Insights

When the Office of Foreign Assets Control (“OFAC”) sanctions a person or entity by adding that person or entity to OFAC’s Specially Designated Nationals and Blocked Persons List, or SDN List, their property, funds, and business interests in the United States are generally frozen, or “blocked,” and U.S. persons and businesses are prohibited from doing business with them unless OFAC authorizes the transaction.

Under OFAC’s 50% Rule, an entity can also be treated as blocked even if its own name does not appear on the SDN List. The rule applies when one or more blocked individuals or entities, either directly or indirectly, own 50 percent or more of another entity.

For example, if a single blocked person owns 50 percent or more of Company A, Company A is also treated as blocked.

The same rule applies when multiple blocked persons collectively own 50 percent or more of an entity, meaning ownership may be aggregated (even if designated under different sanctions programs).

In either case, the entity is blocked by operation of law, and U.S. persons generally cannot conduct business with it without OFAC authorization. In 2023, Microsoft paid OFAC roughly $2 million after it and certain subsidiaries provided software or services to sanctioned jurisdictions and blocked persons. Microsoft’s screening systems failed to identify entities that were not named on the SDN List but were owned 50 percent or more by SDNs.

The rule exists because sanctioned individuals and entities do not always conduct business in their own names. A blocked person may operate through a subsidiary, affiliate, holding company, shared ownership arrangement, or other legal structure involving non-blocked individuals. OFAC established the 50% Rule in 2014 to prevent blocked parties from circumventing sanctions through these indirect business activities.

There are a few important considerations with this rule:

• If a blocked entity sits at the top of a corporate structure and owns 50 percent or more of its subsidiaries, those subsidiaries may also be treated as blocked, even if they do not appear separately on the SDN List.

• State-owned companies in heavily sanctioned jurisdictions, such as China and Russia, may be subject to the 50% Rule even if they are not listed by name. Exporters should therefore conduct due diligence to identify ownership by SDN-designated parties and other blocked persons.

• Using a third-party distributor does not eliminate sanctions responsibility.

• Companies should also screen across languages, aliases, and name variations. A compliance program that screens only English-language names may miss restricted parties in higher-risk markets.

• Software downloads, license activations, product keys, renewals, updates, cloud-based access, and technical support may all constitute prohibited exports or services when provided to restricted parties.

• Voluntary disclosure, cooperation, and remediation can reduce the final penalty.

• The same conduct can raise sanctions issues under OFAC and export-control issues under the Commerce’s Bureau of Industry and Security (“BIS”), as Microsoft separately settled with BIS for related export-control violations.

Why List Screening and Ownership Checks Are No Longer Enough

Although OFAC’s 50% Rule is formally an ownership rule—not a control rule—companies should be careful not to read that distinction too narrowly. OFAC has long stated that an entity is not automatically blocked solely because it is controlled by an SDN, unless blocked persons own 50 percent or more of the entity, directly or indirectly. At the same time, OFAC has cautioned in its published guidance that dealings involving SDNs, including arrangements in which SDNs hold positions of control, can still increase sanctions risk. More recently, OFAC’s guidance on sham transactions has made it clear that the analysis cannot stop with name screening or a mechanical ownership calculation.

In practice, OFAC expects companies to consider whether a blocked person continues to control, benefit from, or retain an interest in property or an entity, even after a supposed transfer or restructuring. That means U.S. parties may need to look beyond formal ownership records and evaluate the practical and economic reality of the transaction. If a blocked person appears to have reduced ownership below 50 percent but still directs decision-making, benefits economically, uses proxies, or retains influence through family members, shell companies, trusts, or other intermediaries, the transaction may still raise sanctions concerns.

That is where OFAC’s sham transaction guidance becomes important. A sham transaction occurs when a blocked person appears to transfer property or ownership on paper but continues to benefit from, control, or retain an interest in that property in practice. ¹ Blocked persons may use a range of legal structures and assets to conceal their continued control or interest in property.

For example, a sanctioned person who owns 60 percent of a company may attempt to “sell” 20 percent to a family member or shell company to avoid the 50% Rule. On paper, the person now owns only 40 percent. In practice, however, the transfer may not meaningfully change who controls or benefits from the company.

Despite these measures, OFAC looks to the practical and economic reality of a transaction, not merely its formal legal structure. A transfer that does not genuinely end the blocked person’s interest may not remove the property from blocked status.

Furthermore, OFAC also advises exporters to look for red flags suggesting that a transaction may be designed to conceal a blocked person’s continuing interest.² These include:

• Commercially unreasonable transactions. If a blocked person transfers property for little or no payment to a related party or on terms that appear highly unfavorable, the transaction may raise concerns (i.e., if a person “sells” shares worth millions of dollars to a friend for one dollar).

• Transfers to close associates, family members, friends, or proxies.

• Transfers lacking a clear business purpose.

• Vague or unclear responses when parties fail to clearly explain the blocked person’s role, the source of funds, the purpose of the transfer, or whether the blocked person continues to benefit from the property.

• Transfers to individuals with no relevant experience, background, expertise, or practical ability to manage the company or property.

• Unnecessarily complex ownership structures, such as multi-layered limited liability companies, partnerships, trusts, holding companies, or offshore structures.

• Holding entities in unrelated jurisdictions with no clear connection to the business, property, owners, or transaction.

• Transfers close in time to sanctions action, such as shortly before or after an OFAC designation, an expected sanctions announcement, or another major sanctions-related development.

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Ultimately, OFAC generally expects companies to conduct appropriate due diligence when reviewing ownership interests in a potential transaction. Because sanctions enforcement implicates national security concerns, companies should take a conservative approach to ownership due diligence. The safest approach is to look beyond formal ownership documents and examine the practical reality of control and ownership.

Our team has developed its own due diligence methodology, supported by best-in-class intelligence software and former government investigators, to assist companies in conducting complex sanctions, ownership, and control reviews. Companies seeking support with high-risk or complex due diligence matters are encouraged to contact us for assistance.