Blocking by Numbers – OFAC Revises its 50 Percent Rule
Treasury’s Office of Foreign Assets Control (OFAC) last week revised and reissued its Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked, also commonly known as the “50 Percent Rule.” The 50 Percent Rule, first published in 2008, explains that any entities 50 percent or more owned by an individual or entity on OFAC’s Specially Designated Nationals and Blocked Persons list (SDN list) are automatically blocked by operation of law, regardless of whether the so owned entities themselves are listed. The revised guidance expands upon the original by setting out a new interpretation now applying this bar to entities owned 50 percent or more in the aggregate by one or more blocked persons – e.g., “if Blocked Person X owns 25 percent of Entity A, and Blocked Person Y owns another 25 percent of Entity A, Entity A is considered to be blocked…. because Entity A is owned 50 percent or more in the aggregate by one or more blocked persons.”
This subject was the cause of some confusion earlier this year when Visa and Mastercard cut off Russian SMP Bank in March due to concern that it is owned by multiple SDNs. However, Mastercard and Visa resumed processing transactions for SMP within a week, reportedly after receiving input from OFAC. (In April, OFAC made moot further consideration of SMP’s ownership structure by directly designating the bank, and Visa and Mastercard again cut it off.) While the new guidance may be a departure from OFAC’s previous informal advice, the new interpretation is clear and now has been formally conveyed.
OFAC also issued Frequently Asked Questions to provide additional detail and illustrate the 50 Percent Rule’s application – of particular note and importance are the explanations that:
The interests of persons blocked under different OFAC sanctions programs are aggregated in applying the 50 Percent Rule.
U.S. individuals and companies cannot engage in business with blocked parties even when the blocked party is acting on behalf of a non-blocked entity – e.g., a blocked CEO of a non-blocked company cannot sign a contract on behalf of the company with a U.S. party. In other words, U.S. persons must be very careful when conducting any business with companies in which blocked parties are involved.
U.S. individuals and companies must also exercise caution on potential transactions with non-blocked companies where one or more blocked persons have significant, but less than an aggregate 50 percent, ownership interest. While not automatically blocked, such companies may of course be subject to future designations or enforcement actions.
The 50 Percent Rule applies to “indirect” ownership of an entity through another entity or entities that are 50 percent or more owned in the aggregate by a blocked person – e.g., if “Blocked Person X owns 50 percent of Entity A and 10 percent of Entity B. Entity A also owns 40 percent of Entity B. Entity B is considered to be blocked. This is so because, through its 50 percent ownership of Entity A, Blocked Person X is considered to indirectly own 40 percent of Entity B. When added to Blocked Person X’s direct 10 percent ownership of Entity B, Blocked Person X’s total ownership (direct and indirect) of Entity B is 50 percent.”
OFAC also applies a 50 percent rule to the Sectoral Sanctions Identification list (SSI list) created in July 2014 to identify individuals and companies determined to be operating in sectors of the Russian economy identified pursuant to Executive Order 13662. Entities owned 50 percent or more in the aggregate by one or more persons subject to the SSI list restrictions are themselves automatically subject to the SSI list restrictions, including prohibitions on transacting in, providing financing for, or otherwise dealing in new debt with a maturity of longer than 90 days.
This new guidance and the need to determine all relevant ownership stakes will implicitly complicate the process of conducting appropriate due diligence on parties to or involved with transactions with U.S. companies. And directly affected industries have no doubt already begun to attempt such evaluations. However, many of the recent additions to the SDN and SSI lists are globally connected, with extensive subsidiary relationships, and involvement in complex financing transactions. It may prove particularly challenging to discern and account for possible transactional involvement of entities automatically subject to the SSI list restrictions due to aggregate ownership interest. Accordingly, implementing effective screening procedures is now more important than ever, but is now far more difficult as well.