Who Is in the Chain of Liability for OFAC Noncompliance?

On Sept. 23, 2001, President Bush signed Executive Order 13224 in an effort to create another important tool for the U.S. government to thwart terrorist activities. The act provides the authority to the U.S. government to designate and block the assets of individuals or entities, which in any way aid, support, or guide terrorist activities. The Executive Order supplements any previous executive orders that prohibit transactions with money launderers, drug lords, or drug dealers.

The Annex to the Executive Order lists 29 individuals and entities, designated by the president as blocked individuals or entities. The Executive Order provides authority to designate additional individuals and entities, which are listed in Section 1 therein and include:

• persons or entities determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General, to have committed, or to pose a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the United States;
• persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Attorney General, to be owned or controlled by, or to act for or on behalf of those persons listed in the Annex to the Executive Order or as determined above;
• persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Attorney General together with such foreign authorities as the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General deems appropriate in the exercise of his discretion;
• persons or entities determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General to assist in, sponsor, or provide financial, material or technological support for, or financial or other services to or in support of, such acts of terrorism or those persons listed in the Annex to the Executive Order or determined to be subject to this order; or
• persons or entities determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General to be otherwise associated with those persons listed in any of the above.

There is also a list of individuals and entities that are determined to be terrorist by the U.S. Treasury Department's Office of Foreign Assets Control (“OFAC”), and it is updated regularly. OFAC publishes the list of individuals and entities controlled by, or acting for or on behalf of targeted countries, along with individuals, groups, and entities, such as terrorists and narcotics traffickers. This list is used to identify “Specially Designated Nationals and Blocked Persons” (“SDNs”) and includes the list in the Annex to the Executive Order. If a name is on the list, it means that all of the assets of that person or entity have been frozen, and all business dealings, both old and new, are barred.

Section 2 of the Executive Order prohibits any transaction dealing with property, or an interest in property, with any individual that is blocked pursuant to the Executive Order, including but not limited to the making or receiving of any contribution of funds, goods or services to or for the benefit of those persons listed in the Annex to the Executive Order or determined to be subject to the Executive Order.

Penalties for Not Complying

Criminal penalties can range from $50,000 to $1 million in addition to sentences ranging from 10- to 30-years in prison, and the potential for civil penalties exists.

However, putting aside the fines and prison sentences, your reputation as a law abiding and patriotic businessperson could be damaged if media reports indicating your possible relationship with a terrorist group were to appear in the newspapers. The impact on your business could be devastating as a result of a lack of confidence in either your integrity or in the security measures at your shopping center or building. Safety is a real concern in the post 9/11 era for potential tenants.

Compliance with the Order

As a landlord, you will have prospective tenants' names delivered to you – usually from a broker in a proposed deal sheet. In order to comply with the Executive Order, a thorough review of the name of the potential tenant with the SDN list should be made by the landlord.

The SDN list can be found at www.treas.gov/offices/enforcement/ofac/sdn.

The SDN list contains thousands of names, aliases, and “doing business as” designations to search and is more than 100 pages long. The SDN list has more than 4000 Specially Designated Nationals and Blocked Persons on it and has been updated multiple times this past year.

There are now companies that sell software that will do the work for you electronically and others that will take on the task of checking the SDN list and documenting its findings as evidence of your compliance.

Make sure when checking the SDN list that you check variations in the spelling; if you find a match, you want to make sure that it is not a “false positive.” Check all the background information you have on the prospective tenant with the information on the SDN list. If that does not help, you can contact the OFAC hotline at 1-800-540-6322.

Many landlords have turned to certification clauses or representation and warranty clauses in their leases to help ensure compliance with the Executive Order and require tenants and brokers to indemnify them if there are any violations and subsequent penalties assessed. A typical warranty, representation, and indemnity clause for a lease is as follows:

(a) Tenant hereby represents and warrants that:

(i) It is not designated as an individual or entity that has been determined to have committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S., which would violate the Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which became effective on September 24, 2001 (the “Order”); and

(ii) It is not owned or controlled by, or acting on behalf of an individual or entity which would violate the Order; and

(iii) It has not and will never assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or individuals or entities designated in or under the Order; and

(iv) It is not otherwise associated with certain individuals or entities designated in or under the Order.

(b) Tenant hereby agrees to defend, indemnify, and hold harmless the Landlord, any parent, subsidiary or affiliate of Landlord, and their respective employees, agents, officers, members, managers, directors, and shareholders from and against any and all fines, penalties, actions, claims, damages, losses, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing warranties and representations.

Most importantly, when complying with the Executive Order, make sure that you always document your compliance efforts and keep records for future evidence.

