OFAC’s 50 Percent Rule explained

The Office of Foreign Assets Control (OFAC) is pivotal in safeguarding US national security and foreign policy objectives by enforcing economic and trade sanctions against targeted individuals, entities, and jurisdictions. One of the key tools in OFAC’s arsenal is the 50 Percent Rule, a regulatory measure designed to prevent circumvention of sanctions through ownership or control structures. 

This article discusses the nuances of the 50 Percent Rule, exploring its origins, implementation, repercussions for non-compliance, and offering insights on how companies can navigate this complex regulatory landscape.

What is OFAC’s 50 Percent Rule?

OFAC’s 50 Percent Rule is a mechanism employed to address situations where sanctioned entities attempt to evade restrictions by hiding behind complex ownership structures. The rule stipulates that if a blocked person or entity owns a 50 percent or greater interest in another entity, that second entity is also considered blocked, regardless of whether it is explicitly listed on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN).

Why was the 50 Percent Rule implemented?

In December 2022, OFAC released an updated version of its regulations for multiple sanctions programs. Previously, OFAC regulations stated that any entity would be considered blocked if it was “50 percent or more owned by” a blocked person. However, the new regulations specify that an entity is blocked if it is “directly or indirectly owned, whether individually or in aggregate, 50 percent or more by one or more persons” who are blocked. While not a significant change, the update formally confirmed OFAC’s previous interpretation of the rule.

The reason behind the rule and its 2022 update was to counteract the practice of sanctioned individuals or entities using corporate veils and intricate ownership arrangements to evade sanctions. By closing this loophole, OFAC aims to ensure that economic restrictions effectively achieve their intended goals, preventing sanctioned parties from benefiting indirectly through obscured ownership ties.

How does OFAC’s 50 Percent Rule work?

While the 50 Percent Rule can appear straightforward, there are some nuances to be aware of to avoid non-compliance:

• Indirect ownership: Beyond direct ownership, the rule considers indirect ownership. If a sanctioned entity holds a substantial ownership stake in another entity through intermediary entities, these ownership connections are cumulatively considered. 
• Cumulative ownership: It should also be noted that OFAC evaluates the cumulative ownership or control exerted by all blocked persons, not merely a single entity. If multiple sanctioned individuals or entities collectively own or control 50 percent or more of a non-sanctioned entity, the 50 Percent Rule is triggered. 
• Blocking by extension: Once the 50 Percent Rule is triggered, the non-sanctioned entity is brought under the same sanctions as the blocked person or entity that meets or exceeds the 50 percent ownership threshold. 

Entities are encouraged to conduct robust due diligence to navigate the complexities of international transactions and business dealings. This involves a thorough assessment of ownership structures to identify any potential exposure to sanctioned individuals or entities. 

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Penalties for non-compliance with the 50 Percent Rule

Non-compliance with sanctions is considered a serious threat to national security and foreign relations. In the first half of 2023, OFAC fined companies over $556.5 million for breaking sanctions rules. In one instance, a $2 million fine was imposed on a global bank for processing transactions that violated the 50 Percent Rule.

In addition to monetary fines, firms that fail to comply with the 50 Percent Rule can face some of the following penalties:

• License revocation: Entities found to be non-compliant may face the loss of specific licenses or authorizations granted by regulatory authorities. This can have far-reaching implications, affecting an entity’s ability to conduct certain types of business.
• Reputational damage: Negative publicity can tarnish the image of the non-compliant entity, affecting its relationships with clients, partners, and stakeholders.
• Global impact: Violating OFAC regulations, including the 50 Percent Rule, can have global ramifications. It may lead to restrictions on international transactions and relationships, hindering an entity’s ability to engage in cross-border activities.
• Enhanced scrutiny and monitoring: Following a violation, entities may be subject to enhanced scrutiny and monitoring by regulatory authorities. This increased oversight can be a burden on normal business operations and may persist for an extended period.

How can companies comply with the 50 Percent Rule?

Ensuring compliance with the 50 Percent Rule requires a proactive and comprehensive approach. To do this, firms can adopt the following strategies:

• Engage compliance experts: Seek guidance from legal and compliance experts specializing in sanctions regulations to navigate the complexities and ensure ongoing adherence to OFAC requirements.
• Due diligence: Conduct thorough due diligence on business partners, investors, and entities in the supply chain to identify any potential connections to sanctioned parties. As part of this, firms should ensure their transaction screening solution can access and screen against current sanctions lists. 
• Continuous monitoring: Establish mechanisms for continuous monitoring of ownership structures and changes, promptly updating records to reflect any shifts that may impact compliance. 
• Employee training:  Provide training to employees involved in compliance functions, emphasizing the importance of understanding and adhering to OFAC regulations. Training should also include historical sanctions screening data and the company’s sanctions risks as determined by its enterprise-wide risk assessment (EWRA).

At the heart of all of these strategies, however, is having access to quality sanctions data that is up-to-date with the most recent of designations. ComplyAdvantage’s category-leading sanctions screening and monitoring solution features a proprietary real-time risk database, providing customers with a comprehensive perspective of risks based on reliable and current information. Moreover, sanctions data experts regularly review the data to ensure its accuracy and relevance.