commencement, as the time to start the clock for purposes of measuring the retention period.

Conclusion

Creating and implementing a compliance policy and program may at first blush seem onerous in the context of commercial leasing and other real estate transactions. However, the task of gathering additional information about the prospective parties and checking the OFAC List can be integrated into the other routine measures inherent in initiating leases and other transactions, and should not present any undue delay or burden. Given the important goals and the serious consequences, steps to comply with Executive Order 13224 must be ranked as a priority for real estate transactionalists among the many changes in the way that business must now be conducted in the United States as a result of the increased threat of terrorism.

Shortly after September 11, 2001, President Bush issued Executive Order 13224 (the “Order”) to combat terrorism. The title of the Order, “Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism” aptly describes the protective measures contemplated by the Order. Among other things, the Order applies to all real estate transactions, including commercial leases. All owners, tenants, guarantors and other parties to lease transactions, as well as their respective agents and affiliates, are obliged to comply with this Order. Given the critically important national interest at stake, as well as the stern penalties that can be encountered for noncompliance, it is essential for all parties involved in real estate transactions to be aware of the Order's requirements and to include compliance measures in all dealings.

Goals and Implementation of the Order

The goals of the Order are to prevent and to suppress acts of terrorism. In the Order, “terrorism” refers to an activity that involves a violent act or an act dangerous to human life, property or infrastructure and that appears to be intended to intimidate or coerce a civilian population, to influence the policy of a government by intimidation or coercion or to affect the conduct of a government by mass destruction, assassination, kidnapping or hostage taking.

The Order seeks to implement its goals by establishing mechanisms intended to (i) deny financing and financial services to terrorists, and (ii) develop and share intelligence about funding activities that may directly or indirectly support terrorism. These mechanisms are as follows:

• the Order blocks (ie, “freezes” activity and access to) all property and interests in property (i) of “specially designated nationals” and “blocked persons” (whether such property is held directly by those persons or indirectly on their behalf by their agents and affiliates), and (ii) that are in the United States or that come within the United States or within the possession or control of any U.S. person; and;
• the Order prohibits any transaction or dealing by any U.S. person or within the United States in such blocked property (including the making or receiving of any contribution of funds, goods or services to or for the benefit of any specially designated national or blocked person).

For purposes of the Order, the term “U.S. person” includes any U.S. citizen, permanent resident alien, entity organized under U.S. law and individual or entity in the United States.

Administration and Enforcement

The U.S. Department of the Treasury administers and enforces the Order. This duty is carried out by the Treasury Department's Office of Foreign Assets Control, which is commonly referred to as “OFAC.” OFAC maintains and updates from time to time a list of the specially designated nationals and blocked persons. In this article, that list is referred to as the “OFAC List.”

The Order was issued pursuant to the International Emergency Economic Powers Act. Under this Act, civil and criminal penalties can be imposed for violations of an order issued pursuant to the Act. Civil penalties for violating the Order can range as high as $10,000 for each violation. A willful violation of the Order can be criminally punished with penalties ranging up to $50,000, imprisonment for up to 10 years, or both. In addition, any officer, director or agent of an entity who knowingly participates in any such violation may be punished by a like fine, imprisonment or both.

Compliance Requirements

There are three fundamental steps required for compliance with the Order. For convenience, this article refers to a party that seeks to comply with the Order as the “Complying Party.” First, the Complying Party to a lease or other transaction must endeavor to confirm that no other party to the transaction (or any of such party's agents or affiliates) is on the OFAC List. Second, if the Complying Party determines that another party (or any of its agents or affiliates) is on the OFAC List, then the Complying Party must reject the transaction and block assets of the party in question to the extent possible. Third, the Complying Party must file a report to inform OFAC of the transaction rejection and asset blockage.

The actions described below are recommended for purposes of implementing compliance actions.