Brokers' Liability

As a landlord, you may rely on the use of several brokers to obtain potential tenants. The Executive Order imposes liability on the individual or entity that enters into a business deal with an entity or individual on the SDN list. Landlords will now review the tenant's information with the SDN list and look for the OFAC Certification language in hopes that doing both will exonerate them from liability for noncompliance of the Executive Order. Landlords should look to the broker as a filter. The broker should be preventing the referral to the landlord of prospective tenants that are on the SDN list. The broker not only has to comply with the Executive Order, but also should willingly provide a warranty and indemnification similar to the one below:

(a) Broker hereby represents and warrants that:

(i) It is not designated as an individual or entity that has been determined to have committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S., which would violate the Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which became effective on September 24, 2001 (the “Order”); and

(ii) It is not owned or controlled by, or acting on behalf of an individual or entity which would violate the Order; and

(iii) It has not and will never assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or individuals or entities designated in or under the Order; and

(iv) It is not otherwise associated with certain individuals or entities designated in or under the Order; and

(v) Before referring any potential tenants to Client it has complied with the Order and has completed a comprehensive comparison of the SDN list (which can be found at www.treas.gov/offices/enforce ment/ofac/sdn) against all prospective tenants and any tenant that is referred to Client is not any person, group, entity, or nation which is designated in the Order.

(b) Broker hereby agrees to defend, indemnify, and hold harmless the Client, any parent, subsidiary or affiliate of Client, and their respective employees, agents, officers, members, managers, directors, and shareholders from and against any and all fines, penalties, actions, claims, damages, losses, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing warranties and representations.

Overlandlord Liability

Shopping center leases come in many forms. A landlord may decide to lease space directly to prospective tenants, or may ground lease the entire shopping center or master lease the shopping center. In all three leases there may be a right to assign or sublet the space. In some cases, it is an unfettered right to assign or sublet; in others it is a right to assign or sublet only after the landlord gives consent, which consent is not to be unreasonably withheld or delayed. In some cases, the prospective subtenant or assignee must pass certain tests and be presented to the landlord for prior approval.

If all landlords now utilize the warranty and indemnification clause to protect themselves from liability for noncompliance with the Executive Order, will that also shield the landlord if its tenant subleases or assigns to a tenant on the SDN list? What responsibility does the landlord have as overlandlord to ensure that any subtenants are not on the SDN list?

While it is not clear how far up the chain the liability for noncompliance will rest, rather than try to answer these questions, it is best to avoid any potential problem by adding a warranty and indemnification clause to all three leases dealing with subleases and assignments. The warranty and indemnification clause should address the potential sublease or lease and any possible assignment.

(a) Tenant hereby represents and warrants that:

(i) It is not designated as an individual or entity that has been determined to have committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S., which would violate the Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which became effective on September 24, 2001 (the “Order”); and

(ii) It is not owned or controlled by, or acting on behalf of an individual or entity which would violate the Order; and

(iii) It has not and will never assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or individuals or entities designated in or under the Order; and

(iv) It is not otherwise associated with certain individuals or entities designated in or under the Order.

(v) It shall not enter into any lease or sublease of space within the shopping center with any person, group, entity, or nation named in the Order or named on the SDN list which can be found at www.treas.gov/offices/enforcement/ofac/sdn.

(vi) It shall not assign this lease

to any person, group, entity, or nation named in the Order or named on the SDN list which can be found at www.treas.gov/offices/enforcement/ofac/sdn.

(b) Tenant hereby agrees to defend, indemnify, and hold harmless the Landlord, any parent, subsidiary or affiliate of landlord, and their respective employees, agents, officers, members, managers, directors, and shareholders from and against any and all fines, penalties, actions, claims, damages, losses, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing warranties and representations.

Conclusion

However remote the possibility of leasing or assigning a property interest to a blocked person on the SDN list may be for you, noncompliance can lead to very stiff penalties and a stigma that may last a lifetime. Although it is unsettled as to how far up the chain the liability for noncompliance would fall, it is wiser to comply now and avoid any potential problems later.

By now many of us have either heard or read several articles written about compliance with the Executive Order 13224, titled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism” (the “Executive Order”). Although the probability of leasing or selling to any “Persons Who Commit, Threaten to Commit, or Support Terrorism,” is extremely low, the consensus among the real estate bar seems to be that it is better to comply with the Executive Order and protect yourself and your client rather than risk the stiff penalties and stigma that would follow by inadvertently violating it. It is apparent that the creation of a Landlord-Tenant relationship or a conveyance of a property interest would give rise to an obligation to comply with the Executive Order, thereby triggering all of the potential liability associated with violating it.

