Not everybody has a glass-half-full kind of mentality, but when it comes to ownership by sanctioned entities, the U.S. Treasury’s Office of Foreign Asset Control certainly does. This is enshrined in what is known as OFAC’s “50% Rule”. However, this does not necessarily portend optimism for banks and other institutions that must comply with sanctions regulations in a world of increasingly complex corporate ownership structures, which presents a degree of extended sanctions risk.
In August 2014, OFAC released its “Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked”. This guidance clarified OFAC’s position on entities owned 50 percent or more by persons that were on the SDN List. However, one key phrase in the guidance crucially changed sanctions screening methodology thereafter. This statement made clear that it was “with respect to entities owned 50 percent or more in the aggregate by more than one blocked person.”
Now, Treasury would begin looking at entities under an ownership structure in which multiple blocked persons had control totalling 50% or more. For example, a company that is not on the SDN List is owned 44% by a blocked individual and 7% by another blocked individual. In the aggregate, this is 51% ownership by more than one blocked person and could constitute an OFAC violation if business were done. One can imagine how quickly this can become further complicated given that ownership is often not direct - the 7% stake held by Blocked Individual #2 could be via a long chain of custody for which little ownership data is available.
With these changes, sanctions compliance went from more clearcut “math” to “political science”, indicating both less straightforwardness as well as the geopolitical considerations baked into the OFAC enforcement process itself. While the aggregation component was perhaps most impactful to industry, there are of course other ways in which the 50% rule can be triggered:
- Direct ownership - wherein a blocked person has a direct majority stake (> 50%) in the entity.
- Indirect Ownership - wherein a blocked person has control over a corporate entity, which in turn has a majority stake in the company in question.
- Cascade Ownership - this is the same as indirect ownership, but in which there are multiple layers that “cascade” up to the ultimate (blocked) beneficial owner.
So, the 50% rule complicated the picture already. This is additionally coupled with incredibly complex webs of corporate ownership structures - many of which have legitimate, legal purposes but some of which are used to conceal ownership. And this change is dynamic. As ACAMS estimates, corporate ownership changes more than 200,000 times per day or 2 changes every second!
Finally, even if there is no majority ownership and the 50% rule is not technically triggered, it is still important to know if there are any links with blocked persons. As Treasury wrote directly into its guidance, U.S. persons are advised to “act with caution” in dealing with entities with any connection to blocked persons, as “such entities may be the subject of future designation or enforcement action by OFAC.”
It is clear that companies need to leverage more data on ownership to stay on top of dynamic sanctions regulations. This is exceedingly difficult when that information is in disparate locations and chains of custody are often (sometimes purposefully) murky. Open-source intelligence, network analysis and negative news screening are critical elements to make sure all associations and ownerships are brought to light. Sigma is proud to have developed technology that simplifies this process by aggregating global data and deriving insights relevant to the sanctions, especially extended sanctions risk, and compliance space.