• Obtain the names of transaction parties and their agents and affiliates. Obtain the names of all parties to a transaction as well as any agents and affiliates of these parties. This includes all owners, tenants, guarantors and other parties involved in the transaction and their respective agents and affiliates. Ideally, this action should be taken at the outset of a proposed transaction before any commitment is made. If a transaction has commenced, this should be done immediately before proceeding further with the transaction.
• Check these names against the OFAC List. Promptly after obtaining these names, check them against the most current OFAC List, which is located at http://www.ustreas.gov/offices/enforcement/ofac/sdn/index.html (this shows the date on which OFAC last updated the list). A searchable version of the OFAC List is located at http://www.nasdr.com/ofac/. In addition, name-checking software has become commercially available and some service companies provide name-checking reports concerning the OFAC List. For example, Equifax and Compliance Data Center provide e-mail notification of potential OFAC List matches.
• Recheck these names. Because the OFAC List is periodically updated, a Complying Party should recheck each updated OFAC List for the names of the parties with whom or which the Complying Party is dealing or has dealt since the inception of the Order. As an alternative to name-checking software or services, update information can be obtained by subscribing to OFAC's e-mail service, as described at http://www.ustreas.gov/offices/enforcement/ofac/automation/index.html.
• Verify name matches. If the name of a party or any of its agents or affiliates appears to match a name on the OFAC List, a Complying Party should evaluate the quality of the match. Additional information may be needed to determine whether there is an exact match. For this purpose, general information concerning any prospective transaction party should be gathered when contact is first initiated. This information should include the prospective party's address, and, in the case of an entity, its organizational jurisdiction. A prospective party should also be requested to identify its agents and affiliates. If an OFAC List review reveals any exact matches or similar entries, the Complying Party may wish to contact OFAC's hotline at 800-540-6322 to verify the match.
• Matches. If there is an OFAC List entry match between a party or any of its agents or affiliates, the Complying Party must:

(a) refuse to enter into any transaction with the party or any of its agents or affiliates, or, if the transaction has been commenced, refuse to proceed further with the transaction;

(b) block any assets of the party, agent or affiliate in question that are in the Complying Party's possession or control, including, for example, earnest money;

(c) report the transaction rejection or blockage of assets to OFAC in writing within 10 days (there is no standardized form for this report, but the authors recommend submitting the report in the form of a letter sent both by fax transmission and by certified mail, return receipt requested); and

(d) not later than September 30 of each year in question, file a report with OFAC on Form TDF 90-22.50 (titled “Annual Report of Blocked Property”) regarding each transaction rejection or blockage of assets during the 12-month period ending as of June 30 of that year.

The Annual Report form can be reviewed at, and printed from, OFAC's forms Web site, address as follows: http://www.ustreas.gov/offices/eotffc/ofac/forms/index.html. All reports submitted to OFAC for purposes of complying with the Order should be filed with the Office of Foreign Assets Control, Compliance Programs Division, U.S. Treasury Department, 1500 Pennsylvania Ave., N.W.-Annex, Washington, DC 20220. A copy of each report, together with delivery confirmation evidence, should be retained by the Complying Party.

As is the case with certain other government-mandated transaction measures, such as for example the Anti-Boycott Compliance Regulations, OFAC encourages the voluntary disclosure of any past violation of the Order. This encouragement is provided by OFAC's willingness to consider self-disclosure to be a mitigating factor in OFAC civil penalty proceedings. Although a self-disclosure should be included in an OFAC Annual Report for the year in question, a Complying Party may also wish to report the matter more promptly. In any event, the authors recommend consultation with legal counsel, who may recommend submission of a detailed letter and other supporting documentation.

At present, self-disclosure reports should be submitted to R. Richard Newcomb, Director, Office of Foreign Assets Control, U.S. Department of the Treasury, 1500 Pennsylvania Ave., N.W., Washington, DC 20220.

Internal Procedures

In addition to the compliance steps described above, a Complying Party is urged to consider implementing the protective action described in the following subparagraphs.