While the signing of the Executive Order has created many unanswered questions, two questions that this article addresses are: What responsibility does an overlandlord have in ensuring compliance with the Executive Order by any subtenants? Can liability be shifted to the broker for compliance?

Executive Order 13224

On Sept. 23, 2001, President Bush signed Executive Order 13224 in an effort to create another important tool for the U.S. government to thwart terrorist activities. The act provides the authority to the U.S. government to designate and block the assets of individuals or entities, which in any way aid, support, or guide terrorist activities. The Executive Order supplements any previous executive orders that prohibit transactions with money launderers, drug lords, or drug dealers.

The Annex to the Executive Order lists 29 individuals and entities, designated by the president as blocked individuals or entities. The Executive Order provides authority to designate additional individuals and entities, which are listed in Section 1 therein and include:

• persons or entities determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General, to have committed, or to pose a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the United States;
• persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Attorney General, to be owned or controlled by, or to act for or on behalf of those persons listed in the Annex to the Executive Order or as determined above;
• persons determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Attorney General together with such foreign authorities as the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General deems appropriate in the exercise of his discretion;
• persons or entities determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General to assist in, sponsor, or provide financial, material or technological support for, or financial or other services to or in support of, such acts of terrorism or those persons listed in the Annex to the Executive Order or determined to be subject to this order; or
• persons or entities determined by the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General to be otherwise associated with those persons listed in any of the above.

There is also a list of individuals and entities that are determined to be terrorist by the U.S. Treasury Department's Office of Foreign Assets Control (“OFAC”), and it is updated regularly. OFAC publishes the list of individuals and entities controlled by, or acting for or on behalf of targeted countries, along with individuals, groups, and entities, such as terrorists and narcotics traffickers. This list is used to identify “Specially Designated Nationals and Blocked Persons” (“SDNs”) and includes the list in the Annex to the Executive Order. If a name is on the list, it means that all of the assets of that person or entity have been frozen, and all business dealings, both old and new, are barred.

Section 2 of the Executive Order prohibits any transaction dealing with property, or an interest in property, with any individual that is blocked pursuant to the Executive Order, including but not limited to the making or receiving of any contribution of funds, goods or services to or for the benefit of those persons listed in the Annex to the Executive Order or determined to be subject to the Executive Order.

Penalties for Not Complying

Criminal penalties can range from $50,000 to $1 million in addition to sentences ranging from 10- to 30-years in prison, and the potential for civil penalties exists.

However, putting aside the fines and prison sentences, your reputation as a law abiding and patriotic businessperson could be damaged if media reports indicating your possible relationship with a terrorist group were to appear in the newspapers. The impact on your business could be devastating as a result of a lack of confidence in either your integrity or in the security measures at your shopping center or building. Safety is a real concern in the post 9/11 era for potential tenants.

Compliance with the Order

As a landlord, you will have prospective tenants' names delivered to you – usually from a broker in a proposed deal sheet. In order to comply with the Executive Order, a thorough review of the name of the potential tenant with the SDN list should be made by the landlord.

The SDN list can be found at www.treas.gov/offices/enforcement/ofac/sdn.

The SDN list contains thousands of names, aliases, and “doing business as” designations to search and is more than 100 pages long. The SDN list has more than 4000 Specially Designated Nationals and Blocked Persons on it and has been updated multiple times this past year.

There are now companies that sell software that will do the work for you electronically and others that will take on the task of checking the SDN list and documenting its findings as evidence of your compliance.

Make sure when checking the SDN list that you check variations in the spelling; if you find a match, you want to make sure that it is not a “false positive.” Check all the background information you have on the prospective tenant with the information on the SDN list. If that does not help, you can contact the OFAC hotline at 1-800-540-6322.

Many landlords have turned to certification clauses or representation and warranty clauses in their leases to help ensure compliance with the Executive Order and require tenants and brokers to indemnify them if there are any violations and subsequent penalties assessed. A typical warranty, representation, and indemnity clause for a lease is as follows:

(a) Tenant hereby represents and warrants that:

(i) It is not designated as an individual or entity that has been determined to have committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S., which would violate the Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which became effective on September 24, 2001 (the “Order”); and

(ii) It is not owned or controlled by, or acting on behalf of an individual or entity which would violate the Order; and

(iii) It has not and will never assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or individuals or entities designated in or under the Order; and

(iv) It is not otherwise associated with certain individuals or entities designated in or under the Order.

