On August 14, 2014, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) published revised guidance regarding entities owned by persons whose property and interests in property are blocked pursuant to an Executive Order or regulations administered by OFAC (blocked persons). Fed. Reg. 47726 (August 14, 2014). Under the revised guidance, any entity that is owned “in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.” This is true even if the entity is not itself listed in the annex to an Executive Order or otherwise placed on OFAC’s list of Specially Designated Nationals (SDNs). As with any blocked person, now a U.S. person generally may not engage in any transactions with an entity that is not formally blocked but is at least 50 percent owned by a blocked person or blocked persons, unless authorized by OFAC.
This announcement updates OFAC’s February 14, 2008, guidance establishing the so-called 50 Percent Rule, which stated that a blocked person 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 greater interest.” While the 2008 guidance left open the question whether aggregate ownership resulted in automatic blocking of the non-blocked entity, OFAC issued the admonition that U.S. persons act with caution when considering a transaction with a non-blocked entity in which a blocked person has a significant ownership interest that is less than 50 percent or “which a blocked person may control by means other than a majority ownership interest.” OFAC repeated this admonition in the revised guidance, which is even more relevant in light of the recent sanctions targeting Russia, where oligarchs appear to have fractional ownership and potentially control interests in many entities that themselves may not be blocked.
When blocked persons own a significant, but still less than 50-percent ownership interest, or otherwise appear to exert control over an entity, U.S. persons considering a transaction with the entity face a difficult issue of risk tolerance. In the first instance, the original and revised guidance provide the practical advice that entities that are less than 50 percent owned by blocked persons “may be the subject of future designation or enforcement action by OFAC.” This designation is now automatic, should blocked persons obtain 50 percent ownership in the aggregate. Further, certain of OFAC’s sanctions programs, such as those regarding Cuba and Sudan, include the notion of “control” in key definitions and provisions, such that an entity that is minority owned by persons blocked under those programs, but still effectively controlled by them, could be considered blocked as well. However, the risk of transacting with entities potentially controlled by blocked persons is difficult to ascertain, given the relative dearth of guidance as to what level of control or influence need be demonstrated.
While the question of control remains murky, OFAC provided additional clarity on the revised guidance with frequently asked questions (FAQ) on the question of entities owned by blocked persons. See FAQ #398-402. Some key points from the FAQ include the following:
OFAC aggregates the ownership interests of persons blocked under different OFAC sanctions programs. See FAQ #399.
While an entity controlled but not owned 50 percent or more by blocked persons is not automatically blocked, persons should be cautious not to conduct business (e.g., enter into contracts) with a blocked person representing the non-blocked entity, which is generally prohibited by OFAC sanctions. See FAQ #398, 400. Beware of the indirect ownership principle when applied to the aggregate ownership guidance. For example, if Blocked Person X owns 50 percent of Entity A, which in turn owns 50 percent of Entity B, Entity B is blocked because Blocked Person X indirectly owns 50 percent of Entity B. See FAQ #401 for additional examples.
OFAC’s common-sense expansion of the 2008 guidance provides a reminder to businesses that vigilance is required when vetting potential or existing counterparties, particularly when those counterparties have complex ownership structures and fractional shareholders. In short, it may not be sufficient simply to determine whether counterparties appear on OFAC’s SDN list. Instead, businesses should endeavor to conduct reasonable screening and due diligence designed to understand the ownership structure of counterparties (and the ownership structure of their related companies) and determine not only whether a counterparty is significantly owned by one or more blocked persons, but also whether blocked persons exert influence over the entity by some other mechanism. A business with exposure to SDNs should reevaluate its existing due diligence processes in light of this expanded guidance to ensure it is taking reasonable steps to avoid transactions with a blocked person or an entity deemed blocked through its association with blocked persons either through ownership interests or other forms of control.