In a surprising and unexpected move, OFAC has abruptly changed its six year-old policy regarding what constitutes a blocked person under U.S. sanctions. The revised policy centers on what is referred to as the “50 Percent Rule,” the threshold under which a person is blocked not because they appear on OFAC’s list of Specially Designated Nationals and Blocked Persons, but because they are owned by someone on the list.
In February, 2008 OFAC released guidance explaining its definition of ownership under sanctions regulations prohibiting dealings with entities owned or controlled by SDNs. According to this guidance, 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.” The issuance of this guidance was intended to provide some clarity following the designation of Belarus’ massive state-owned oil and petrochemical firm Belneftekhim in 2007. The company’s opaque corporate structure and involvement in wide swaths of Belarus’ economy left many U.S. companies confused struggling to determine who they could and could not deal with in the country.
There were two main implications of the old policy:
1) An entity was not considered blocked if a single SDN had less than a 50% ownership interest, even if multiple SDNs owned over 50% in aggregate.
Example: if SDN 1 owns 25% of Entity A and SDN 2 owns 25% of Entity A, Entity A is not blocked, even though 50% of Entity A is owned by SDNs.
2) If an entity is blocked because it is owned by an SDN, any subordinate entity, such as a subsidiary, which is owned by that entity is also blocked.
Example: If Entity A is 50% owned by SDN 1 and Entity A owns Entity B, Entity B is blocked.
It should be noted however that dealings by U.S. persons with any entity in which an SDN has an interest always contain an element of risk.
OFAC, despite providing extensive and ongoing guidance both privately and in public fora regarding the correct interpretation of the old 50% rule, has now significantly broadened the definition of a blocked person. Under the new policy, an entity is considered blocked if SDNs hold 50% or greater ownership interest in aggregate. As stated in the title, if SDN 1 owns 25% of Entity A, while SDN 2 owns 25% of Entity A, Entity A is now blocked.
Many readers may remember the brouhaha surrounding Miley Cyrus and Justin Timberlake’s performances at Helsinki’s Hartwall Arena earlier this year. The arena is jointly owned by Gannady Timchenko and the Rotenberg brothers Boris and Arkady – all Russian SDNs. It’s unclear whether any one of them owned a greater than 50% stake in the venue, but one plausible explanation of why the concerts went on is that that none of three owned a majority share. Under the new guidance, neither Ms. Cyrus nor Mr. Timberlake would have been authorized to perform.
OFAC also provides numerous examples of how they intend to interpret the new policy in a series of FAQs. While the examples are pretty self-explanatory, Example 2 is worth noting specifically:
“Blocked Person X owns 50 percent of Entity A and 50% of Entity B. Entities A and B each own 25 percent of Entity C. Entity C is considered blocked.”
Using this example as guidance, U.S. companies now must determine not only whether a firm, which does not appear on the SDN list, is blocked by function of law because of SDN ownership, they must also determine whether a firm is blocked because 50% of its owners, none of whom appear on the SDN list, are blocked by function of law.
Any U.S. companies currently involved in dealings with SDNs, or in SDN-rich jurisdictions, should review these relationships or undertake additional due diligence to ensure that they are not partnering with newly blocked entities.
Additionally, someone should probably forward Lenny Kravitz a copy of the new guidance – he’s scheduledto perform at Hartwall in October.