(b) Tenant hereby agrees to defend, indemnify, and hold harmless the Landlord, any parent, subsidiary or affiliate of Landlord, and their respective employees, agents, officers, members, managers, directors, and shareholders from and against any and all fines, penalties, actions, claims, damages, losses, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing warranties and representations.

Most importantly, when complying with the Executive Order, make sure that you always document your compliance efforts and keep records for future evidence.

Brokers' Liability

As a landlord, you may rely on the use of several brokers to obtain potential tenants. The Executive Order imposes liability on the individual or entity that enters into a business deal with an entity or individual on the SDN list. Landlords will now review the tenant's information with the SDN list and look for the OFAC Certification language in hopes that doing both will exonerate them from liability for noncompliance of the Executive Order. Landlords should look to the broker as a filter. The broker should be preventing the referral to the landlord of prospective tenants that are on the SDN list. The broker not only has to comply with the Executive Order, but also should willingly provide a warranty and indemnification similar to the one below:

(a) Broker hereby represents and warrants that:

(i) It is not designated as an individual or entity that has been determined to have committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S., which would violate the Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which became effective on September 24, 2001 (the “Order”); and

(ii) It is not owned or controlled by, or acting on behalf of an individual or entity which would violate the Order; and

(iii) It has not and will never assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or individuals or entities designated in or under the Order; and

(iv) It is not otherwise associated with certain individuals or entities designated in or under the Order; and

(v) Before referring any potential tenants to Client it has complied with the Order and has completed a comprehensive comparison of the SDN list (which can be found at www.treas.gov/offices/enforce ment/ofac/sdn) against all prospective tenants and any tenant that is referred to Client is not any person, group, entity, or nation which is designated in the Order.

(b) Broker hereby agrees to defend, indemnify, and hold harmless the Client, any parent, subsidiary or affiliate of Client, and their respective employees, agents, officers, members, managers, directors, and shareholders from and against any and all fines, penalties, actions, claims, damages, losses, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing warranties and representations.

Overlandlord Liability

Shopping center leases come in many forms. A landlord may decide to lease space directly to prospective tenants, or may ground lease the entire shopping center or master lease the shopping center. In all three leases there may be a right to assign or sublet the space. In some cases, it is an unfettered right to assign or sublet; in others it is a right to assign or sublet only after the landlord gives consent, which consent is not to be unreasonably withheld or delayed. In some cases, the prospective subtenant or assignee must pass certain tests and be presented to the landlord for prior approval.

If all landlords now utilize the warranty and indemnification clause to protect themselves from liability for noncompliance with the Executive Order, will that also shield the landlord if its tenant subleases or assigns to a tenant on the SDN list? What responsibility does the landlord have as overlandlord to ensure that any subtenants are not on the SDN list?

While it is not clear how far up the chain the liability for noncompliance will rest, rather than try to answer these questions, it is best to avoid any potential problem by adding a warranty and indemnification clause to all three leases dealing with subleases and assignments. The warranty and indemnification clause should address the potential sublease or lease and any possible assignment.

(a) Tenant hereby represents and warrants that:

(i) It is not designated as an individual or entity that has been determined to have committed, or poses a significant risk of committing, acts of terrorism that threaten the security of U.S. nationals or the national security, foreign policy, or economy of the U.S., which would violate the Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which became effective on September 24, 2001 (the “Order”); and

(ii) It is not owned or controlled by, or acting on behalf of an individual or entity which would violate the Order; and

(iii) It has not and will never assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or individuals or entities designated in or under the Order; and

(iv) It is not otherwise associated with certain individuals or entities designated in or under the Order.

(v) It shall not enter into any lease or sublease of space within the shopping center with any person, group, entity, or nation named in the Order or named on the SDN list which can be found at www.treas.gov/offices/enforcement/ofac/sdn.

(vi) It shall not assign this lease

to any person, group, entity, or nation named in the Order or named on the SDN list which can be found at www.treas.gov/offices/enforcement/ofac/sdn.

(b) Tenant hereby agrees to defend, indemnify, and hold harmless the Landlord, any parent, subsidiary or affiliate of landlord, and their respective employees, agents, officers, members, managers, directors, and shareholders from and against any and all fines, penalties, actions, claims, damages, losses, liabilities, and expenses (including attorney's fees and costs) arising from or related to any breach of the foregoing warranties and representations.

Conclusion

However remote the possibility of leasing or assigning a property interest to a blocked person on the SDN list may be for you, noncompliance can lead to very stiff penalties and a stigma that may last a lifetime. Although it is unsettled as to how far up the chain the liability for noncompliance would fall, it is wiser to comply now and avoid any potential problems later.