The OFAC 50 percent rule for vendors: when an unlisted supplier is blocked through its owners

The rule in OFAC's words

The current statement is OFAC's revised guidance of August 13, 2014. It starts from how broadly OFAC defines blocked property, including interests of any nature, direct or indirect, and then sets the rule: blocked persons are considered to have an interest in all property of an entity in which they own, individually or in the aggregate, directly or indirectly, a 50 percent or greater interest. “Consequently, any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.”

The listing question is answered in the next sentence. The entity's property is blocked “regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC's list of Specially Designated Nationals.” The practical consequence for a payer follows: “a U.S. person generally may not engage in any transactions with such an entity” unless OFAC authorizes it.

OFAC repeats the point in its basic FAQs. FAQ 91 says some sanctions block categories of persons not on the SDN List, including persons blocked under the 50 percent rule, and that “The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed on the SDN List.” FAQ 9 lists such entities alongside SDNs and blocked governments as blocked persons whose property must be reported within 10 business days.

The guidance also notes that some programs, such as Cuba and Sudan at the time, block a broader category of entities based on, for example, ownership or control. Program rules can go further than the 50 percent rule; they do not go narrower.

Aggregation across blocked owners

The 2014 revision exists because of aggregation. Before it, the question was whether a single blocked person owned 50 percent; now the stakes of all blocked owners are added together. FAQ 399 gives the simplest case: if Blocked Person X owns 25 percent of Entity A and Blocked Person Y owns another 25 percent, Entity A is blocked, because it is owned 50 percent or more in the aggregate by blocked persons.

The owners do not have to be under the same program: “For the purpose of calculating aggregate ownership, the ownership interests of persons blocked under different OFAC sanctions programs are aggregated” (FAQ 399). A supplier with two minority owners designated under unrelated programs can therefore be blocked even though neither owner controls it and neither program targets its country.

Indirect ownership: OFAC's five examples

FAQ 401 defines indirectly as ownership of shares through another entity or entities that are 50 percent or more owned in the aggregate by the blocked persons. The rule cascades through a chain only where each link is itself blocked. OFAC's examples, in summary:

Example 4 is the one most often misread. OFAC does not multiply percentages down a chain; a blocked person's stake passes through an intermediate entity only if that entity is itself blocked. In OFAC's explanation, because Entity B is not 50 percent or more owned by X, X is not treated as owning any of Entity C through its stake in B.

Control is not ownership, but signatures matter

FAQ 398 is direct: “OFAC's 50 Percent Rule speaks only to ownership and not to control.” An entity a blocked person controls without owning 50 percent is not automatically blocked, although OFAC may designate it and add it to the SDN List.

That does not make such a vendor safe to deal with. The 2014 guidance advises U.S. persons “to act with caution when considering a transaction with a non-blocked entity in which one or more blocked persons has a significant ownership interest that is less than 50 percent,” or which blocked persons may control by other means, because such entities may be the subject of future designation or enforcement action. And FAQ 400 closes the obvious gap: a blocked individual acting for an unblocked company is still a blocked person, so “U.S. persons may not, for example, enter into contracts that are signed by a blocked individual.” Screening the signer on a vendor agreement, not just the vendor, is how an AP or procurement team applies this.

The guidance adds that a U.S. person may not procure goods, services or technology from, or engage in transactions with, a blocked person directly or indirectly, including through a third-party intermediary.

What it means for a vendor that is not listed

For a payer the rule changes what a clean screen proves. A negative result on the vendor's name shows that the vendor itself is not listed; it does not show that the vendor is not blocked. If the vendor is owned 50 percent or more by blocked persons:

• payments to it are prohibited dealings with a blocked person, absent an OFAC license;
• funds or other property of the vendor that come into your possession or control must be blocked and reported within 10 business days, as described in blocked or rejected payments and OFAC reporting;
• OFAC's FAQ 5 chart lists entities blocked under the 50 percent rule in the block column, next to SDNs and blocked governments.

