New guidance from OFAC on “50% rule” expands restricted parties through aggregation

The 50 percent rule: How it was

In August of 2008, when OFAC originally published its guidance on the 50 percent rule, ownership of an entity by a group of individuals on the Specially Designated National (SDN) List did not automatically banish the entity from doing business with U.S. citizens – even if the total ownership amounted to greater than 50 percent. An entity had to have at least 50 percent ownership by an individual or entity listed on OFAC’s SDN List for itself to be considered a prohibited entity. If two different people listed on the SDN list owned 33 percent of an entity respectively, making the entity 66 percent owned by restricted parties, it was still permissible to conduct transactions with the entity as it was not majority-owned by a sanctioned party.

The 50 percent rule: How it is today

In August 2014, six years after its original publication, OFAC issued revised guidance pertaining to entities owned by SDNs. The revised guidance now states that Entities can be blocked from doing business with the U.S. based on an aggregation of the entities ownership by SDNs, whereas previously, the entity was free to do so as long as the SDN or SDNs respectively owned only a minority share of the entity. This means that two SDNs who each own 33 percent of an entity will now see that entity blocked due to their minority ownership being aggregated together rather than viewed separately. Essentially, the rule of “An entity is blocked if a single SDN owns 50 percent or more of the entity” has been changed to read more like “An entity is blocked if one or more SDNs each own shares of an entity that when added together, equal 50 percent or greater ownership of the entity” An example of this scenario is the Rotenberg brothers, Boris and Arkady, both listed SDNs. Under the former rule, the brothers would be able each own 1/3 of an entity without it being restricted, as neither brother individually owned more than 33 percent state in the entity. Today, their ownership is aggregated to an amount of 66 percent, thus making the entity blocked itself.

Further complications

So far the revised guidance seems fairly straightforward, but ownership of an entity often isn’t. Take the example below, provided by OFAC, as an example of how indirect ownership can affect – and cause headaches – for exporters trying to determine if they are prohibited from conducting business with an entity or not.

“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.”

As you can see, determining the ownership status of an entity is not always a simple endeavour. OFAC officials themselves have suggested companies hire an outside firm specializing in these types of matters if it is unsure whether a potential trade partner could be associated with other individuals or entities currently on the SDN List. It is worth noting, that this new aggregation rule actually brings the U.S. interpretation in line with that of the EU.

For more information, the U.S. Department of the Treasury has posted a PDF outlining the licensing requirements, as well as an FAQ on OFAC.