What is the OFAC 50 Percent Rule?

OFAC (Office of Foreign Assets Control) is a division of the US Department of the Treasury responsible for foreign assets control and for enforcement actions monitoring compliance with economic and trade sanctions. The main goal of OFAC and enforcement actions is to prevent the financing of illegal activities and to protect national security and international and foreign relations and national security both.

One of the main tools of OFAC is the 50 Percent Rule. This rule applies if more than 50% of a company-blocked individual or family member is blocked from conducting business in pursuant, a property-blocked individual, family member or other blocked pursuant, or considered blocked asset belongs to considered blocked individuals from the SDN list. In such a case, all transactions with the entities owned by these considered blocked persons or considered blocked assets are considered by blocked persons too.

OFAC’s 50% Rule is a key mechanism applied to ensure strict compliance with sanctions legislation. According to this rule, if the greater interest of 50% of combined ownership of one or more persons of a sanctioned party ownership of a company, asset, or account is indirectly owned by individuals or organizations from the SDN list, such entities indirectly owned by sanctioned party ownership assets automatically fall under sanctions. This rule ensures that only sanctioned entities attempt no other complex ownership schemes to circumvent the existing sanctions restrictions.

The 50 percent rule is aimed at preventing the circumvention of sanctions, especially in cases where sanctioned entities attempt individuals from the SDN list attempt to conceal their involvement through indirect or combined indirect ownership of assets. Even if sanctioned persons, non-blocked entities’ indirect ownership or combined indirect ownership of the assets are distributed among several entities, but the cumulative indirect or combined indirect ownership made by a sanctioned entity holds an individual from the list exceeds 50%, all assets are considered blocked or subject to blocking.

This rule is actively applied within the framework of various sanctions programs, including OFAC, sanctions lists, programs that block individuals and other restrictions such as sanctions against Cuba, and sanctions lists that provide for the blocking of assets of companies and organizations associated with sanctioned individuals from the SDN list. OFAC’s sanction programs cover a wide range of areas, including control over the financing of terrorism, money laundering, and violations of international law.

In narrative sanctions violation cases where assets from majority SDN-owned entities are blocked per the 50 percent rule, their unblocking will require obtaining a special license from OFAC. This process requires an extended period of time and preparation of complete documentation. Considering the complexity of the procedures and the seriousness of the consequences, it is important to seek assistance from lawyers who will help with compliance with sanctions regulations and legislation.

Compliance with the OFAC’s 50 percent rule is not only a legal obligation but also a way to avoid severe fines criminal prosecution potential penalties, asset freeze sanctions, criminal prosecution, and reputational loss. Consulting with experts will allow you to minimize risks and interact effectively with regulatory authorities and OFAC.

The introduction of the 50 percent rule has significantly limited the ability of organizations to conduct business in sanctioned territories or with companies associated with affected territory or with sanctioned entities from affected territory or with sanctioned individuals from the SDN list. Companies are now required to do due diligence on foreign relations and sanctioned ownership and thoroughly verify the ownership structure of their business partners, to avoid violations and evade sanctions. Errors in complying with the 50 percent rule can lead to asset freezes, fines, and legal consequences.

To address situations and minimize risks of international violence, economic and trade sanctions, and sanctions violations, it is important to turn to OFAC lawyers. Professional assistance will allow for the correct interpretation of sanction rules, avoiding mistakes in processing transactions blocked entities that evade sanctions and maintaining sanctioned individuals’ ability to work legally in international markets.

Non-compliance with the 50 percent rule may lead to serious sanctions for individuals, blocked persons, entities, and legal entities. OFAC strictly has sanctions regulations and monitors the enforcement of non-compliance with this rule to prevent attempts to circumvent sanctions legislation. The most common consequence of violating sanction is large monetary fines, which can reach millions of dollars depending on the severity of the crime. Fines are imposed on SDN-controlled entities, the ownership of the company, and its management.

Apart from financial sanctions, the company may lose its business licences. This part of OFAC sanction is especially relevant for organizations in businesses operating in the financial money services sector, where compliance with the 50 Percent Rule of OFAC regulations is mandatory. Additionally, OFAC sanctions may make regulatory authorities take a greater interest in businesses operating in financial institutions and establish constant monitoring of the company’s activities, including transaction checks, operation control, compliance programs, and mandatory reporting.

Violation of the 50 percent rule causes serious damage to the company’s reputation. Information about sanctions becomes public, leading to a loss of trust from clients, business partners, and investors. To prevent such consequences, it is important to regularly consult with lawyers, check counterparties for compliance with sanction legislation requirements, and use reliable databases to analyze complex ownership structures and control structures. Compliance with the rules allows a greater interest in avoiding fines and preserving the company’s reputation.