OFAC's "50% Rule" Challenges Compliance

In 2008, the Treasury Department's Office of Foreign Assets Control (OFAC) issued "guidance" that precludes U.S. companies and individuals from conducting business with entities that are owned 50% by a sanctioned party. 

Specifically, these sanctioned parties have been placed on OFAC's Specially Designated Nationals and Blocked Persons (SDN) List and the Sectoral Sanctions (SSI) List for alleged activities that harm U.S. national security and foreign policy interests. 

In time, OFAC's so-called "50% rule" has become one of the most onerous sanctions compliance obligations for American and foreign companies involved in cross-border trade. 

"The 50% rule is difficult to comply with on a transactional basis," said Brian Amero, head of global compliance and ethics for Boston-based Teradyne TER and a member of the American Shipper Editorial Board. "Placing the burden on exporters to determine beneficial ownership of foreign companies doesn't seem fair." 

Doug Jacobson, a Washington, D.C.-based attorney with Jacobson Burton Kelley PLLC​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ who specializes in U.S. export controls, spends "a great deal of time assisting companies and banks on compliance-related issues associated with the 50% rule."

"This is one of the biggest compliance challenges for companies and banks today," Jacobson said.

In 2014, OFAC revised the 50% rule to include parties on the SDN and SSI lists that hold an aggregate of 50% or greater interest in a property. 

The agency by that time had added numerous wealthy individuals and entities connected to Russia's defense, financial and energy sectors as punishment for Russia's military incursion in Eastern Ukraine and takeover of Crimea. 

A problem with the existing 50% rule came to light most publicly in the spring of 2014, when concert promoter Live Nation arranged for Justin Timberlake to perform at the Hartwall Arena in Helsinki, Finland. Concerned about the ownership of the arena by Russian businessmen Boris and Arkady Rotenberg and Gennady Timchenko, all of whom were placed on the SDN List, Live Nation notified OFAC to confirm whether it could conduct business with the Finnish venue. The agency determined that each Russian businessman had less than 50% ownership in the arena and thus Live Nation could proceed with booking the concerts. 

However, OFAC, realizing the enforcement challenges of the rule, revised its policy to state that if a blocked person or persons are collectively part of a property ownership arrangement that is 50% or greater than the property is blocked. 

This action technically prevented Live Nation from working with the Hartwall Arena since the three Russian businessmen collectively owned more than 50% of the property. The other minority owner in the property at the time was Finnish firm Lanbvik Capital, which was not on the SDN List. 

To get around this obstacle, one of the Rotenberg brothers sold his interest in the arena to a son, Roman Rotenberg, who is not a blocked party, bringing the collective Russian ownership in the facility to below OFAC's 50% threshold. 

Many of Russia's wealthy businessmen who have been placed on the SDN List invest not only in domestic enterprise but in companies scattered throughout the world.

"Teradyne and most of my peer electronic companies view sales to Russian customers as the most at risk of the OFAC 50% rule," Amero said. 

"It's onerous because trying to get corporate ownership information involving Russian individuals and entities is not easy," Jacobson said. 

With the increased use of sanctions and additions to the SDN List under the Trump administration, U.S. companies not only have to worry about the 50% rule as it applies to Russia, but sanctioned individuals and entities in other countries, such as Iran and Venezuela. 

OFAC's first enforcement settlement involving a violation of the 50% rule was announced by the agency on Feb. 8, 2016. Barclays Bank Plc BCS agreed to settle a $2.48 million civil liability for 159 apparent violations of the Zimbabwe Sanctions Regulations.  

According to the settlement, from July 2008 to September 2013, Barclays processed 159 transactions worth about $3.37 million to or through financial institutions located in the U.S. — including Barclays' New York branch — for or on behalf of corporate customers of Barclays Bank of Zimbabwe Ltd. that were owned 50% or more, directly or indirectly, by a person identified on the SDN List. 

On Nov. 27, 2018, OFAC reached a $87,507 settlement with Arlington, Va.-based Cobham Holdings on behalf of its former subsidiary Aeroflex/Metelics for three violations of the Ukraine Related Sanctions Regulations that involved the 50% rule. The alleged violations involved the indirect export of components for use in commercial air traffic control radar to an entity owned 50% or more, directly or indirectly, by a person on the SDN List. OFAC's lower fine for Cobham was due to its voluntarily self-disclosure of the violations on behalf of Metelics, deemed "non-egregious." 

To avoid running afoul of the 50% rule, U.S. companies should analyze the ownership structure of their potential customers. The problem is that information may be several layers deep or not be readily accessible, explained R. Clifton Burns, senior counsel to Washington, D.C.-based law firm Crowell & Moring LLP who focuses on sanctions and export control regulations. 

"It's hard to see that a 50% rule policy pursued in this way makes U.S. sanctions policy more effective," Burns said. "The best policy if you want to sanction someone is to put them on the SDN List, but to impose on everyone to determine compliance with the 50% rule is problematic." 

However, inquiring about a customer's ownership structure and obtaining and recording what information is available demonstrates to OFAC that a company used due diligence with regard to the 50% rule, he added. 

"Obtaining a statement from a potential customer that is not 50% or more owned by parties on the SDN and SSI lists is a very useful way for companies to document that they have performed the necessary due diligence," Jacobson said. "Supplementing the end-user statement with information from other sources is also important." 

Online, subscription-based tools are available to assist U.S. companies with their corporate ownership queries, such as Dow Jones Risk and Compliance and Kharon, which include detailed ownership information that their analysts have obtained from various sources. 

However, Paul DiVecchio, a 40-year export compliance consultant based in Boston, warned that it could be cost prohibitive and extremely time consuming for the compliance resources at many U.S. exporters to use these screening modules for every international transaction. 

"One has to be selective in screening through these types of modules for those countries and parties that may be owned or partially owned by government agencies that are high risk to the 50% rule," he said. 

Teradyne, for example, uses Dow Jones to ensure its customers are compliant with OFAC's 50% rule. Dow Jones can identify company ownership through its analysis of Dun and Bradstreet information. 

"As an exporter, we still need to subscribe to other services that perform license determinations," Amero said. "More rules, more complexity, more cost."

Image Sourced from Pixabay