Sanctions policy is a crucial tool that countries use to influence international relations, particularly in combating terrorism, human rights violations, and other threats. The primary body regulating sanctions in the USA is the Office of Foreign Assets Control (OFAC). This agency of the US Department of the Treasury is responsible for implementing sanctions that include a wide range of prohibitions, including economic restrictions on specific individuals and companies. One of the key aspects of OFAC’s work is the so-called “OFAC’s 50 percent rule,” which details the regulations for controlling entities associated with sanctioned individuals. For legal support in matters related to sanctions and compliance with these rules, one can turn to professionals who provide SDN Legal Services, which help ensure compliance with OFAC requirements.
What is the 50 Percent Rule of OFAC?
OFAC’s 50 percent rule is a regulation implemented by the U.S. Office of Foreign Assets Control (OFAC) that pertains to entities (companies, organizations, etc.) that are owned, directly or indirectly, by one or more blocked persons. According to this rule, if blocked person owns, in the aggregate, directly or indirectly, a 50 percent or greater interest in an entity, then that entity is also considered blocked regardless of whether it is specifically named on OFAC’s list of Specially Designated Nationals and Blocked Persons (SDN List). In practical terms, this means that any company which is owned 50 percent or more by individuals or entities that are under sanctions by the U.S. government is itself subject to the same restrictions as those sanctioned individuals or entities. This includes prohibitions on U.S. persons engaging in processing transactions involving these companies, as well as freezing of assets under U.S. jurisdiction. The rule essentially expands the reach of U.S. sanctions to include not just those explicitly named on sanctions lists but also entities that are significantly controlled by those sanctioned parties.
This rule requires companies to exercise due diligence and thoroughly check the ownership structure of their counterparts to avoid collaboration with sanctioned organisations. However, the difficulty lies in the fact that OFAC does not provide a complete list of companies under the majority control of SDNs, thus placing the responsibility for compliance on the companies themselves.
OFAC’s 50 percent rule means that any company automatically falls under sanctions if one or more blocked individuals own, in aggregate, 50% or more of its assets.
- Direct and indirect ownership: The rule takes into account both direct and indirect possession through other companies or structures.
- Total calculation: The shares of several blocked individuals are added together to determine the 50% threshold.
Why the 50 Percent Rule was implemented?
OFAC’s 50 percent rule was implemented to strengthen the US sanctions policy. Initially, it aimed to prevent prohibited individuals or organisations from concealing their involvement in business activities through complex corporate structures. The idea behind the rule was to prevent the circumvention of sanctions by limiting the influence of sanctioned entities on the economy and protecting companies from the risks of cooperating with such organisations.
In December 2022, OFAC updated its 50 Percent Rule to include provisions on direct and indirect ownership. This means that now, any companies where sanctioned individuals collectively or individually own 50% or more of the shares are subject to restrictions, regardless of the ownership structure. This update reaffirmed the previous policy and closed potential loopholes for evading sanctions.
Thus, the changes were aimed at preventing sanctioned individuals from indirectly benefiting and to strengthen control over ownership structures. For companies, this means they must exercise even greater caution in their dealings with potential partners. OFAC lawyers assist in ensuring OFAC sanctions regulations, and help companies comply with economic and trade sanctions by assessing their risks.
Implications of the 50 Percent Rule
OFAC’s 50 percent rule has significant implications for companies and individuals, as restrictions apply to any organisation where a sanctioned entity owns 50% or more. This means that such organisations cannot conduct business within territories where sanctions are in effect, or enter into contracts with other companies within that market.
For businesses, this creates a need for thorough vetting of counterparts and owners to avoid collaboration with companies that are under the influence of sanctions. Failing to meet this requirement can lead to serious consequences: from hefty fines to significant reputational damage. Ensuring compliance is particularly crucial, and this is where sanctions lawyers come in, offering the necessary legal support.
Adhering to the OFAC’s 50 percent rule is becoming a complex process, especially due to the lack of official lists of such companies. This increases the risks for companies operating in international markets and requires a comprehensive approach to risk management in order to avoid potential sanctions violations and ensure full compliance with sanction regulations.
Indirect ownership also has a significant impact within the framework of the OFAC’s 50 percent rule. This concept covers instances where a sanctioned entity owns less than 50% in an organization but, through control in other companies, has an indirect influence or share that exceeds the threshold. Such an approach requires an even more thorough analysis of the ownership structure of counterparties. Companies must consider both direct and indirect ownership to avoid accidental breaches of the sanctions regime.
How to comply with the 50 Percent Rule?
Adhering to the 50 percent rule requires a comprehensive and systematic approach to managing risks associated with sanctioned individuals and organisations. OFAC compliance lawyers recommend taking the following measures for companies:
- Engaging sanctions experts. For a detailed understanding of OFAC requirements and complex ownership structures, it’s advisable to consult sanctions lawyers. They can assist in navigating the legal intricacies and establish a robust compliance system.
- Careful vetting of counterparties and partners is crucial. It’s important to conduct regular screening of partners, investors, and suppliers, checking them against sanction lists. Such checks help identify potential connections with organisations that are under restrictions. Companies often use services like SDN legal services for this process.
- Monitoring changes in ownership structure. Continuously tracking changes in ownership helps to avoid accidental violations. When 50% of shares are transferred under the control of sanctioned individuals, an organisation automatically becomes subject to sanctions, so it’s important to respond quickly to such changes.
- Conducting training for employees. Professional training of staff responsible for compliance helps to increase their awareness of OFAC requirements. Training programmes should include examples from real audits, requirements for the OFAC 50 percent rule, and the risks of violations.
- Utilising verified databases and screening systems. Companies must ensure access to up-to-date sanctions databases and employ advanced systems for monitoring and risk assessment.
Transactions Conducted by a Sanctioned Individual
Processing transactions carried out by blocked persons or individuals who are under sanctions are automatically considered illegal within the jurisdiction of OFAC. This includes any financial transactions, asset transfers, or contract agreements.
Participation in such transactions can lead to serious consequences, including fines, asset freezes, and loss of access to financial markets. It is crucial for companies to ensure effective control and monitoring to avoid breaching sanctions.
Entities Owned by Sanctioned Individuals
Legal entities in which one or more sanctioned individuals own 50% or more are automatically subject to sanctions under the OFAC 50% Rule. This applies to both direct and indirect ownership. The cumulative control of several sanctioned entities is also considered: for example, if two blocked persons each own 25%, the company is considered blocked.
Such legal entities are required to comply with restrictions imposed on sanctioned individuals, including asset freezes, prohibitions on transactions, and restricted access to international financial markets. They are also prohibited from engaging in activities with companies or individuals from jurisdictions where sanctions are in effect.
Contact OFAC Sanctions Solicitors
If you’re facing issues related to OFAC sanctions or the 50 percent rule, don’t ignore them. Companies that fail to comply end up on the SDN list. We understand how crucial it is for your business to stay abreast of all changes in the legal framework and to avoid any legal risks.
Our sanctions lawyers have significant experience in handling cases related to sanctions and can assist you with the following matters:
- Assessment of risks associated with potential sanctions.
- Conducting due diligence on business partners and ownership structures.
- Developing strategies for compliance with OFAC regulations.
- Consultations on business recovery after lockdown.
Don’t wait until the situation worsens. Contact us today, and we will help you find effective solutions for your business!
