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What is the 50 percent rule? – FAQ and Everything you need to know

07.23.2024 | SymphonyAI team
 

The US, UK, and EU all have a 50 percent rule in their sanctions regulations but what does it mean? 

Monitoring customers is critical to modern banking. Through know your customer (KYC) and customer due diligence (CDD) processes, a bank or financial institution is equipped to understand exactly who they are dealing with, whether it’s a person or business customer. 

The OFAC 50 percent rule – also known as ‘Entities Owned by Blocked Persons’ – is another area that banks must focus on when doing business within the US (under the jurisdiction of the Office of Foreign Assets Control [OFAC], hence its name). The UK and the EU both have their own versions of the rule, with sanctions screening software required for institutions to stay compliant. 

Because of the nature of modern business, governments and regulators are aware that many organizations are structured in such a way that it is hard to know who owns which company, and how much of it they may own. There can be good reasons for such a structure but nefarious ones also. This is where the 50 percent rule comes in – to prevent businesses from breaching international law by working with sanctioned entities. 

What are the main sanctions lists? 

Sanction lists are imposed and published by countries, groups of countries (such as the European Union), and international organizations (United Nations, Interpol, etc.) These act as living documents with governments and agencies maintaining sanctions lists, allowing them to be freely accessible online to ensure that companies can reference them before working with an unknown entity (either a person or organization). 

There are many and variable sanctions lists, which make complying with each one a difficult and time-consuming process. As such, banks and financial institutions often use third-party sanctions screening tools to help with sanctions, PEP, and adverse media screening. For example, out of the box, SymphonyAI currently analyzes 350+ lists in 60 languages and can integrate new watchlists in as little as 15 minutes. Major lists to be aware of include: 

What is the OFAC 50 percent rule? 

The US Treasury’s OFAC 50 percent rule imposes sanctions on companies where sanctioned entities own 50% or more of the organization. In effect, they are blocked from doing business with the US. It is a straightforward rule based around ownership. For example, although a company itself may not appear on sanctions lists, it is treated as a sanctioned business because of its sanctioned owner. 

Although 50% is the threshold, it shouldn’t be seen as a hard line; OFAC recommends caution if a sanctioned entity holds a large stake in a company. As such, the 50 percent rule may still apply if a company is 47% owned by a company or organization on a sanctions list. It’s best to flag a transaction just in case. 

This safeguards against an institution becoming culpable should the scope of the rule change, or in cases where CDD appears to have been neglected. 

It’s important to note that 50% is a cumulative number – should two sanctioned entities own 25% of a company, it would still trigger the OFAC 50 percent rule. 

Additionally, indirect ownership also results in an organization being sanctioned. If entity A, which is subject to sanctions, owns 50% of company B, and company B owns 50% of company C then company C will still be sanctioned by association.  

The EU and the UK both operate a similar rule, but it is slightly different in its wording. 

What is the 50 percent rule of the UK and EU? 

Prior to Brexit, the UK followed the guidelines of the EU 50 percent rule. They are still broadly similar enough to align here as both differ from the US in one key aspect – the UK and EU 50 percent rule applies where there is either ownership or control. 

An entity falls under the sanctions when over 50% of a company is owned (directly or indirectly) by a person appearing on a sanctions list of either the UK or EU. In contrast to the US, under the EU and UK rules, a joint 50/50 venture between two people where one person is sanctioned would not automatically mean the business is subject to sanctions. 

However, because the UK and EU 50 percent rules can come into force when a sanctioned entity ‘controls’ a company, the ownership part of the rule is arguably moot; a company can still be subject to sanctions if the sanctioned entity owns less than 50% of the business but controls the company. 

Controlling a company is much less clear-cut than ownership. It requires that a financial organization must undertake a more intensive analysis surrounding a company and its operations and, to make things more confusing, the UK and EU’s definitions of ‘control’ are different. Alongside this, suitable ways to test for control aren’t always readily available, while those being asked to provide the information may not wish to provide the necessary documentation.  

The rules are so complex that the EU regularly releases a 50 percent rule FAQ to help with companies looking to understand current sanctions against Russia and Belarus. 

