Specially Designated Nationals (SDN)

Executive Summary

Specially Designated Nationals (SDNs) are individuals, organizations, and entities sanctioned by the U.S. Treasury’s Office of Foreign Assets Control (OFAC).
U.S. persons and entities are generally prohibited from engaging in transactions with SDNs.
The SDN list helps enforce U.S. foreign policy and national security objectives.
Compliance with SDN regulations is crucial for financial institutions, fintechs, and cross-border payment businesses.
Non-compliance can result in severe penalties and reputational damage.

Definition of Specially Designated Nationals (SDN)

Specially Designated Nationals (SDNs) are individuals and entities that have been identified by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury as being involved in terrorism, narcotics trafficking, human rights abuses, weapons proliferation, or other activities that pose threats to U.S. national security, foreign policy, or economic stability. These individuals and entities are listed on the SDN List, and their assets under U.S. jurisdiction are blocked. U.S. persons are generally prohibited from dealing with them.

Background / Backstory on SDNs

The SDN List was created to support the implementation of economic and trade sanctions based on U.S. foreign policy and national security goals. OFAC has maintained the list for decades, evolving it over time to respond to global geopolitical shifts and security concerns. The SDN designation is a tool to isolate malicious actors from the U.S. financial system and apply economic pressure on rogue states, terrorist groups, and criminal networks.

The origins of OFAC and its sanctioning authority date back to World War II, but its role expanded significantly after the 9/11 terrorist attacks and continues to grow with global threats and enforcement needs.

How SDNs Are Used in the Industry Today and Their Significance

In the financial services industry, especially in sectors like banking, fintech, and cross-border payments, compliance with the SDN list is a non-negotiable requirement. Organizations must integrate SDN screening into:

Customer onboarding (KYC processes)
Transaction monitoring
Ongoing due diligence
Cross-border payment screenings

Non-compliance can lead to multimillion-dollar fines, sanctions, and severe reputational harm. For example, in recent years, major global banks have paid fines exceeding hundreds of millions of dollars for inadvertently processing transactions involving SDNs.

How Does It Work? (With Examples)

How It Works:

List Publication: OFAC publishes and updates the SDN list regularly.
Screening: Financial institutions and fintech companies screen customer names and transactions against the SDN list.
Blocking/Reporting: If a match is confirmed, the institution must block the transaction and report it to OFAC.
No Dealings: U.S. persons cannot conduct business with SDNs without specific authorization from OFAC.

Example 1: Cross-Border Payment Blocking

A U.S.-based payment processor detects that an incoming international wire transfer originates from an SDN-designated entity. The payment is immediately blocked and reported to OFAC, and the funds are frozen.

Example 2: Fintech KYC Compliance

A fintech app onboarding new users uses an API to screen names against the SDN list. A match triggers an alert, and the application is rejected, ensuring compliance with sanctions laws.

A Simple but Detailed Analogy

Imagine the SDN list is like a “no-fly list” for money. Just as certain individuals can’t board a plane for security reasons, some people and companies are on a “no-pay list” and can’t send or receive money in the U.S. financial system. If your customer is on that list, you can’t let their money take off — you have to ground it and report it.

ELI5 (Explain Like I’m 5)

Some people are on a special “bad guy list” made by the government. If you’re playing a game and one of the bad guys tries to join, you’re not allowed to play with them. Grown-ups who handle money have to make sure they don’t give money or do trades with people on that list.

Stakeholders and Implementation

Who Uses It:

Banks
Fintech companies
Payment processors
Crypto exchanges
Money service businesses (MSBs)
E-commerce platforms

Implementation:

Integrated SDN screening software or APIs
Compliance teams monitor transactions
Periodic audits and updates

Challenges:

False positives from name matches
Frequent list updates
International counterparties not subject to U.S. law
Real-time monitoring complexity

Pros & Cons

Pros:

Helps combat terrorism and crime
Encourages global financial integrity
Protects companies from inadvertently violating sanctions

Cons:

False positives can delay or block legitimate transactions
High compliance costs
Constantly changing regulations and geopolitical risks

Future Outlook

As geopolitical tensions rise and sanctions become a more prominent tool of foreign policy, the SDN list is likely to expand. Automation, machine learning, and API-driven compliance tools will increasingly be used to manage risk and ensure real-time screening. Cross-border platforms will also need to harmonize sanctions compliance with international counterparts.