On Wednesday, August 13, 2014, the US Office of Foreign Assets Control (“OFAC”) issued “Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property are Blocked” (the “revised guidance”). This revised guidance is effective today, August 14, 2014, pursuant to its publication in the Federal Register. This revised guidance replaces previous guidance that OFAC issued on this topic on February 14, 2008 (the “previous guidance”).
U.S. Persons are prohibited from dealing, directly or indirectly, with Specially Designated Nationals (“SDNs”). Further, any property or property interests of an SDN is blocked if it comes within the United States or in the control or possession of a U.S. Person. As described in the previous guidance, until today, OFAC policy was to treat any entity that is 50% or more owned by a single SDN to itself be an SDN, even if not explicitly listed on OFAC’s SDN List.
Under the revised guidance, now any entity owned 50% or more in the aggregate by one or more SDNs is considered to be an SDN. As a result of this policy change, U.S. Persons would need to cease dealings with entities that, though they were not SDNs under the previous guidance because no single SDN held a 50% or more ownership interest, would now be considered to be SDNs because the ownership interests of two or more SDNs in the aggregate total 50% or more of the entity’s ownership. Not only will this affect how companies conduct due diligence into third parties going forward, but it may trigger the need to reopen due diligence efforts for third parties determined not to be SDNs under the previous guidance.
Furthermore, OFAC has issued updated FAQs that reflect the revised guidance as well as provide clarification on other related issues, such as how to calculate 50% ownership in the context of complex ownership structures with SDNs holding interests in an entity directly or indirectly via several chains of entities.
This 50% ownership analysis has been a hot topic in the context of the Ukraine-related sanctions given the sweeping impact of those sanctions on mainstream companies in Russia and those companies’ constantly changing ownership structures. That said, it is important to recognize that the revised guidance applies to SDNs designated under any sanctions program, not just those designated under the Ukraine-related sanctions.
Also, despite the fact that the guidance itself only refers to SDNs, the FAQs confirm that the revised guidance also applies to entities on the Sectoral Sanctions Identification List (“SSIL entities”) designated under the Ukraine-related sanctions, with respect to whom U.S. Persons are subject to more limited restrictions on “new debt” of longer than 90 days maturity and/or “new equity”. That is, entities that are 50% or more owned in the aggregate by more than one SSIL entity are now themselves considered to be an SSIL entity.
