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?Comment


On August 13 2014 the Treasury Department's Office of Foreign Assets Control (OFAC) revised its guidance on entities owned by blocked persons. The revised guidance makes clear that an entity is blocked if one or more blocked persons directly or indirectly owns a 50% or greater interest in the entity, whether individually or in aggregate. OFAC also published a set of frequently asked questions (FAQs) to illustrate application of the revised guidance.

Example 1

Blocked Person X owns 50% of Entity A, which owns 50% of Entity B. Entity B is considered to be blocked. This is so because Blocked Person X owns, indirectly, 50% of Entity B. In addition, Blocked Person X's 50% ownership of Entity A makes Entity A a blocked person. Entity A's 50% ownership of Entity B in turn makes Entity B a blocked person.

Example 2

Blocked Person X owns 50% of Entity A and 50% of Entity B. Entities A and B each own 25% of Entity C. Entity C is considered to be blocked. This is so because, through its 50% ownership of Entity A, Blocked Person X is considered to indirectly own 25% of Entity C; and through its 50% ownership of Entity B, Blocked Person X is considered to indirectly own another 25% of Entity C. When Blocked Person X's indirect ownership of Entity C through Entity A and Entity B is totalled, it equals 50%. Entity C is also considered to be blocked due to the 50% aggregate ownership by Entities A and B, which are themselves blocked entities due to Blocked Person X's 50% ownership of each.

Example 3

Blocked Person X owns 50% of Entity A and 10% of Entity B. Entity A also owns 40% of Entity B. Entity B is considered to be blocked. This is so because, through its 50% ownership of Entity A, Blocked Person X is considered to indirectly own 40% of Entity B. When added to Blocked Person X's direct 10% ownership of Entity B, Blocked Person X's total ownership (direct and indirect) of Entity B is 50%. Entity B is also blocked due to the 50% aggregate ownership by Blocked Person X and Entity A, which are themselves both blocked persons.

Example 4

Blocked Person X owns 50% of Entity A and 25% of Entity B. Entities A and B each own 25% of Entity C. Entity C is not considered to be blocked. This is so because, even though Blocked Person X is considered to indirectly own 25% of Entity C through its 50% ownership of Entity A, Entity B is not 50% or more owned by Blocked Person X and therefore Blocked Person X is not considered to indirectly own any of Entity C through its part ownership of Entity B. Blocked Person X's total ownership (direct and indirect) of Entity C therefore does not equal or exceed 50%. Entity A is itself a blocked person, but its ownership of Entity C also does not equal or exceed 50%.

Example 5

Blocked Person X owns 25% of Entity A and 25% of Entity B. Entities A and B each own 50% of Entity C. Entity C is not considered to be blocked. This is so because Blocked Person X's 25% ownership of each of Entity A and Entity B falls short of 50%. Accordingly, neither Entity A nor Entity B is blocked and Blocked Person X is not considered to indirectly own any of Entity C through its part ownership of Entities A or B.

?Comment

The 50% rule does not apply to entities that are controlled, but not owned by blocked parties. That is, if blocked parties control an entity but own less than 50% in the aggregate of an entity, that entity is not considered blocked. However, engaging in dealings with such controlled entities may still pose a risk, because such non-blocked entities may become the subject of future designations or enforcement actions by OFAC. Similarly, US persons should ensure that they do not engage in dealings with a blocked individual who represents a non-blocked entity. For example, OFAC published a FAQ stating that US persons may not enter into contracts that are signed by a blocked individual.

This rule marks a break with previous OFAC guidance on the question of aggregate ownership. OFAC previously stated that property owned 50% or more in the aggregate by two or more specially designated nationals was not considered blocked unless a single person held a 50% or greater interest in the property. This rule is particularly relevant to Ukraine-related sanctions, because two brothers sanctioned under that programme - Boris and Arkady Rotenberg - co-own a significant amount of property where neither brother's interest is 50%. Under the previous OFAC guidance, property co-owned by the Rotenberg brothers was not blocked; under the new guidance, it is. This new interpretation comes on the heels of expanded US and EU sanctions against Russia in response to conflict in Ukraine.

For further information on this topic please contact Lisa Crosby, Andrew Shoyer, Robert Torresen or Lindsay Bourne at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (lcrosby@sidley.com,ashoyer@sidley.com, rtorresen@sidley.com or lbourne@sidley.com). The Sidley Austin LLP website can be accessed at www.sidley.com.

Example 3