• Adopt formal compliance measures. A Complying Party may find it advantageous to adopt a formal compliance policy and to create a compliance program. When assessing mitigating factors relating to a violation of the Order, OFAC reviews the totality of the circumstances surrounding any violation and takes into account the quality of a company's OFAC compliance program. As is the case with any other compliance policy and program, it will be very important for the Complying Party to ensure when devising its program that the procedures set forth are practicable and are followed.
• Inform, educate and train your employees. A Complying Party should provide compliance training to all of its employees having responsibilities that could bear upon compliance with the Order.
• Transactional Protection. A Complying Party should consider obtaining compliance-related representations and warranties in writing from all other parties to the lease or other transaction in question. Although reliance cannot be placed upon the representations and warranties in lieu of checking the OFAC List and fulfilling the other compliance steps described in this article, the representations and warranties may provide a desirable additional level of comfort in that they will cause the parties to focus upon the need for compliance. Ideally, liability for a breach of the warranties and representations given to the Complying Party should be joint and several among the other parties so that the Complying Party will have the benefit, by way of a “double-check,” of the additional due diligence activities that should be undertaken by the other parties concerning each other for purposes of making the representations and warranties.

The following comprises sample language for such representations and warranties to be given by a tenant in a lease:

Tenant and each Guarantor hereby jointly and severally warrant, represent and covenant to and for the benefit of Landlord as follows:

(a) Tenant and each of its subsidiaries, predecessors, agents, direct and indirect owners and their respective affiliates has at all applicable times been, is now and will in the future be, in compliance with U.S. Executive Order 13224 and no action, proceeding, investigation, charge, claim, report or notice has been filed, commenced or threatened against any of them alleging any failure to so comply;

(b) neither Tenant nor any Guarantor or any of their respective agents, subsidiaries or other affiliates has, after due investigation and inquiry, knowledge or notice of any fact, event, circumstance, situation or condition which could reasonably be expected to result in (i) any action, proceeding, investigation, charge, claim, report or notice being filed, commenced or threatened against any of them alleging any failure to comply with the Order, or (ii) the imposition of any civil or criminal penalty against any of them for any failure to so comply;

(c) the names, addresses and, in the case of entities, jurisdiction of formation or organization, as the case may be, of Tenant and each Guarantor and the predecessors, agents, subsidiaries, direct and indirect owners, and affiliates of each of them are set forth on the attached Schedule _____ (titled “Executive Order 13224 Compliance Information”), and none of the them are included in the OFAC List (as hereinafter defined); and

(d) prior to any changes in direct or indirect ownership of Tenant or any Guarantor, Tenant shall give a written notice to Landlord signed by Tenant and each Guarantor (i) advising Landlord in reasonable detail as to the proposed ownership change, and (ii) reaffirming that the representations and warranties herein contained will remain true and correct.

• Prepare and maintain written records. A Complying Party should prepare and maintain full and accurate written records of the due diligence steps taken with respect to each transaction. These records should among other things reflect the compliance procedures followed for purposes of the Order, including name checking, resolution of any possible or actual matches, and any communications with OFAC, including all reports filed with OFAC. These records should be retained for at least five years following the consummation of a transaction. In the case of a lease, the authors are of the view that it is advisable to treat the end of the lease, rather than its commencement, as the time to start the clock for purposes of measuring the retention period.

Conclusion

Creating and implementing a compliance policy and program may at first blush seem onerous in the context of commercial leasing and other real estate transactions. However, the task of gathering additional information about the prospective parties and checking the OFAC List can be integrated into the other routine measures inherent in initiating leases and other transactions, and should not present any undue delay or burden. Given the important goals and the serious consequences, steps to comply with Executive Order 13224 must be ranked as a priority for real estate transactionalists among the many changes in the way that business must now be conducted in the United States as a result of the increased threat of terrorism.