OFAC Expected to Increase Enforcement of 50 Percent Rule

The Treasury’s Office of Foreign Assets Control is expected to increase enforcement of its 50 percent rule, placing more of a burden on companies to determine whether they are indirectly dealing with a sanctioned party, said Joshua Shrager, a former Treasury official and a senior specialist with Kharon, a sanctions advisory firm. While the 50 percent rule -- which bans transactions with a company owned 50 percent or more by a sanctioned party -- is growing increasingly complicated due to a rise in U.S. sanctions, OFAC’s compliance expectations are rising too, Shrager said.

“We’re going to see more enforcement,” Shrager said, speaking during a Dec. 13 event in Boston hosted by the Massachusetts Export Center. Companies are feeling a heavier compliance burden due to a rise in publicly available information on sanctioned companies, which places more onus on non-sanctioned companies to do exhaustive research, Shrager said. “There’s more and more pressure from the Treasury Department and regulators that we’re expected to find out this information and understand it,” he said. “And that becomes a threshold that's very hard for all of us to keep up with.”

Companies also do not have a definition for “publicly available information,” Shrager said, leaving some questioning how extensive their due diligence needs to be. “When is something publicly known?” Shrager said. “If it’s a public corporate record in Russia that you could find if you spoke Russian and looked correctly, does that meet the threshold? I don't know.” OFAC has not provided a “real answer” to this, Shrager said, leaving companies combing through enforcement cases for hints. “That’s the best way we understand the evolving thoughts of OFAC and of the regulators to enforce the 50 percent rule,” he said.

Although the 50 percent rule bans transactions with companies that are majority-owned by sanctioned parties, OFAC has cautioned companies from dealing with companies that come close to the threshold, Shrager said. He added that Treasury is considering amending the rule to the “45 percent rule or the 35 percent rule,” which would sufficiently increase compliance obligations. “Truth be told, who knows if that’s going to happen,” Shrager said. “But in the meantime … they expect an air of caution for ownership under the majority.”

Shrager also said industries would like more guidance from OFAC despite the agency’s recent attempts to provide sanctions clarity through frequently asked questions. “The FAQs, we see that they get beefed up, but maybe not to where we all would hope they would be,” he said. A complicated problem where guidance may be needed, Shrager said, is when a U.S. company begins a multi-month, expensive project with a non-sanctioned foreign business, but the business is later placed on a U.S. sanctioned list when the project is nearly complete. The U.S. company may be responsible for the costs of the project without receiving any of the benefits.

In that situation, Shrager recommended that companies call OFAC, explain their situation and apply for a license. Companies should also document and record their screening checks to prove they made the effort. “At least have that conversation,” Shrager said. “Say, ‘look, we’re on it, we’re doing our due diligence.’”

Even with maximum due diligence and resources, companies can still struggle with sanctions compliance, Shrager said. “Even to the best of your knowledge, effort and everything else, you could say, well, they look good, no red flags … but the political winds are blowing so rapidly now,” he said. “The current environment we all see where it’s new sanctions daily -- that’s the reality.”