On August 13, 2014, the Treasury Department’s Office of Foreign Assets Control (―OFAC‖) released revised guidance on its so-called ―50% Rule,‖ which governs the treatment of entities 50% or more owned by persons (a term which includes both individuals and entities) whose property and interests in property are blocked by virtue of being listed on OFAC’s Specially Designated Nationals and Blocked Persons (―SDN‖) List. Also released was a set of Frequently Asked Questions (―FAQs‖) related to this guidance.
The New Guidance Requires Aggregation of Blocked Ownership Interests to Determine if an Entity is Blocked
Contrary to earlier informal advice by OFAC given when the recent Ukraine-related and Russian blocking sanctions were issued, the new guidance now states that blocked persons’ interests will be aggregated in determining whether the 50% Rule is met. For example, if one blocked person owns 25% of an entity and another blocked person owns 25% of that entity, the entity will now be treated by OFAC as blocked because the aggregate total of ownership by blocked persons is 50% or greater, even if the entity is not otherwise listed on the SDN List.
The 50% Rule also continues to apply to layers of entities, so that if, for example, Blocked Person A owns 50% or more of Entity B, which owns 50% or more of Entity C, not only is Entity B automatically blocked by virtue of being owned by a blocked person, but Entity C is also automatically blocked by virtue of being owned by the now-blocked Entity B. Applying the new guidance to the same example, if Blocked Person A and Blocked Person X each own 25% of Entity B, Entity B will again be blocked and therefore so will Entity C.
The 50% Rule and Due Diligence Transactions or dealings with any blocked person by U.S. persons (which includes U.S. citizens, permanent resident aliens, entities organized under U.S. laws—including foreign branches—or any person in the United States) are prohibited. U.S. persons must also freeze any assets of blocked persons that come into their possession or control or that come within the United States. U.S. persons must thus conduct reasonable due diligence on the entities with which they do business. Note that under the new guidance there is no hypothetical minimum ownership percentage that escapes aggregation–if one blocked person owns 45% of an entity, and five other blocked persons own 1% each, the entity is still automatically blocked. Due diligence is thus even more challenging under the new guidance because all owners of an entity, not just owners with 50 percent or greater ownership interests, will need to be screened against the SDN List.
Divestment of a Blocked Person from an Otherwise Unblocked Entity
Also of particular note, the FAQs address the situation in which a blocked person divests itself of an interest in an entity that is blocked by virtue of the blocked person’s ownership interest, either alone or in combination with other blocked persons. Because the person is blocked, this divestiture would have to occur outside the United States and not involve any U.S. persons. According to the FAQs, if one or more blocked persons divest their ownership stake such that the resulting combined ownership by blocked persons is less than 50%, the entity is no longer considered automatically to be a blocked entity. After the divestment is complete, U.S. persons may then deal with the entity. However, property of a blocked entity that entered the United States or came into the possession or control of a U.S. person prior to the divestment remains blocked and must be held unless OFAC takes action to unblock the property. This is true whether the blocking was based on one person having 50% or more ownership or it was based on aggregation of the interest of several blocked persons. The person holding the property must continue to do so, although OFAC will consider licenses to transfer such property on a case-by-case basis.