![SMP Bank Credit Cards via http://smpbank.ru/uploads/show/c20c2f8bd8d7d2550bdd3b4c38bbdd00839d8fd2.jpg [Fair Use]](https://www.exportlawblog.com/images/SMP_Bank.jpg "SMP Bank Credit Cards via http://smpbank.ru/uploads/show/c20c2f8bd8d7d2550bdd3b4c38bbdd00839d8fd2.jpg [Fair Use]")
The Office of Foreign Assets Control (“OFAC”) today issued new guidanceand revised its FAQs, on its notorious fifty-percent rule. Under that rule, an entity in which a blocked person has a fifty percent interest or greater is itself blocked, even though it may not be listed on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SDN List.”).
Under the new guidance, if multiple blocked parties own an interest in an entity, their interests will be aggregated and that entity will be blocked if that aggregated interest is 50 percent or more. So if SDN1 holds 1 percent of Company X and SDN2 holds 49 percent of Company X, Company X will be blocked because the aggregated interests of SDN1 and SDN2 equal 50 percent.
This new rule is not merely a clarification policy but a clear reversal of guidance previously given by OFAC. As you may recall, when Arkady and Boris Rotenberg, co-owners of SMP Bank, were added to the SDN List back in March, Visa and Mastercard initially stopped allowing their cards to be processed through SMP Bank. The two credit card companies had a change of heart after having been apparently advised by OFAC that there was no need to aggregate the Rotenberg brothers individual 38.5 percent interests. Then, at the end of April, OFAC designated SMP Bank and Mastercard and Visa cut them off again from their international payment system. Why OFAC has changed its mind here on aggregation is not clear.
Ironically, this new rule may have more negative impact on U.S. businesses than it will on Putin and his friends because it will make SDN screening quite difficult in many cases. Under the old rule, when evaluating whether an entity was blocked, you only needed to screen individuals with an interest of 50 percent or more. Under the aggregation rule, you must now screen every owner to see whether multiple owners are blocked and in the aggregate hold an interest of 50 percent or more. It seems no one at OFAC thought about this.
Yes, we got the old interpretation in writing from Compliance. I think that’s why they felt they had to issue a new guidance document rather than just the FAQ.
Actually, looks like you don’t have to screen all the owners. As long as the ‘clean’ individuals own >50 percent in aggregate, you don’ have to screen the others.
Dmitry – Good point. You only need to screen until you get just over 50% of the owners and verify that they are not on the list. Still, rather than screening one or two individuals you will have to screen more and, possibly, many more owners.
And, in the case of companies owned by multiple holding companies, the web remains complicated, since one has to determine the ‘clean’ status of each company that owns shares in a company (up until 50% +1 are clean).
Also, how would one account for circular holdings, where Company A owns X% of Company B in exchange for B owning Y% of A?