Comply with Executive Order on Terrorism to Avoid Stiff Penalties

On Sept. 24, 2001, President Bush signed Executive Order 13224, entitled “Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism,” which bars individuals and organizations from doing business with any individual or entity on a U.S. government list of terrorists. This order (which supplements previous executive orders barring transactions with drug dealers, drug kingpins, and money launderers) went into effect immediately and remains in effect, notes Washington, D.C., attorney and specialist in combating money laundering Christopher A. Myers. But if you're like many office building or shopping center owners, you may not know that it exists or that it applies to you and can affect the way you pick tenants.

To comply with this order, you must screen prospective tenants against a long, growing list of individuals and entities identified as terrorists. If you sign a lease with any individual or entity on this list, you could owe criminal and civil penalties and face damaging media coverage.

To help you comply with the order, we'll answer some basic questions about it and give you some compliance steps you can take. There's also a Model Lease Clause on p. 3 that you can adapt and use in your compliance efforts.

What does the order apply to? The order applies to many different types of transactions, including commercial real estate transactions. The order bans “United States persons” from doing business with any person, entity, or group specially designated as a terrorist or terrorist entity, says Myers. When issued, the order included a list of 27 individuals and entities designated as terrorists, he notes. (The order can be found at http://www.treas.gov/offices/enforcement/ofac/sanctions/terrorism.html.)

The list of terrorists, which is kept by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC), has been updated many times since and has been combined with the preexisting “Specially Designated Nationals and Blocked Persons” (SDNs) list issued by OFAC. The combined OFAC list is more than 100 pages long and consists of names of thousands of SDNs (including terrorists, drug dealers, drug kingpins, and money launderers)—all of whom you're banned from doing business with, says Myers.

Banned from doing business with means that all of these SDNs' reachable assets are frozen; all further dealings with these SDNs are blocked; and any new or continued business relationship with them is barred, Myers says.

Who must comply with the order? Every real property owner, tenant, property manager, broker, real estate attorney, guarantor, agent, affiliate, as well as any other party to a commercial real estate transaction who's a United States person must comply with the order, says Myers. According to Myers, a “United States person” means a:

• U.S. organization (whether business, charity, or other type of entity);

• U.S. citizen, permanent resident, or other person physically located in the U.S.;

• Organization (including a foreign corporation) doing business in the U.S.; or

• Foreign branch of a U.S. corporation.

Which operations are affected? Under the order, you must not rent space to a tenant who's a designated terrorist or acting on behalf of one, says Myers. (Similarly, a tenant must not sublet space or assign its lease to a subtenant or assignee who's a designated terrorist or acting on behalf of one.)

Practical Pointer: The order could affect virtually all other aspects of your operations, too, warns Robert Hayes, former security director of Georgia-Pacific. Not only are you barred from renting space to a tenant who's a designated terrorist or acting on behalf of one, but you're also barred from hiring any employee, contractor, or supplier who's a designated terrorist or acting on behalf of one, he points out.

What are the consequences of not complying with the order? The chances that you'll get involved with a tenant who's a designated terrorist or acting on behalf of one are slim, notes Myers. But the consequences of not complying with the order are steep. It sets out civil and, in some cases, criminal penalties for both organizations and individuals. For instance, civil penalties can range from $11,000 to $275,000 for each violation, says Myers. Criminal penalties can range from $50,000 to $1 million plus 10 to 14 years in prison, he adds. Even inadvertent violations of the order can result in civil penalties, Myers warns.

You could also be portrayed in the media as aiding terrorists if you engage in lease deals with someone on the OFAC list, even unintentionally, points out Hayes. Some owners have already found this out. Any negative publicity has the potential of damaging customer relations and your building's or center's image, hurting chances of future financing, and scaring away potential tenants, he emphasizes. It could also affect how existing tenants view the effectiveness of your security practices at the building or center.

How to Comply with Order

When a prospective tenant wants to rent space in your building or center, you can take the following steps to comply with the order and protect your interests, advise Myers and Chicago attorney Carole L. Pechi:

Check tenant's name against OFAC SDN list. Find out the name of the tenant, and then check it against the OFAC SDN list, says Pechi. (Because the OFAC SDN list is more expansive than the order's original list, you must check names against the entire OFAC SDN list, notes Myers.) You can find that list at http://www.treas.gov/offices/eotffc/ofac/sdn/index.html.

If the tenant is an individual or a known entity—such as a publicly traded company—it's probably sufficient to check only the tenant's name against the OFAC list, says Myers. Otherwise, you should probably ask for the names of all the entity's officers and directors, as well as shareholders, partners, or members having at least a 25 percent ownership interest in the company—and check those names against the OFAC list, he advises. No regulations directly require this, but other U.S. Treasury Department regulations require financial institutions dealing with foreign banks to “know” whom they're dealing with, down to owners having at least a 25 percent interest in the company, Myers points out.

You can check the names manually. But this is tough to do and time-consuming, says Myers. The OFAC SDN list is big—there are over 4,000 names, aliases, and “doing business as” designations to search—and it's updated often. Plus, you should check not only the exact spelling of the tenant's name but also variations of the spelling, he advises. And if the tenant isn't an individual, you may have to check many names against the OFAC SDN list.

