The U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) revised its guidance with respect to entities owned 50 percent or more in the aggregate by more than one blocked persons. The new guidance, issued on August 13, 2014 and effective immediately, will have significant impact across a variety of sanctions programs and will require companies to exercise additional caution when dealing with entities owned by designated persons.
OFAC’s list of Specially Designated Nationals and Blocked Persons (“SDN List”) names individuals and companies owned or controlled by, or acting for or on behalf of, sanctioned countries. The SDN List also includes individuals, groups, and entities designated under programs that are not country-specific (e.g., narcotics traffickers or terrorists). Property blocked pursuant to an Executive Order or regulations administered by OFAC includes any property or interest in property, tangible or intangible, including present, future or contingent interests. A property interest subject to blocking includes interests of any nature whatsoever, direct or indirect.
The new rule represents a major shift in how OFAC treats entities minority-owned by multiple blocked persons and clarifies that OFAC now aggregates the shares of blocked persons in determining whether the entity is 50% or more owned by a blocked person or persons. For example, if Entity X is 25% owned by Blocked Person A and 25% owned by Blocked Person B, Entity X is now considered to be blocked. Moreover, if Entity X in turn holds 50% of Entity Y, then Entity Y also will be blocked. By way of one other example of a potential cascading effect of indirect ownership, if Blocked Person A owns 50 percent of Entity X, and Blocked Person B owns 50% of Entity Y, and Entities X and Y own 25% each of Entity Z, then Entity Z is deemed blocked because designated individuals indirectly own 50% of Entity Z.
OFAC traditionally has looked to both ownership and control in determining whether to block an entity. In this instance, OFAC has clarified that an entity that is controlled, but not owned 50 percent or more, by one or more blocked persons is not considered automatically blocked. OFAC cautioned that such entities may be designated in the future and that there are significant risks with regard to transacting with such entities.
SSI List Implications
OFAC also applies a 50 percent rule to entities on the Sectoral Sanctions Identification List (“SSI List”) created in July 2014 in response to the ongoing concerns regarding the situation in Ukraine. While the property and interests in property of persons on the SSI List (and entities owned 50% or more in the aggregate by one or more persons subject to the SSI List restrictions) are not required to be blocked, the new 50 percent rule can help identify which subordinates of SSI List entities are now subject to the SSI List restrictions involving the extension of new debt and new equity.
Implications for Compliance
The new interpretive guidance will likely have significant repercussions across a variety of sanctions programs and will impose an additional screening burden. Under the previous guidance, companies needed only to screen for interests greater than 50 percent. Under the new aggregation rule, those seeking to comply with U.S. sanctions must now screen every owner to determine whether multiple owners are blocked and in the aggregate hold an interest greater than 50 percent. For example, when Boris and Arkady Rotenberg were added to the SDN List in March 2014, SMP Bank was not treated as a blocked entity despite the fact that each brother held a minority stake in SMP Bank and the two stakes in the aggregate exceeded 50 percent. Under the old guidance, OFAC was required to formally add SMP Bank to the SDN List in order to block it (which it did thereafter). Under the new guidance, OFAC would treat entities in circumstances similar to SMP Bank as blocked without a formal designation by virtue of ownership by several blocked persons collectively exceeding 50 percent. In addition, many sanctions programs (such as Cuba and Sudan) block persons based on criteria rather than specific designation. The 50 percent rule applies to criteria-based designations and will require companies operating in these countries to exercise additional caution.
Any assets of any individual or entity on the SDN List that is subject to U.S. jurisdiction – or that comes under the control or possession of U.S. persons – must be blocked, and U.S. persons are prohibited in dealing in such assets. In order to comply with the new guidance, we recommend companies remain vigilant in screening all parties to contemplated transactions in countries with elevated sanctions risk profiles for connections to individuals or entities listed above as well as entities or individuals listed on the SDN List.