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SDNs: Specially Designated Nationals

Definition

Specially Designated Nationals (SDNs) are individuals, entities, vessels, aircraft, or organisations designated by the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) under various sanctions programmes.

Parties listed on the SDN List are subject to comprehensive asset-blocking measures, meaning that all property and interests in property within U.S. jurisdiction are frozen, and U.S. persons are generally prohibited from engaging in transactions with them unless authorised by OFAC.

In AML/CFT and sanctions-compliance frameworks, SDNs represent the highest-risk category of sanctioned parties.

Exposure, direct or indirect, to an SDN can result in severe civil and criminal penalties, regulatory action, reputational damage, and loss of correspondent banking relationships.

Explanation

The SDN List is a consolidated sanctions list maintained by OFAC and updated on a continuous basis.

Designations are issued pursuant to U.S. statutes, executive orders, and international policy objectives, including counterterrorism, counter-proliferation, anti-narcotics, anti-corruption, and country-based sanctions regimes.

An SDN designation does not apply solely to the named party.

OFAC’s “50 Percent Rule” extends blocking obligations to entities that are owned, directly or indirectly, 50 percent or more in aggregate by one or more SDNs, even if those entities are not explicitly named on the SDN List.

This ownership rule materially increases compliance complexity and requires institutions to assess beneficial ownership structures rather than relying solely on name screening.

Although SDNs are designated by U.S. authorities, their impact is global.

Non-U.S. financial institutions frequently comply with SDN restrictions to avoid secondary sanctions risk, loss of U.S. dollar clearing access, or restrictions on correspondent banking.

SDNs in AML/CFT and Sanctions Frameworks

SDNs sit at the intersection of sanctions compliance and AML/CFT obligations.

While sanctions are legally distinct from AML regimes, most regulators expect institutions to integrate SDN screening into their broader financial crime control frameworks.

Key intersections include:

  • Customer due diligence and onboarding processes must screen customers, beneficial owners, directors, signatories, and counterparties against the SDN List.
  • Transaction screening must detect direct or indirect involvement of SDNs in payment flows, trade finance, securities transactions, and digital asset transfers.
  • Ongoing monitoring is required because SDN designations change frequently, and customers previously cleared may later become sanctioned.
  • Suspicious activity reporting obligations may arise when attempted or blocked transactions involving SDNs indicate evasion, structuring, or facilitation risk.

Regulators and examiners typically treat sanctions failures involving SDNs as critical compliance breaches due to the strict-liability nature of many OFAC enforcement actions.

Key Components of the SDN Regime

Designation Authorities

SDNs are designated under multiple legal authorities, including:

  • Counterterrorism sanctions programmes.
  • Narcotics trafficking and transnational organised crime frameworks.
  • Country-based sanctions regimes (for example, Iran, North Korea, Russia-related programmes).
  • Global Magnitsky sanctions targeting corruption and human rights abuses.

Each SDN entry includes identifying attributes such as names, aliases, dates of birth, nationalities, passport numbers, addresses, vessels or aircraft identifiers, and programme tags.

Asset Blocking and Prohibitions

Once designated:

  • All property and interests in property of the SDN within U.S. jurisdiction must be blocked.
  • Transactions involving SDNs are prohibited for U.S. persons unless licensed.
  • Funds must be placed into blocked accounts and reported to OFAC within prescribed timelines.
  • Facilitation, evasion, or indirect dealing is prohibited, including routing transactions through intermediaries.

Risks & Red Flags Associated With SDNs

SDN-related risk arises not only from direct matches but also from indirect exposure and evasion techniques.

Key risk indicators include:

  • Use of intermediaries, shell companies, or nominee structures to obscure SDN ownership.
  • Transactions routed through multiple jurisdictions or non-transparent payment chains.
  • Sudden changes in ownership, directors, or counterparties shortly before or after designation events.
  • Trade transactions involving sanctioned geographies, commodities, or shipping routes.
  • Attempts to restructure payments to avoid U.S. nexus or currency clearing channels.