You can, instead, use one of the software programs now available to search the OFAC SDN list electronically. It's quick and cost-efficient, says Myers. Look for a software program that will, for example, automatically update itself when the OFAC list is revised; immediately alert your compliance staff if there's a potential match between the tenant and a name on the OFAC list; block all further business with the tenant until you've determined whether the match is accurate; and instruct you on what action to take when a match occurs.

Check for “false positives.” Whether you check the OFAC list manually or electronically, if you turn up what seems to be a match to a prospective tenant, you should take steps to reduce the risk of a “false positive,” notes Myers. The list includes many common Arabic, Hispanic, and Anglo names, so it can be hard to determine whether the tenant is really a SDN or just has the same or a similar name, he explains. To make a determination, review all information on the OFAC SDN list about the matching SDN. Then compare that information to the information you have about your prospective tenant. If the information doesn't match, it's probably safe to proceed with the transaction, Myers recommends.

Practical Pointer: You can also get help from OFAC in verifying whether the tenant is a SDN. First, go to http://www.treas.gov/offices/eotffc/ofac/faq/one_page.html and follow the steps listed there for evaluating a possible match. If those steps don't eliminate the match, you can call the OFAC hotline at 1-800-540-6322. But you sometimes have to wait weeks or months for a response, warns Myers.

If you find a match, call off deal. If, after checking the OFAC SDN list and all other relevant information, you believe that the tenant is a SDN, contact your attorney, call off the lease deal, and report the tenant to OFAC and to your local branch of the FBI, says Myers.

If you don't find a match, add “OFAC certification” clause to lease. If you don't find the tenant's name on the OFAC SDN list and you're ready to negotiate a lease, protect yourself by adding a special “OFAC certification” clause to the lease, advises Pechi. Your clause, like our Model Lease Clause, should require the tenant to:

Certify it's not a SDN. Require the tenant to certify that it's not acting, directly or indirectly, for or on behalf of any person, group, entity, or nation that's named as a terrorist or SDN or that's banned or blocked by any law, order, rule, or regulation by OFAC, says Myers. Also, have the tenant certify that it's not making the lease deal on behalf of such a person, group, entity, or nation, adds Pechi [Clause, par. a]. This certification is important because if the tenant is acting on behalf of a SDN, you probably won't find the tenant's name on the OFAC SDN list. But you could still get into trouble for signing a lease with the tenant.

Indemnify for violating certification. Make the tenant agree to indemnify—that is, reimburse—you for and defend and hold you harmless from claims, damages, and other costs you incur because the tenant violated its certification, says Pechi [Clause, par. b]. This language protects you if OFAC discovers that the tenant was a SDN or acting on behalf of one, and OFAC imposes penalties on you, she explains.

An OFAC certification clause isn't required by law, but it can help you, says Pechi. The clause gives you ammunition against a tenant who lies about not being—or not acting on behalf of—a SDN. And it may provide evidence to OFAC of your “due diligence” in your investigation—which may lessen any penalties that OFAC might impose against you if you inadvertently did business with a SDN, Pechi explains.

Practical Pointer: Expect a savvy tenant to demand that the OFAC certification clause be mutual. That is, that you must also certify that you're not a SDN or acting on behalf of one and that you'll indemnify the tenant for violating the certification, says Pechi. That's a reasonable demand to agree to, she says.

Keep records of your investigation. Keep all records relating to your investigation of the tenant (including a copy of the OFAC certification clause) for a minimum of five years after the lease is signed, says Myers. This way, they'll be readily available to prove your due diligence if there's a government audit or investigation later on, he explains.

Practical Pointer: It's a good idea to check whether your employees, contractors, and suppliers are SDNs or acting on behalf of SDNs, says Hayes. And make sure you keep records of those investigations, too, he says.

CLLI Sources

Robert Hayes, CPP, CFE: Managing Partner, Corporate Security & Integrity Solutions, Inc.; (404) 502-1600; RobertHayes@bellsouth.net.

Christopher A. Myers, Esq.: Partner, Holland & Knight, LLP, 1600 Tysons Blvd., Ste. 700, McLean, VA 22102-4867; (703) 720-8038; chris.myers@hklaw.com.

Carole L. Pechi, Esq.: Of Counsel, Holland & Knight, LLP, 131 S. Dearborn St., 30th Fl., Chicago, IL 60603; (312) 263-3600; carole.pechi@hklaw.com.

Sidebar

Does Patriot Act Apply to Owners?

There's uncertainty about whether some requirements in the antiterrorism law known as the Patriot Act apply to owners of buildings and shopping centers. The Patriot Act requires all “financial institutions” to establish anti-money laundering programs, says Washington, D.C., attorney and specialist in combating money laundering Christopher A. Myers. The term “financial institution” includes “persons involved in real estate closings and settlements”—but that phrase isn't defined, he notes.

Last year, the U.S. Treasury Department's Financial Crimes Enforcement Network, which will enforce the anti-money laundering provisions of the Patriot Act, asked the public for comments on proposed rules defining persons involved in real estate closings and settlements. The rules haven't been issued yet. Until those rules are released, you're not required to comply with the Patriot Act, says Myers. But you must comply with Executive Order 13224, effective now, he says. The obligation to check the Office of Foreign Assets Control's list of “Specially Designated Nationals and Blocked Persons” is a separate matter from whether the U.S. Treasury Department will require you to set up an anti-money laundering compliance program under the Patriot Act, Myers points out.