On 13 August, OFAC issued revised guidance on the so-called “50% Rule,” which describes the circumstances under which an entity that is not itself designated for sanctions is nonetheless subject to blocking sanctions because it is owned 50 percent or more by a blocked person.  OFAC also offers new clarifications to the 50% Rule through the issuance of new Frequently Asked Questions (“FAQs”).

The most significant change under the new guidance is that, for purposes of calculating the 50 percent threshold, all ownership interests of blocked persons are aggregated.  OFAC provides the following example: “[I]f 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.”

The new guidance also applies to entities on the Sectoral Sanctions Identification List (“SSI List”). Thus, entities owned 50 percent or more in the aggregate by SSI entities are subject to the same restrictions as the SSI entities themselves.

In addition, the FAQs offer several important clarifications on the application of the 50% rule:

First, the FAQs confirm that the 50% Rule “speaks only to ownership and not to control,” meaning that an entity that is controlled, but not owned 50 percent or more, by one or more blocked persons is not itself automatically blocked. OFAC cautions, however, that such an entity would be a  potential candidate for future designation.

Second, OFAC makes clear in the FAQs that US persons may not negotiate, contract or otherwise transact with a blocked person even if that blocked person is acting on behalf of a non-blocked entity. This would mean, for example, that if an officer or director of a company is a blocked person, a US person cannot deal with that person acting on behalf of the company.

Third, the FAQs provide additional guidance on how to apply the 50% Rule in situations of complex ownership structures involving multiple entities that may be owned by one or more blocked persons.  Essentially, the effective ownership stake of the blocked person is computed by looking through any intermediate holding company, as illustrated by the examples in the relevant FAQ.

Finally, the FAQs clarify that if the blocked persons reduce their ownership in an entity to below 50%, then that entity is no longer a blocked person.  However, any property of that entity that was previously blocked because it was in the US or in the possession or control of a US person must remain blocked until it is unblocked by OFAC or the relevant blocked person is removed from the SDN list.

OFAC Announcement

Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked, 13 August 2014

OFAC Frequently Asked Questions #398-402 (Regarding the 50% Rule)