On August 14, 2014, the Office of Foreign Assets Control (OFAC) of the US Treasury Department issued a new guidance stating that any entity owned in the aggregate 50% or more by one or more blocked persons is itself considered to be blocked. This policy applies even if the entity is not named on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDNs). As a result, US persons now face an enhanced due diligence obligation not to conduct transactions involving, or deal in the property of, a non-listed entity that is owned 50% or more, in total, by one or more blocked persons. OFAC has also issued FAQs that provide guidance on indirect ownership by a listed entity that renders a non-listed entity blocked.
The new guidance, which revises and replaces the guidance issued by OFAC in February 2008 about blocking the property of non-listed entities, states that anyone whose property and interests in property is “blocked” by OFAC is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or more interest. Before issuing the new guidance, there was an informal understanding that OFAC’s policy of blocking non-listed entities applied only where an entity was owned, directly or indirectly, 50% or more by a single blocked person. OFAC has now clarified that an entity owned 50% or more by one or more blocked persons in the aggregate – even if each individual blocked person owns less than 50 percent – is also blocked whether or not it is directly listed as a SDN.
US persons are prohibited from directly or indirectly procuring goods, services, or technology from, or engaging in transactions with, blocked persons, and are required to freeze all property or property interests of blocked persons that come into their possession or are located in the United States.
OFAC also issued FAQs that provide guidance on indirect ownership (i.e., ownership through another entity or entities) by a listed entity that renders a non-listed entity blocked. Below is a summary of these FAQs:
- An entity that is 50% owned by an entity which itself is 50% owned by a blocked person is also considered to be blocked by virtue of being indirectly owned 50% by a blocked person.
- When entity X is 25% owned by entity A which is 50% owned by a blocked person SDN1, and 25% owned by entity B which is 50% owned by another blocked person SDN2, then entity X is also considered to be blocked because SDN1 and SDN2 in the aggregate indirectly own 50% of X.
- When blocked person SDN owns 50% of entity A and 10% of entity B, and entity A owns 40% of entity B, then entity B is considered to be blocked because (i) SDN indirectly owns 40% of entity B via its 50% ownership of entity A, and directly owns 10% of entity B, making SDN a 50% owner of entity B, and, separately, (ii) entity B is owned, in the aggregate, 50% by blocked persons SDN as well as entity A.
- When blocked person SDN owns 50% of entity A and 25% of entity B, and entity A and entity B each owns 25% of entity C, then entity C is not considered to be blocked because (i) SDN indirectly owns only 25% of entity C (through its 50% ownership of entity A), and (ii) entity A, which is considered to be blocked, does not own 50% or more of entity C. If SDN owns less than 50% of entity A and all other facts remain the same, then again entity C is not considered to be blocked because no blocked person owns 50% or more of entity C.
Additionally, OFAC clarified that if one or more blocked persons divest their ownership stake so that an entity is no longer owned 50% or more by one or more blocked persons after the divestment, then such an entity is no longer considered to be blocked, provided that the divestment transaction: (i) occurred entirely outside the US jurisdiction, (ii) does not involve US persons, and (iii) was not a sham transaction. OFAC does not recognize an unauthorized transfer of any blocked person’s interest in a property after that property has been blocked by OFAC until OFAC removes the blocked person from the SDN list.
OFAC’s new guidance also advised that US persons should continue to exercise caution when considering a transaction with an entity in which one or more blocked persons (1) in aggregate has or have a significant ownership interest but that is less than 50%,or (2) may exercise control by means other than a majority ownership interest. The risk here is that OFAC may designate such an entity as a SDN or blocked person in the future.
As a result of the new guidance, due diligence efforts could be more complicated for US persons engaging in transactions, investments, or dealings. Screening for non-listed entities that may be collectively owned, directly or indirectly, 50% or more by listed entities may need to evaluate more fulsome consideration of minority ownership interests by one or more blocked persons. US persons should exercise caution appropriately when considering a transaction with a non-SDN listed entity in which one or more blocked persons has any ownership interest because of the possibility that several minority ownership interests could add up to 50% or more, rendering the non-listed entity blocked.