Sanctions are a tool that is used by the initiator of restrictive measures to put pressure on geopolitical rivals, individual states or certain territories. States and organizations impose sanctions and create liabilities for their violation at the legislative level.

However, direct sanctions do not always lead to the desired political result for their initiator. Countries under sanctions look for and successfully find new ways of development, new business partners, open up new markets and often even take advantage of the current situation.

The beneficiaries of the expansion of the scope of sanctions measures are the United States. A division of the United States Department of the Treasury, the Office of Foreign Assets Control, commonly known as OFAC, is the originator of the 50% Rule.

For the first time OFAC applied the 50% Rule in 2008 as part of its Iran containment program. Subsequently, the Rule was extended to other sanctions programs.

According to the 50% Rule, any entity that is 50% or more owned, directly or indirectly, by one or more sanctioned entities is also treated as a sanctioned entity, even if it is not on the list.

The purpose of the Rule was to extend sanctions to all entities that may be directly or indirectly associated with individuals and companies under sanctions.

Let's take a look at the application of the 50% Rule with a few examples.

Person X is sanctioned and owns 60% of Company A. Company A owns 50% of Company B. At the same time companies A and B are not on the sanctions list.

According to the 50% Rule both companies A and B are subject to sanctions restrictions.

Person X is sanctioned and owns 40% of Company A. Company A owns 80% of Company B. At the same time companies A and B are not on the sanctions list.

According to the 50% Rule companies A and B will not be subject to sanctions restrictions.

Person X and Company are under sanctions. Person X owns 4% and Company owns 47% of Company A. At the same time company A is not on the sanctions list.

According to the 50% Rule shares of persons under sanctions are added up, so Company A is also subject to restrictions.

Person X is under sanctions and owns 50% of Company A and 25% of Company B. In their turn companies A and B own 25% of Company C. At the same time companies A, B, C are not on the sanctions list.

According to the 50% Rule Company A is subject to sanctions restrictions. Company B is not subject to the restrictions because the person under sanctions owns only 25%. Company C will also not be considered as being sanctioned, since the indirect ownership of Person X in the company is less than 50%.

On the legislative level only the United States Department of the Treasury, the European Commission and His Majesty's Treasury use the 50% Rule. Nevertheless, other political players in the market of sanctions regimes, such as Japan, Canada, Switzerland, call the US, the EU and the UK their partners, therefore, for full-fledged sanctions compliance, it is recommended to carry out a check according to the 50% Rule for all countries and organizations leading sanctions lists.

You can check your counterparty for sanctions risks, including the 50% Rule, in Globas using the Sanctions Compliance module.

Direct sanctions do not always lead to the desired political outcome, even given the availability of tools to apply the 50% Rule. Therefore, regulators may apply other mechanisms of secondary sanctions.

Secondary sanctions, from the point of view of their initiator, should perform the following functions:

One of examples of secondary sanctions is the $2 million fine imposed on Exxon Mobil for signing an agreement for cooperation with PJSC Rosneft Oil Company (INN: 7706107510) in 2014. At the time of signing the agreement, PJSC Rosneft Oil Company was not included in the sanctions lists and was not subject to restrictive measures under the 50% Rule. However, the Chief Executive Officer of Rosneft, Igor Sechin, who signed the document, was on the sanctions list. That served as a basis for the imposition of a fine.

This case became an occasion for compliance officers to check not only the formal presence of the company on the sanctions lists, but also to analyze all related and affiliated persons.

In the recent years, the Russian business faces the large number of new risks. Risks revealed especially sharply in the ongoing sanctions pressure, counter-sanctions regulation as response to sanctions, as well as in many novellae leges and changes in the Russian legislation.

Currently, compliance procedures are not limited to sanctions screening, but also include keeping the Register of Foreign Agents and related parties and checks against the list of PEPs.

