One of the challenges in compliance with the requirement to refrain from doing business with individuals and entities sanctioned under the new Russian sanctions (or any other sanctions program for that matter) is dealing with the so-called 50 percent rule used by the Office of Foreign Assets Control in enforcing sanctions programs. Under that rule, any entity controlled by a designated individual or entity, or in which a designated entity or individual owns a 50 percent or greater interest, is itself deemed to be designated. Even though this entity is not specifically named or designated, the effect of this rule is to require U.S. persons to block its assets and to refrain from engaging in transaction with this entity.

That means, of course, that compliance requires you to  trace all the way up the ladder the ownership structure of any entity with which you are doing business to assure that a designated party does not have an ownership interest that would cause the entity you are dealing with to also be subject to sanctions. The designated entity could be three or more layers up, and as long each company in the chain has at least 50 percent of the company below, the bottom layer company will also be designated.

With that principal in mind, it is not surprising that the new Russia/Ukraine designations have effectively designated parties not actually appearing by name on the lists of sanctioned parties. The first such instance I’ve discovered is Sobinbank which is owned by Rossiya Bank. The second is SMP Bank which is owned by Arkady and Boris Rotenberg, both of whom were named as individuals covered by the Russia sanctions.

Both Visa and Mastercard have cut off dealings with both Sobinbank and SMP Bank because of their connections to individuals and entities designated under the Russia sanctions.

Tags: ofac guidance

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