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 50% Rule
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.
Example 1:
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.
Source - credinform.ru/en-GB
According to the 50% Rule both companies A and B are subject to sanctions restrictions.
Example 2:
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.
Source - credinform.ru/en-GB
According to the 50% Rule companies A and B will not be subject to sanctions restrictions.
Example 3:
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.
Source - credinform.ru/en-GB
According to the 50% Rule shares of persons under sanctions are added up, so Company A is also subject to restrictions.
Example 4:
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.
Source - credinform.ru/en-GB
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.
Other secondary sanctions
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:
- increase sanctions pressure;
- expand the range of sanctions measures;
- increase the effectiveness of sanctions measures;
- prevent the sanctions evasion.
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.
Globas
Sanctions Compliance
A new module has been added to Globas for deeper sanctions check of counterparties. The check is conducted by over than 40 new criteria. The Sanctions Compliance provides an opportunity to check Russian and foreign companies, individuals, water and air transport. Persons associated with companies are also checked: beneficiaries, owners, managers, affiliates and subsidiaries. The module contains extensive information about the imposed sanctions and restrictions, including the 50% Rule, additional sources and deeper analytics on companies, individuals and objects that are subject to restrictions and various negative registers.