With so many differing approaches to a 50 percent rule, it makes it very difficult for financial institutions to do business, especially considering many operate across the US, UK, and EU and need to comply with each of the sets of rules.  To make things even more difficult, multinational companies may also have to comply with the rules of other countries, such as Japan, Canada, Switzerland or Australia. Sanctions screening software is therefore a necessity and extremely valuable to global financial institutions. 

What is the 50 percent rule in the APAC region? 

There is no equivalent 50 percent rule in Australia and Singapore, two of the countries within APAC that have autonomous sanctions frameworks. New Zealand has the third APAC autonomous sanctions framework. The remaining countries in Southeast Asia tend to implement just the UN listings. 

Interestingly, relevant government bodies in APAC provide very limited guidance, though New Zealand did put out a guide on Russian sanctions which mentions the 50 percent rule.  

In practice, the finance industry in APAC tends to observe the OFAC 50 percent rule if dealing with OFAC frameworks. In other cases, countries apply their own AML program beneficial ownership percentage (usually 10-25%). 

Complying with the 50 percent rule 

Complying with the 50 percent rule can be difficult without appropriate sanctions screening tools, especially because those named explicitly in sanctions lists (‘explicit sanctions’) are estimated to only make up 5% of sanctioned entities.  

This means that up to 95% of entities are subject to sanctions via what is known as narrative or implicit sanctions: these entities may be subject to sanctions if they fit within the broad statement (the narrative summary), which accompanies each sanctions list. This means that a person not named in a sanctions list might be sanctioned through association with a sanctioned entity (e.g., a family member or somebody working with a terrorist organization). This is known as ‘sanctioned by association’.  

Entities may also be subject to sanctions if they are part of so-called sectoral sanctions. This is where sanctions apply to countries for instances of war or international violence. For example, many Russian oligarchs and government officials were subject to sanctions despite not necessarily being individually named on sanctions lists. 

It’s also important to note that a sanctioned individual in one country may not be sanctioned in another. However, doing business with a sanctioned entity outside of the US will still cause a financial institution to breach the OFAC’s 50 percent rule. 

Examples of OFAC’s 50 percent rule 

Because OFAC’s 50% rule is the most straightforward, here a few examples from OFAC to help with guidance and understanding: 

Example #1 

A sanctioned individual – Mr. X – owns 50% of Company A. 

Company A owns 50% of Company B. 

In this example, Company B is blocked because Mr. X indirectly owns 50% of the company through his holding of Company A. 

Because Mr. X owns 50% of Company A, it would also be blocked. 

It is important to note OFAC’s idea of ‘indirect’ ownership. If an entity owns 50% or more of a company – and therefore has a controlling interest in it – the entity is responsible for the full percentage of whatever that company then goes on to own. 

Example #2 

A sanctioned individual – Mr. X – owns 50% of Company A. 

Company A owns 50% of Company B. 

Company A and Company B each own 25% of Company C. 

As with the previous example, Company A and Company B are also blocked for the same reasons. 

Company C is sanctioned and becomes a blocked entity because Mr. X indirectly owns 50% of the company through his holdings in Company A and Company B. 

Example #3 

A sanctioned individual – Mr. X – owns 50% of Company A. 

Mr. X also owns 10% of Company B. 

Company A owns 40% of Company B. 

In this case, both companies are sanctioned and blocked because Mr. X owns 50% of Company A and 50% of Company B (10% directly, 40% indirectly). 

Example #4 

A sanctioned individual – Mr. X – owns 50% of Company A. 

Mr. X owns 25% of Company B. 

Company A and Company B each own 25% of Company C. 

In this instance, Company A is the only company to be sanctioned and blocked. 

At 25%, Mr. X’s ownership of Company B is not enough to breach the 50 percent rule. 

Meanwhile, Mr. X’s stakes in Company A and Company B are not enough to breach the 50 percent rule with Company C either. 

Example #5 

A sanctioned individual – Mr. X – owns 25% of Company A. 

Mr. X also owns 25% of Company B. 

Company A and Company B each own 50% of Company C. 

In this example, no company will be sanctioned and blocked.  

Mr. X’s ownership of Company A and Company B are both below the 50% threshold so neither company is sanctioned. The same is true for Company C. 

