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U.S. Treasury Raises Bar on Corporate Compliance Obligations

The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently expanded its guidance for determining whether an entity is considered to be owned by a sanctioned person, and therefore is the target of U.S. economic sanctions (the 50 Percent Rule). The expanded guidance increases the already complicated task of screening business partners to prevent dealings with sanctioned entities and individuals. Companies engaged in international business transactions should review, and update if needed, their existing sanctions screening and business partner due diligence processes to adhere to the new guidance. The new guidelines (and OFAC regulations) do not specify how companies must screen business partners. Instead, OFAC simply prohibits U.S. persons from engaging in transactions with sanctioned entities and individuals. So it is up to companies to design and develop risk-based compliance programs to effectively prevent violations.

Although OFAC guidance has long established that any entity in which a single blocked or sanctioned person owns a 50 percent or greater interest is a blocked entity, OFAC had never specified its policy on entities in which multiple blocked persons hold non-majority ownership shares. The new guidance explains that any entity in which multiple blocked persons own anaggregate share of 50 percent or greater will be blocked. For example, if Company A, an entity not listed on OFAC’s Specially Designated Nationals (SDN) List, is owned 25 percent by SDN-listed Person B and 25 percent by SDN-listed Entity C, then Company A will be deemed a blocked entity.

The OFAC FAQ accompanying the new guidance explains that OFAC applies the same analysis when applying the 50 Percent Rule to the new Sectoral Sanctions, a set of limited restrictions recently imposed on certain Russian entities in response to the ongoing instability in Ukraine. Although the Sectoral Sanctions are limited in nature, they generally prohibit U.S. persons from dealing in “new debt” by, on behalf of, or for the benefit of the sanctioned entities. Under the new OFAC guidance, an entity owned 50 percent or more in the aggregate by one or more persons designated on the Sectoral Sanctions Identification (SSI) List will itself be a target of the Sectoral Sanctions restrictions.

Additionally, when determining whether an entity is a blocked person for U.S. sanctions purposes, ownership percentages are not deemed “diluted” when the SDN or SSI’s interest is indirect.  Instead, an intermediary entity (subsidiary of the SDN or SSI) is considered fully blocked (if owned 50 percent or more by an SDN or SSI entity), and in turn the intermediary’s percentage of ownership is what should be considered in determining whether an ultimate subsidiary (indirect subsidiary of SDN or SSI) is also a blocked entity.

In light of the new OFAC guidance, we strongly advise companies engaged in international business transactions to review their existing sanctions screening and business partner due diligence procedures and enhance their compliance programs to adequately address this new legal risk.

Based in Washington, D.C., our Export Controls team advises and represents clients on the full range of international goods, software, and technology transfer issues. We have broad experience providing export controls and related regulatory counsel to both U.S. and foreign businesses. Our industry-specific experience includes assisting companies in a wide range of industries such as aerospace, defense, firearms and ammunition, electronics, software and information technology, food, consumer products, biotechnology, medical device, and engineering services.

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About this Author

Kara Bombach, Greenberg Traurig, Washington DC, International Trade and White Collar Defense Attorney
Shareholder

Kara Bombach assists companies to lawfully export goods, technology and services around the globe. She places significant emphasis on helping clients achieve practical, workable solutions to complex regulatory situations arising under anti-corruption and anti-bribery measures (U.S. Foreign Corrupt Practices Act (FCPA) and OECD Convention), export control laws (EAR and ITAR), anti-boycott laws, and special sanctions (embargoes) maintained by the U.S. government (OFAC and other agencies) against various countries (including Iran, Cuba and Sudan), entities and individuals....

202-533-2334
Cyril Brennan, Greenberg Traurig Law Firm, Washington DC, International Trade Law Attorney
Shareholder

Cyril (Cy) Brennan focuses his practice on international trade regulation and compliance, with an emphasis on U.S. export controls and economic sanctions. Cy handles matters regarding the International Traffic in Arms Regulations (ITAR), the Export Administration Regulations (EAR), U.S. sanctions programs administered by the Treasury Department’s Office of Foreign Assets Control (OFAC) and the Department of Commerce’s anti-boycott regulations. In addition, he represents clients before the Committee on Foreign Investment in the United States (CFIUS), and advises clients on the Foreign Corrupt Practices Act (FCPA), the foreign direct investment reporting requirements of the Bureau of Economic Analysis (BEA), and other trade and investment-related regulations in the context of mergers and acquisitions.

Concentrations

  • Export controls and economic sanctions

  • Committee on Foreign Investment in the United States (CFIUS)

  • Anticorruption compliance

  • Foreign direct investment reporting

  • Regulatory due diligence

  • Foreign ownership, control or influence (FOCI)

202-533-2342