False negatives are particularly dangerous in SDN screening, as liability can arise even when violations are inadvertent.

Common Methods of Sanctions Evasion Involving SDNs

Criminal and sanctioned actors may attempt to bypass controls through:

  • Ownership dilution schemes, fragmenting SDN ownership across multiple entities to obscure the 50 percent threshold.
  • Use of front companies registered in permissive jurisdictions with weak beneficial ownership disclosure.
  • Payment layering, routing funds through multiple correspondent banks or payment service providers.
  • Trade-based sanctions evasion, including falsified shipping documents, transshipment, and mis-declared end users.
  • Digital asset usage, leveraging cryptocurrencies or decentralised platforms to move value outside traditional banking rails.

These methods require institutions to supplement list-based screening with ownership analysis, network analytics, and behavioural monitoring.

Examples of SDN Exposure Scenarios

Indirect Ownership Through a Subsidiary

A corporate customer is not listed on the SDN List but is 60 percent owned by two sanctioned individuals acting through holding companies.

Even without a direct name match, the entity is considered blocked under OFAC rules.

Correspondent Banking Exposure

A non-U.S. bank processes U.S. dollar transactions for a foreign respondent bank that unknowingly services SDN-controlled entities.

The U.S. clearing nexus triggers enforcement risk despite the absence of a direct customer relationship.

Trade Finance Sanctions Breach

Letters of credit are issued for goods routed through a third country, masking the involvement of an SDN-designated shipping company.

Documentation appears compliant, but vessel identifiers link back to a blocked party.

Digital Payments and Crypto Transfers

An SDN-controlled wallet interacts with compliant exchanges through mixers or decentralised protocols.

Failure to screen wallet exposure results in indirect facilitation of a sanctioned party.

Impact on Financial Institutions

Failures related to SDNs can result in:

  • Significant civil monetary penalties and enforcement actions.
  • Criminal liability in cases of wilful violations.
  • Loss of U.S. correspondent banking access.
  • Mandatory remediation programmes, independent monitors, and enhanced regulatory oversight.
  • Severe reputational harm affecting customers, investors, and counterparties.

Regulators often cite SDN-related failures as evidence of weak governance, insufficient resourcing, or ineffective sanctions risk assessment.

Challenges in SDN Screening and Compliance

Institutions face multiple operational challenges:

  • High volumes of alerts due to common names, aliases, and transliterations.
  • Rapid list updates requiring near real-time screening refreshes.
  • Complex ownership structures that require non-linear analysis.
  • Inconsistent data quality across jurisdictions and counterparties.
  • Integration challenges across payments, trade finance, securities, and digital channels.

Effective SDN compliance therefore requires more than static list screening; it demands dynamic risk assessment and continuous data enrichment.

Regulatory Oversight & Governance Expectations

Supervisors expect institutions to demonstrate:

  • Board and senior management oversight of sanctions compliance.
  • Clearly defined sanctions risk appetite and escalation protocols.
  • Automated screening systems covering customers, transactions, and beneficial owners.
  • Timely blocking, reporting, and record retention for SDN-related events.
  • Periodic independent testing, audits, and sanctions risk assessments.

Failure to evidence these controls is frequently cited in enforcement actions.

Importance of SDN Controls in AML/CFT Programmes

Robust SDN screening and controls are essential to:

  • Prevent facilitation of terrorism, proliferation, corruption, and organised crime.
  • Protect access to the global financial system, particularly U.S. dollar clearing.
  • Meet strict-liability sanctions obligations and regulatory expectations.
  • Support intelligence-led AML frameworks by identifying high-risk networks and counterparties.

As sanctions regimes expand and geopolitical risk intensifies, SDNs will remain a critical focal point for financial institutions worldwide.

Related Terms

  • Office of Foreign Assets Control (OFAC)
  • Sanctions List Screening
  • 50 Percent Rule
  • Blocked Account
  • Secondary Sanctions
  • Beneficial Ownership

References

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