The Exponential Reach of OFAC's 50 Percent Rule
The Office of Foreign Asset Control (“OFAC”) division of the Department of the Treasury requires compliance with respect to all “Specially Designated Nationals” (“SDNs”), whether they are published by OFAC or derived through application of OFAC’s “50 Percent Rule”(so-called “unlisted SDNs”). This blog explains the mechanical operation of the 50 Percent Rule to illustrate its exponential reach.
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ny transaction with an SDN by a U.S. person is generally prohibited and U.S. persons must block any property in their possession or under their control in which such parties have an interest. SDNs are both published by OFAC (“listed SDNs”), and derived, through application of OFAC’s 50 Percent Rule (“unlisted SDNs”). In addition, pursuant to the “once an SDN, always an SDN rule”, property of an SDN (whether listed or derived/unlisted) that came into the U.S. jurisdiction or within the possession or control of a U.S. person remains blocked even if ownership is subsequently transferred. Penalties are program specific: civil penalties can reach $1 million for each violation and criminal penalties can reach $10 million and imprisonment up to 30 years.
Exponential Growth of Unlisted SDNs
Because of OFAC’s 50 Percent Rule, the number of unlisted SDNs is exponentially larger than the number of listed SDNs. In the case of China (including Hong Kong), there are hundreds of listed SDN entries. A technical application of OFAC’s 50 Percent Rule on the WireScreen platform yields thousands of entities and over 10,000 Chinese entities having indirect SDN connections.
How are Unlisted SDNs derived?
An unlisted SDN is derived by being 50 percent or more owned individually or in the aggregate by one or more listed SDNs or unlisted SDNs. See OFAC’s guidance on the subject here https://perma.cc/JWD9-A72X and here https://perma.cc/HR24-W2X7.
In the simple case, a listed SDN causes its first tier subsidiary to be an unlisted SDN.
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In a slightly less simple case, each unlisted SDN has the ability to cause additional unlisted SDNs down each tier of ownership. In this example, the third tier subsidiary and each subsidiary before it are unlisted SDNs. This is despite the fact that the listed SDN only has an indirect interest of 12.5% and 25%, of the third tier and second tier entities, respectively. In the event there were fourth tier subsidiaries and beyond (with a 50% interest at each level), all of them would also be unlisted SDN. There is no published limit to the number of unlisted SDNs provided the 50 Percent Rule is met.
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More complex cases exist when the aggregate component of the 50 Percent Rule is applicable. In this example, the first tier subsidiary is an unlisted SDN because the interests of its two SDN shareholders are aggregated. Since the first tier entity is an unlisted SDN, it produces unlisted SDNs at the second and third tier the same as the previous example.
The following video provides a narrated example of how unlisted SDNs are derived.
Video by Pete James, WireScreen's Director of Training and Development
Navigate China’s business landscape, identify risk, and spot opportunity.
