I think more needs to be said about OFAC’s greater than 50 percent rule which was covered in yesterday’s post. As you recall, the rule in question says that if a blocked party owns more than 50 percent of another entity that latter entity and all its assets are blocked as well, even if the latter entity is not listed on the SDN list. Since that rule appears to be recursive, it makes it difficult to screen parties because you need to know the owners of the company, and the owners of the owners, and the owners of the owners of the owners and so forth. The rule is also written in such a way as to impose undue hardships on the other owners of the blocked entity where the party owning more than 50 percent is blocked after the other parties invest in the enterprise.
But consider this scenario which brings out even more vividly the problems with OFAC’s rule. Suppose that Mr. A is an SDN and he owns 60 percent of Company B and 45 percent of Company C. Further suppose that Company B owns 40 percent of Company D, and Company C owns 60 percent of Company D. Now, pop quiz. Who and what is blocked under the OFAC rule?
Clearly Company B and its assets are blocked, whereas Company C and its assets are not. But what about Company D? Mr. A owns 24 percent of Company D through his 60 percent ownership in Company B. He also owns 27 percent of Company D through his 45 percent interest in Company C. That’s a cumulative interest of 51 percent of Company D. So even though Mr. A cannot control Company D, since he doesn’t control Company C, the majority owner, Company D would be blocked as would all of its assets.
Surely the screening problems that this rule poses are manifest in a situation like this as is the unfairness of this rule to the other (and majority) owners of Company C if Mr. A is designated after his investment in Company C. The question then is how on earth can this happen? Can the agency be that deaf to the business realities of the parties it regulates? Does it even care?
Well, the answer to this question is hidden in the rulemaking itself. Near the end of the Federal Register notice there is this juicy little nugget:
Because these amendments to 31 CFR parts 594, 595, and 597 involve a foreign affairs function, Executive Order 12866 and the provisions of the Administrative Procedure Act (5 U.S.C. 553) requiring notice of proposed rulemaking, opportunity for public participation, and delay in effective date are inapplicable.
There you have it. The agency has no interest in public participation or input.
Now contrast this to the positions taken by the Bureau of Industry and Security (“BIS”) and the Directorate of Defense Trade Controls (“DDTC”). Both agencies could also argue that they are engaged in a foreign affairs function and yet both regularly put their rules out for public comment, a process which has led to valuable industry feedback and rules that address the real-world concerns of actual businesses. OFAC should follow the example of its sister export agencies.