What sanctions does the Russian business need to comply with, what additional sources are used for the deep check of counterparties, and how the functionality of the new Sanctions Compliance module in Globas will help to carry out the deep check of the Russian and foreign counterparties - this is what our April Newsletter is about.

Sanctions are measures taken by governments and international organizations to restrict economic, political or other types of relations with a certain country, organization or part of the territories. Sanctions may include a ban on the export and import of goods, restrictions on financial and banking transactions, entry bans for certain individuals, asset freezes, and other measures.

Over the past year, Russia has been subject to extensive sanctions by a number of states and organizations. Such beneficiaries of sanctions as the USA, the European Union, Great Britain, Canada, Switzerland applied new types of restrictions and programs with each new package of sanctions. At the same time, within one country, there may be several different sanctions regimes, which are controlled by different departments and branches of the government.

Secondary sanctions also affected Belarus, as well as Russia's partners around the world. Some countries that did not previously use sanctions measures have now introduced their autonomous sanctions regimes at the legislative level. For example, Poland and New Zeeland.

Russian persons are bound only by sanctions imposed by Russia itself, as well as sanctions approved by the UN Security Council, of which Russia is a permanent member. Thus, Russia is participating in the coordination of the introduction of various restrictions.

Many organizations and individuals must take into account the presence of sanctions risks, depending on the specifics of their business. This is especially important for persons conducting foreign economic activity, for branches of foreign companies, banks, non-residents of the Russian Federation and companies that deal with foreign partners and use foreign currency for settlements. Screening for sanctions is an important security measure for such entities.

Due to the variety of sanctions regimes and sources, manual verification of the presence of sanctions risks becomes difficult. Given the current geopolitical situation, we can conclude that the sanctions rhetoric of some global political players will not weaken, but most likely will only increase.

To thorough check of a counterparty for sanctions risks, it is necessary to take into account all possible threats and conduct a research efficiently and quickly.

Sanctions Compliance, a new Globas product, will assist in reducing time for partners screening and carring out full compliance control if necessary.

The Sanctions Compliance module contains detailed information on sanctions and restrictions, including the 50% Rule, as well as additional sources and deeper analysis of companies, individuals and objects under restrictions.

Sanctions Compliance facilitates the process of sanctions check by providing many options:

In addition to the sanctions lists, there are also other restrictive registers, the keeping of which is regulated by the legislation of the Russian Federation.

On December 1, 2022, Federal Law No. 255-FZ of July 14, 2022 “On the Control over Activities Carried out by Persons under Foreign Influence” came into force. According to the Law, persons under foreign influence can be recognized as foreign agents.

A foreign agent is a person who has received support from foreign sources or is under foreign influence.

Among the restrictions and prohibitions associated with the foreign agent status, the following could be highlighted:

Violation of the legislation of the Russian Federation on foreign agents entails administrative, criminal and other liability.

Given the specifics of one's business, it may also be important to check partners for the inclusion in the Register of Foreign Agents, as well as Persons Affiliated with Foreign Agents.

Using the Sanctions Compliance module in Globas, you can check whether your counterparties are included in the Register of Foreign Agents, as well as in the Register of Persons Affiliated with Foreign Agents. The module also allows to check if persons were previously included in the Register.

For additional check of counterparties, it is worth paying attention to checking individuals belonging to the category of Publicly Exposed Persons (PEPs). Such persons should be under special control by companies that are subjects of No. 115-FZ Federal Law in order to prevent possible abuse of their position. For this purpose, companies must track PEP-related transactions, identify the sources of the capital, and report these transactions to Rosfinmonitoring if it is beleived such sources may be related to money laundering.

The Sanctions Compliance module contains a list of PEPs, which includes both active and archived PEPs records. Check of individuals may be conducted in a separate PEP list, with the use of Requires attention factors in the company profile and in the Sanctions Compliance report.

Active Globas users have an opportunity to try out the module at no cost. To get trial access, please, send a request or contact your manager.