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US sanctions against the Russian Federation have become diverse and multi-level. As a result, it’s challenging to interpret and apply them to a particular case. However, there are certain fundamental principles that everyone needs to know to understand how the sanctions work in general and to whom they can apply. One of the basic principles is the 50 Percent Rule.
The 50 Percent Rule
The 50 Percent Rule was developed by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury and set out in the OFAC Guidance of August 13, 2014 . This rule applies to any tangible and intangible property held in the present or future, including “present, future, or contingent interests.”
The essence of the rule is that any company in which a blocked person owns 50 % or more is also considered to be blocked. Such ownership can be individual or in the aggregate, direct or indirect. Moreover, this company and all its assets are deemed blocked, regardless of whether the entity was mentioned in the US sanctions list. Therefore, to carry out any transaction with such a company without violating the US sanctions regime, it is a must to obtain an OFAC license. In addition, the OFAC Guidelines warn against any possible transactions with companies where a blocked person has a significant interest, even if it is less than 50 %. Such companies may become candidates for inclusion in the US sanctions list shortly.
“Indirect” and “Aggregate” Ownership
Once we know the 50 Percent Rule, the critical question is how “indirect” and “aggregate” ownership are interpreted here. For example, if a blocked person owns 50 % of Company A, and Company A, in turn, owns 50 % of Company B, then Company B is also considered blocked. This is regardless of whether it is on any sanctions lists.
To continue this example, if Companies A and B each own 25 % of Company C, then Company C is also considered under US sanctions. The logic here is the following. The blocked person owns 25 % of Company C through Company A and 25% through Company B, which the person owns indirectly through Company A. Thus, the blocked person indirectly owns 50 % of Company C in the aggregate.
Let’s take another example. In this case, the blocked person owns 50 % of Company A and 30 % of Company B. Companies A and B each own 25 % of Company C. Company C will not be considered blocked. While the blocked person owns 25 % of Company C through Company A, in which he has a 50 % interest, he owns less than 50 % of Company B. Thus, it turns out that the person under sanctions does not own indirectly in the aggregate 50 % of the Company C.
Please note that we provide all of the above explanations for general guidance only and do not recommend applying them to business situations related to the US sanctions regime without professional advice. If you have questions about any issues related to US sanctions on Russia, you can contact us, and we will tell you what we can do for you.