On April 8, 2011, the US Department of the Treasury, Office of Foreign Assets Control (OFAC), issued guidance and a General License No. 4 regarding US sanctions against Libya. This General License is issued pursuant to Executive Order (EO) 13566 of February 25, 2011, (76 Fed. Reg. 11315-318) (discussed in our prior advisory), which prohibits transactions with, and blocks the interests in property of, certain individuals associated with the Ghadafi family and regime; the Central Bank of Libya; the Government of Libya (GOL); any agency, instrumentality, or entity “controlled” by the GOL; or such individuals or entities added to the Specially Designated Nationals and Blocked Persons List (collectively referred to herein as Blocked Persons).
Pursuant to EO 13566, the property of Blocked Persons subject to US jurisdiction is blocked and cannot be paid, transferred, withdrawn, or otherwise dealt in without authorization from OFAC. General License No. 4 authorizes US persons to be involved in the “normal operations” of an “investment fund” that is organized, located, managed, or administered in the United States in which a Blocked Person has “both a non-controlling and a minority interest.” While these terms are not defined by OFAC, in unrelated, prior OFAC guidance, the agency has stated that an entity in which a Specially Designated National has 50 percent or more ownership is also considered to be "property" subject to blocking orders issued under the authority of the International Emergency Economic Powers Act (IEEPA).
Extrapolating from this guidance, because the President issued EO 13566 under IEEPA, and subject to further OFAC guidance, an investment fund with less than 50 percent of its ownership ascribed to a Blocked Person should not be off limits to US persons (either as investors, directors, officers, managers, advisors, financial fiduciaries, or related service providers), as long as the Blocked Person is not otherwise able to control the investment fund by means other than a majority ownership interest. Correspondingly, if the Blocked Person holds a 50 percent or greater ownership interest in the investment fund, or otherwise controls the investment fund, then the entire investment fund that is subject to US jurisdiction is apparently blocked. Also, US persons would be restricted from conducting transactions or dealings with, or providing any services to, such an investment fund.
Under General License No. 4, OFAC advises that "normal operations" in which US persons can engage include, but are not limited to: investment management functions; the purchase and disposition of portfolio investments; the custody of portfolio investments; the making of payments owed by the investment fund to its managers, other service providers, directors, government regulators, tax authorities, or investors whose property and interests in property are not blocked; or the receipt of funds, securities, or other assets.
Use of General License No. 4 is subject to the following conditions and reporting obligations:
- Any payment or transfer of funds, securities, or other assets in the possession or control of a US person to any Blocked Person may only be directed or made into a blocked account at a financial institution in the United States in the name of the Blocked Person. (Note that ‘‘US person’’ means any: (i) US citizen or national, or permanent resident alien; (ii) entity organized under the laws of the United States or any jurisdiction within the United States [including foreign branches]; or (iii) person located in the United States.)
- Transfers of funds, securities, or other assets by a US person between blocked accounts created or funded pursuant to the preceding paragraph in its branches or offices are authorized provided that: (i) no transfer is made from an account within the United States to an account held outside the United States; and (ii) a transfer from a blocked account may only be made to another blocked account held in the same name.
- No “immediate financial or economic benefit” is accessible or made available to any Blocked Person.
- US persons shall not: (i) make any loans to, or on behalf of, any Blocked Person; or (ii) debit a blocked account for repayment of a loan or as setoff for a debt owed by any Blocked Person.
- Reports must be submitted on a monthly basis providing an accounting of the value of the Libyan interest in the investment fund, as well as an explanation of any change from the previous report, to OFAC at the following address: Sanctions Compliance & Evaluation, US Department of the Treasury, 1500 Pennsylvania Avenue, NW, Washington, DC 20220.
Depending on certain facts or circumstances, there could be complications with US persons and investment funds subject to US jurisdiction following this guidance and General License No. 4. In our view, a key aspect of this General License and guidance is an explicit statement that a minority or non-controlling ownership interest in an investment fund by a Blocked Person will not lead to blocking of the entire investment fund. Nonetheless, based on the authorization and conditions, US persons and subject investment funds must carefully monitor ownership interests and take steps when administering the fund to ensure that: (i) no immediate financial benefit, payment, or transfer of funds, securities, or other blocked property assets is provided to a Blocked Person; and (ii) reporting obligations are satisfied.