Why institutions must use sanctions screening solutions to comply with the 50 percent rule 

Failure to comply with the 50 percent rule can result in strict fines and penalties. This is why it is important to ensure that your organization is not dealing with an entity that is sanctioned by association or which is subject to narrative sanctions. Because so many different laws and regulations exist globally, using sanctions screening software is paramount to avoid punishment. 

Penalties can be severe as dealing with sanctioned entities is seen as a threat to national security and foreign relations. For example, potential penalties for breaching OFAC’s 50 percent rule include: 

  • Revoking of licenses and/or authorizations: The most significant penalty, OFAC has the power to remove licenses and authorizations from companies dealing in the US. In effect, this designates an offending company as being a sanctioned entity and prevents an organization from operating in the entire US market.  
  • Criminal prosecution: Non-compliance with OFAC’s 50 percent rule can lead to up to 20 years’ imprisonment. 
  • Loss of assets: An organization’s assets may be frozen. Physical assets, such as cars or property, may be destroyed. 
  • Global consequences: Fines and penalties do not occur in a vacuum. Any company found in violation of sanctions may face global consequences, leading to potential restrictions on international business. 
  • Reputational impact: Even if countries don’t place restrictions on an organization because of sanctions violations, the consequences can still be severe with a significant reputational hit. Relationships with stakeholders, clients, and partners might all diminish as a result. 
  • Further monitoring: Although an investigation may be complete, and no fine or penalty issued, a company may notice further scrutiny by regulatory authorities. This can have a significant impact on productivity in the short term and may last for an extended period, until such time as OFAC is satisfied that further problems with not be forthcoming.  

The exact nature of the penalty is dependent on the US entity, the scale of the violation, and the industry where it occurred. 

Because of the severity of the consequences, OFAC encourages companies to volunteer the issue once discovered, cooperate with authorities, and make no attempt to conceal the wrongdoing. Even in these instances though, such actions only lessen the resulting fines. It is always best to use the leading sanctions screening solutions to dramatically minimize the possibility of any wrongdoing. 

Staying ahead of the 50 percent rule 

Entity resolution 

With so many sanctions lists and many different implementations of the 50 percent rule from the US, EU, and the UK, ensuring compliance has never been more difficult. 

Thankfully, SymphonyAI offers entity resolution to make everything easier. Perfect for AML, payment fraud, KYC/CDD, and sanctions screening, entity resolution allows financial institutions to transform their risk and compliance ecosystem. 

Available out of the box in SymphonyAI’s tools for AML transaction monitoring, screening, and CDD processes, entity resolution allows businesses to resolve disconnected data. Not only does it allow for more effective investigations, but it also helps identify duplicate records and expose hidden risk. 

Reconciling data hidden in siloed systems for a unified view of customers, entity resolution allows for the identification of shared contact details, easily allowing investigators to recognize how different entities relate to one another, or how they may even be the same person. 

Visualize customer relationships and follow the money to uncover concealed relationships and expose criminal networks, improving a financial institution’s ability to remain compliant with the 50% rule. 

Want to know more? Visit the entity resolution page. 

Dynamic sanctions screening solutions 

Another method to help your organization stay ahead of the 50 percent rule is by using dynamic name screening and transaction screening software. This demands both real time scale and response but also easily adapted screening tools that keep up with changing demands. 

SymphonyAI’s sanctions screening solutions improve detection accuracy, accelerates investigations, enhances the customer experience, and allows for scalable compliance, which can easily be configured to suit your needs. 

With 350+ watchlists (in 60+ languages), 2000+ rules, a 98% accuracy rate in identifying true positives, and 70% decrease in false positives, it provides effective sanctions screening for businesses of all sizes. 

By prioritizing the highest risk alerts and using intelligent name matching and AI-driven data analytics that process in real-time, SymphonyAI’s dynamic sanctions screening software maximizes investigator efficiency alongside improved detection accuracy. 

Want to know more? Visit the sanctions screening page. 

Discover SensaAI for Sanctions 

SymphonyAI also offers SensaAI for Sanctions. Augment your existing detection solutions to dramatically enhance matching capabilities with gen AI and predictive AI that analyzes and structures previously unstructured text and significantly reduces false positives. The result is a real-time AI upgrade for screening with a seamless, streamlined process.  

Learn more about SensaAI for Sanctions. 

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