Treasury and Delaware Sign Pact to Boost Sanctions Enforcement

Delaware’s corporate formation requirements have historically allowed for a degree of anonymity, which can limit the ability of authorities to quickly collect beneficial ownership information, lawyers and former Treasury officials said. That can be attractive to blacklisted parties that may try to use anonymous entities as vehicles for illicit finance or sanctions evasion.

“Authorities in Delaware have such significant access to information about companies that are formed in Delaware, which can sometimes be difficult for OFAC to get,” said Eric Lorber, a vice president at advisory firm K2 Intelligence Financial Integrity Network. “So this is going to ease that process.”

The access could help OFAC cross-reference information with other investigators, including those in the U.S. intelligence community, said Mr. Lorber, a former senior adviser to the Treasury’s undersecretary for terrorism and financial intelligence.

Delaware in 2019 introduced requirements that new business entities formed in the state be screened against the U.S.’s sanctions blacklist.

“Delaware’s 2019 decision to revoke the certificates of registration for OFAC-designated Delaware entities, identified as blocked property, prompted OFAC and the Delaware Department of Justice to identify the most effective means to coordinate on the disposition of blocked property,” a Treasury spokesman said in an email. He said OFAC was open to additional agreements with states for investigative purposes.

OFAC, which has long focused on financial institutions’ efforts to avoid transactions with blacklisted individuals and entities, has similar cooperation agreements with financial regulators in many states.

One of the more prominent agreements is with financial regulators in New York, where many financial institutions are based. Banks there have been the target of high-profile enforcement actions involving federal authorities and the New York State Department of Financial Services.

OFAC has increased its sanctions compliance expectations for nonfinancial companies in recent years as the U.S.’s blacklist of entities and individuals has expanded. The Delaware agreement could be reflective of that trend, said Adam M. Smith, a partner at law firm Gibson, Dunn & Crutcher LLP.

“In this regard, New York and Delaware are similar,” said Mr. Smith, who previously served as a senior adviser to the director of OFAC. “Where New York is the home to a large number of financial institutions, Delaware is home to an equally large, if not larger, number of incorporated entities.”

That the agreement spells out roles for OFAC and Delaware in investigations and enforcement actions indicates that the state, which hasn’t historically played a large role in sanctions enforcement, could begin to do so, Mr. Smith said. “This could portend a much more robust and forward-leaning relationship between federal authorities and state authorities in investigating sanctions violations,” he said.

Delaware officials frame it that way. The state’s attorney general, Kathy Jennings, in a statement described the agreement as a new chapter in the state’s collaboration with OFAC.

Delaware Secretary of State Jeffrey Bullock, meanwhile, said the state has stepped up work with the U.S. Justice Department to shut down corporations connected to illicit activity. “This agreement builds on that progress,” he said in a statement.