Earlier this week the Office of Foreign Assets Control (OFAC) issued a revised guidance on entities owned by persons whose property and interests in property are blocked. The new guidance can be found in this pdf. OFAC also provided a handful of new FAQs on its revised guidance.
The key takeaway of the guidance is the redefinition of OFAC’s 50 percent rule. Whereas in the past, an unlisted entity would only be considered blocked if a single Specially Designated National (SDN) owned at least 50 percent of the entity, the revised rule states that the property and interests in property of unlisted entities directly or indirectly owned 50 percent or more in the aggregate by one or more blocked persons are considered blocked.
The likely result of this revision will be that more unlisted entities (i.e., not on the SDN List) will be considered blocked by OFAC. This, in turn, will increase the exposure of U.S. persons to liability for inadvertently violating sanctions regulations. Since sanctions violations are strict liability offenses, U.S. persons may be held to account by paying hefty civil penalties or by having their property blocked because an unlisted entity may have an interest in that property.
Another issue this revised rule creates is that U.S. persons must now scrutinize all of the owners of an entity against the SDN List, further increasing the cost of doing business. Whereas previously, U.S. persons would only need to assess the majority owner of an unlisted entity, the “in the aggregate” rule makes it possible to block an entity when no single SDN has a controlling stake in that entity. As OFAC states in its FAQ, “[I]f Blocked Person X owns 25 percent of Entity A, and Blocked Person Y owns another 25 percent of Entity A, Entity A is considered to be blocked. This is so because Entity A is owned 50 percent or more in the aggregate by one or more blocked persons.”
In FAQ No. 401, OFAC provides five examples of how unlisted entities could be considered blocked under this new rule. The examples illustrate the expansiveness of OFAC’s interpretation of the rule and the definition of “indirectly” owned.
For example, OFAC states that, “Blocked Person X owns 50 percent of Entity A and 10 percent of Entity B. Entity A also owns 40 percent of Entity B. Entity B is considered to be blocked. This is so because, through its 50 percent ownership of Entity A, Blocked Person X is considered to indirectly own 40 percent of Entity B. When added to Blocked Person X’s direct 10 percent ownership of Entity B, Blocked Person X’s total ownership (direct and indirect) of Entity B is 50 percent. Entity B is also blocked due to the 50 percent aggregate ownership by Blocked Person X and Entity A, which are themselves both blocked persons.”
With these types of interpretations, the consolidation of wealth and power in fewer and fewer hands in Russia, Burma, and elsewhere can become a liability for those nations. If oligarchs control too much of the economy, a few key listings can amount to a pretty comprehensive embargo under this new rule without the imposition of formal country-based sanctions. A robust middle class with wealth more equally distributed amongst society would appear to insulate an economy from the damning effects of OFAC’s new interpretation.
Another important takeaway highlighted in the FAQ section is that this revised “in the aggregate” interpretation of the 50 percent rule applies to the Sectoral Sanctions Identification List (SSI List) in the Ukraine-related sanctions context. As such, the limited transaction restrictions associated with the SSI List apply to an entity not listed on the SSI List if that entity is directly or indirectly owned 50 percent or more in the aggregate by one or more SSI-listed persons.
Disclaimer: Blog posts should not be relied upon as legal advice and are only provided for informational purposes. Information contained in blog posts may also become outdated with the passage of time as laws change and U.S. foreign policy and national security objectives evolve.