It’s not a widely-enough known fact that not everyone who is sanctioned appears on a sanctions list. Learn about the 50 percent rule here and, if you work in AML/KYC due diligence, find out how you can do more to catch all sanctioned individuals and entities.
This is an OFAC (the Department of the Treasury’s Office of Foreign Assets Control), EU and UK rule that prescribes that sanctions also apply to companies that are owned in at least 50 percent by sanctioned individuals or entities.
It could be one or more sanctioned individuals/entities that make up that 50 percent threshold. For example, if two sanctioned individuals have a 26 percent stake each in a company then they cumulatively pass the 50% threshold and therefore the company they own is sanctioned.
In other words, the 50% is based on what total percentage of ownership is held by an individual and/or entity that is sanctioned in aggregate NOT what percentage one single sanctioned individual/entity owns of the company (which may be under 50% according to this rule).
What about cases of indirect ownership?
Yes, indirect ownership still counts. Here’s an example from OFAC’s website: Blocked Person X owns 50 percent of Entity A, and Entity A owns 50 percent of Entity B. Entity B is considered to be blocked. This is because Blocked Person X owns, indirectly, 50% of Entity B. In addition, Blocked Person X’s 50 percent ownership of Entity A makes Entity A a blocked entity. Entity A’s 50 percent ownership of Entity B in turn makes Entity B a blocked entity.
So, whether a company is directly or indirectly owned by sanctioned individuals/entities in 50 percent or more, it is sanctioned by association.
See the infographic below for more examples of the 50 percent rule. These examples can help make it clearer.
OFAC recommends being careful if sanctioned ownership nears 50 percent but doesn’t quite make the cutoff. For example, if a sanctioned person owns 48 percent of a company you are investigating.
It’s best to think twice before doing business with such an entity. Get advice from an experienced sanctions compliance expert
If you are an analyst, don’t forget to red flag such an entity, add it to your reports and draw your superior’s attention to it as such a business may require special steps to be taken.
Sanctioned by association (sometimes referred to as “sanctioned by extension”) is the term for those companies that are owned by an explicitly sanctioned individual or entity (or another entity that is explicitly owned by a sanctioned individual or entity) in at least 50 percent. So, yes the terms “50 percent rule” and “sanctioned by association” refer to the same issue, but “sanctioned by association” is the term for the entity that meets the 50 percent rule.
According to experts, those who are explicitly sanctioned (i.e. those whose names appear in black and white on a sanctions list) may make up only 5% of those who are sanctioned. The other 95% belong to wants called narrative sanctions.
What does this mean? Sanctions programs include a narrative statement, which is a broad statement on who else may be sanctioned. Those sanctioned individuals and entities who fall under these broad blanket statements are under so-called narrative sanctions.
If your AML/KYC processes only entail searching sanctions lists, you are likely missing individuals or entities who are sanctioned by extension. Keep in mind, bad actors know about this rule and have been working to hide their ownership or using other methods to obscure their controlling stake in companies.
Read on to find out how you can make your sanctions monitoring more robust.
Before we go on, step one must be to do sanctions screening of the main global sanctions lists (like EU, OFAC, UN, DFAT). You can use Complytron’s sanctions screening tool to this easily and affordably.
Next let’s turn our attention to how you can uncover those people and companies who are sanctioned by association.
Given how hard it is to even pin down who the owners of an entity are and what percentage stake they have, it’s definitely onerous and challenging to try to catch them.
Still to satisfy sanctions regulations, you do have to show that you tried to uncover this information as part of enhanced due diligence. You don’t want to be caught entering a business relationship with a sanctioned entity and then be unable to provide evidence that you did everything possible to avoid it.
So, what can you do?
You risk fines and other penalties if you are caught doing business with someone who is sanctioned by association.
Therefore, as a general rule, you should not enter a business relationship or transact with a client or potential client who is sanctioned by association.
Now you know what the 50 percent rule is and how you can use tools like Complytron’s to try to catch those who may be sanctioned by association, you can help protect yourself and your company from falling foul of sanctions regulations and remain compliant.
Contact us to learn more about how Complytron can help you enforce sanctions regimes. Together we can make the world a safer place free from financial crimes.
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