OFAC Issues New Guidance Regarding Status of Entities Owned by Specially Designated Nationals and Blocked Persons

by Goodwin
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The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued new guidance regarding the status of entities that are 50% or more owned by persons or entities whose property and interests in property are blocked by Executive Order or regulations administered by OFAC (each such person, a “Blocked Person”).  Under prior guidance issued in February 2008, OFAC considers a Blocked Person to have an interest in all property and interests in property of any entity in which the Blocked Person owns, directly or indirectly, a 50% or greater interest, which means that such an entity is also treated as a Blocked Person even if it is not listed as a Specially Designated National or otherwise identified in an annex to an Executive Order relating to a sanctions program (an “SDN”).  Under the new guidance, OFAC now considers one or more Blocked Persons to have an interest in property of an entity in which such Blocked Persons own, individually or in the aggregate, directly or indirectly, a 50% or greater interest.  This type of entity is also treated as a Blocked Person even if it is not specifically identified as an SDN.

In connection with issuing the new guidance, OFAC has updated the FAQs that appear on its website to address in more detail the manner in which it will apply this 50% rule.  The FAQs make it clear that OFAC will aggregate the interests held by Blocked Persons in an entity for purposes of determining whether or not the entity must be treated as a Blocked Person even if the interests of the Blocked Persons in that entity are blocked under different sanctions programs administered by OFAC.  The FAQs also clarify that one or more Blocked Persons will be considered to indirectly own an interest in an entity if that interest is held through an entity that is 50% or more owned in the aggregate by the Blocked Persons.  If an entity is treated as a Blocked Person because one or more Blocked Persons own 50% or more of the entity but the Blocked Person or Blocked Persons later divest a sufficient amount of its or their interests in the entity in a transaction that occurs entirely outside of the United States and that does not involve U.S. persons so that the resulting combined ownership interest in the entity owned by Blocked Persons is less than 50%, the FAQs clarify that the entity will no longer be automatically considered a Blocked Person.  However, if property of an entity owned 50% or more by one or more Blocked Persons comes into the United States or within the possession or control of a U.S. person and is blocked, the property will remain blocked even if the interests of the Blocked Person or Blocked Persons in the entity fall below 50%.  The property remains blocked unless OFAC authorizes the unblocking of or other dealings in the property or removes the Blocked Person from the list of SDNs.

The FAQs clarify that OFAC applies a 50% rule for purposes of determining the scope of the sectoral sanctions recently created in the Ukraine-related context.  Specifically, the persons and entities identified in the Sectoral Sanctions Identification List created in July 2014 and entities owned 50% or more in the aggregate by one or more of such persons or entities will be subject to such sectoral sanctions (which do not require blocking of property but impose a more limited set of transaction related restrictions).

The OFAC guidance also cautions U.S. Persons to exercise care when dealing with entities in which one or more Blocked Persons directly or indirectly own an interest that is less than 50% or which one or more Blocked Persons may control by other means, even if the entity is not itself treated as a Blocked Person.  For instance, OFAC takes that position that a U.S. person may not enter into a contract signed by a Blocked Person even if the Blocked Person is signing the contract in his or her capacity as an officer or director of an entity that is not itself a Blocked Person, and U.S. persons may not procure goods, services or technology from or enter into transactions with a Blocked Person, even if the transactions are mediated or conducted through a third party that is not a Blocked Person.  OFAC also noted that entities that are not Blocked Persons but in which one or more Blocked Persons own an interest or over which one or more Blocked Persons may exercise control may be the subject of a future OFAC designation or other enforcement action.

The new OFAC guidance, which became effective on August 13, 2014, applies to U.S. persons, which generally include U.S. citizens and permanent residents, persons in the United States, entities incorporated in or organized under U.S. law and their foreign branches and, for certain purposes, subsidiaries of U.S. entities.  The new guidance highlights the need for U.S. persons, including financial institutions as well as private funds and their sponsors and managers, to conduct detailed due diligence on their counterparties, including with respect to ownership structure.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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