Because the vendor has no list entry, there is nothing for screening software to match on the vendor's own name. The only route to the answer is the owners.

Due diligence on ownership

OFAC's guidance on how far to go is framed as an expectation rather than a rule. FAQ 401: “OFAC urges persons considering a potential transaction to conduct appropriate due diligence on entities that are party to or involved with the transaction or with which account relationships are maintained in order to determine relevant ownership stakes.” The Framework treats ownership as part of the risk assessment and lists, among the root causes of past violations, “improper or incomplete due diligence by a company or corporation on its customers, such as their ownership, geographic location(s), counter-parties, and transactions.” Its risk assessment section names supply chain and counterparties alongside customers.

Applied to vendor onboarding, what is appropriate scales with risk. A practical, risk-based approach that follows OFAC's framing:

• Ask. For foreign vendors, vendors in higher-risk regions, and vendors paid by international wire, collect the direct owners and the ultimate parents, and screen them. Because OFAC adds up all blocked owners' stakes, small holdings matter once one blocked owner turns up.
• Screen the people. Owners, directors and the person who signs the contract or the bank change form.
• Trace chains. Where an owner is itself a company, apply OFAC's examples: follow the stake through only if the intermediate company is 50 percent or more owned by blocked persons.
• Record it. Keep what was provided, what you screened and the conclusion. OFAC's recordkeeping rule in 31 CFR 501.601 is 10 years.
• Refresh it. Ownership changes; designations of owners change. Re-ask on a change of control, a change of bank country, or a new designation that touches a known owner.

The vendor onboarding checklist and the carrier onboarding packet are where an ownership question fits. For foreign vendors the same intake gathers the W-8; see foreign vendors, W-8 and 1042-S.

When ownership is unclear

OFAC's published guidance does not give a safe harbor for ownership you cannot determine, and it does not say a payer may assume an entity is unblocked. What it does say:

• Escalate before acting. Where an alert points to an unlisted entity blocked by operation of law, FAQ 5 says to “consider escalating the issue to your supervisor or compliance department before taking action because OFAC regulations may prohibit the transaction or require blocking.”
• Use caution with significant minority or control positions. The 2014 guidance and FAQ 398 urge caution where blocked persons hold a significant stake below 50 percent or control by other means.
• Make a risk-based decision and document it. FAQ 5 recommends that organizations weigh all the information available and make a risk-based decision in line with their policies and risk profile.
• Ask OFAC where needed. OFAC's Compliance Hotline takes questions about its guidance, and OFAC's FAQs repeatedly encourage parties to contact OFAC with questions about their transactions. Specific licenses are applied for under 31 CFR 501.801.

In practice, a vendor that will not tell you who owns it, where blocked persons are known to be involved in its sector or region, gives you an unresolved alert. The decision whether to pay belongs with compliance or counsel, not with the AP clerk who processed the invoice.

When ownership changes

FAQ 402 deals with divestment. If blocked owners sell down below 50 percent in a transaction entirely outside U.S. jurisdiction, the entity is no longer automatically blocked going forward, but OFAC urges caution and says “Sufficient due diligence should be conducted to determine that any purported divestment in fact occurred and that the transfer of ownership interests was not merely a sham transaction.” Property you already blocked stays blocked until OFAC authorizes its release or removes the relevant persons from the SDN List; a later fall in ownership does not unblock it.

The rule and non-SDN lists

The 50 percent rule is a blocking rule, but OFAC applies the same ownership test in some non-blocking programs. For the Ukraine-/Russia-related sectoral sanctions directives (the SSI List), OFAC says the prohibitions apply to the named persons and their property and interests in property, “which includes entities owned 50 percent or more by one or more persons identified as subject to the Directives” (FAQ 373). There the result is the directive's restrictions, not blocking. Each non-SDN list's program rules decide.

Questions people ask

Related in this round: OFAC sanctions screening for vendor payments and blocked or rejected payments and OFAC reporting. Industry context: logistics and freight and marketplaces and gig platforms.