As you may know, the OFAC 50 Percent Rule guidance says that entities owned by 1 or more sanctioned parties subject to the same types of sanctions (e.g. asset freezes, capital markets restrictions, etc.) are considered sanctioned themselves if the ownership stake of the sanctioned parties reaches 50% or greater when aggregated. It then also applies to entities owned “indirectly” by the sanctioned parties – that means that by looking at the holdings of the entities owned by those directly-owned organizations. And so on, and so on….
Now, you may have seen analyses trying to do the math (misleadingly) by showing a case where sanctioned person A owns 100% of company B, which owns 50% of company C and declaring C sanctioned due to A’s 50% indirect ownership. Just to make this less sterile (I hate using letters and numbers – it seems too theoretical), let’s call A “Anderson Co.”, B “Ballet Products Inc” and C “Crayon Corp”.
But that’s not the right way to look at it. Crayon Corp is sanctioned because Ballet Products owns 50% – because Ballet Products is treated as if it had been sanctioned explicitly by OFAC (e.g. subject to the application of the 50 Percent Rule) due to Anderson’s ownership stake in it.
You may wonder why this is the proper way to look at this. After all, if Anderson only owned 50% of Ballet Products, then its indirect ownership of Crayon Corp is only 25％. So, Crayon Corp shouldn’t be sanctioned, right?
Actually, no – Crayon Corp is still sanctioned. And let me explain, in real world terms, why.
IF Anderson owns 50% of Ballet Products, unless there is uniform opposition from the remaining owners (which is why I personally prefer the EU model, which requires an actual majority), it controls all of Ballet Product’s actions – not just 50%. And similarly, Ballet Product’s stake in Crayon Corp controls all of Crayon Corp’s actions. So, Anderson “only” having 25% indirect ownership clearly understates the actual amount of control – as an objective matter, it controls Crayon Corp. So, Crayon Corp should be considered sanctioned because of Anderson’s ability to control its activities.
Hope that helps…
BTW, I have no idea if this same calculation applies to the EU control and ownership guidance (I don’t even recall how I learned about this on the OFAC side), but logic says it should…