A 50% narrative sanctions applies to an entity not sanctioned by name or appearing on a blocked / restricted entity list but is covered by a narrative statement on a sanctions program extending such sanctions to such non-listed entity.

Firms face the challenge of understanding to what extent they should screen their customers and key stakeholders against designated sanctioned entity lists.

This update looks at the risk of indirect transactions which may result in a breach of the relevant sanctions regime and specifically, the “50 percent rule” imposed by EU Member States and the U.S.

The EU and U.S. Sanctions Regimes

EU

1. The EU applies a 50 percent rule and criterion to establish the ownership and control of an entity to ascertain whether it is subject to sanctions restrictions. For example, if a listed individual has 50 percent or more ownership of a non-listed entity, EU persons/entities are prohibited from making available funds and economic resources to that entity. It may also be prohibited to transact with that entity if the listed person can “control” it for example, by holding dominate influence or majority voting rights (amongst other means). In these cases, transacting with the non-listed entity is viewed as an indirect transaction for the benefit of the listed individual and is therefore prohibited.

US

2. On 13 August 2014 the U.S. Department of Treasury issued guidance regarding the 50 percent rule which goes beyond the position in the EU by stating that if one or more blocked persons or entities own 50 percent or more in aggregate of a non-listed entity (either directly or indirectly), that entity is also automatically blocked.
3. In practice, this means that the U.S. requires that for the purposes of calculating the 50 percent threshold that all ownership interests of sanctioned persons must be aggregated.
4. Where this rule applies, U.S. law requires U.S. persons and foreign entities owned or controlled by U.S. persons, to refrain from transacting business with (including negotiating and contracting) or investing in a blocked entity and to freeze any property of the entity that they hold.

ALL

5. In all cases, companies should remain cautious as indirect transfers can occur with a non-listed entity without an ownership or control link to a listed entity.

What does this mean for CI/EU firms?

1. We believe that the main consequence of the 50 percent is that every transaction will require enhanced due diligence and that simply screening against the sanctioned entity lists will not be sufficient.

2. We have already seen how this has become incredibly burdensome for many of our clients particularly since the introduction of the sanctions against Russia, Crimea and Sevastopol.

3. The most well-known example of this is the US Department of Treasury’s Office of Foreign Assets Control (OFAC) 2014 (revised from 2008) 13 August 2014 guidance note:  http://1.usa.gov/1RLpOb1

The OFAC guidance relates to the status of:

1. “entities owned by persons whose property and interests in property are blocked”:

2. “Persons whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (blocked persons) are considered to have an interest in all property and interests in property of an entity in which such blocked persons own, whether individually or in the aggregate, directly or indirectly, a 50 percent or greater interest.

Consequently:

1. any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.
2. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC’s list of Specially Designated Nationals (“SDNs”).
3. Accordingly, a U.S. person generally may not engage in any transactions with such an entity, unless authorized by OFAC. [Furthermore] U.S. persons are advised to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent or which one or more blocked persons may control by means other than a majority ownership interest.
4. Such entities may be the subject of future designation or enforcement action by OFAC.”