BEWARE "RUSSIAN DOLL" ENTITIES…..how deep do you dig when screening clients

Will sanctioned individuals go and hide behind complex structures incorporated worldwide to continue business as usual?

As Prime Minister Boris Johnson has highlighted, governments need to expose the "Russian dolls" of property and company ownership for sanctions to work.

• Boris Johnson has repeatedly promised to "open up the Matryoshka doll of Russian-owned companies", which are often set up offshore, so the actual owners are not identified.
• https://news.sky.com/story/measures-to-expose-dirty-money-stashed-in-uk-property-fast-tracked-to-target-russian-oligarchs-12552059

And PM Boris is right. Those in the know can evade sanctions.

So What all compliance professionals must focus on is the 50% rules in the EU, UK and US for Asset Freezing Measures – Ownership and Control

And to assist, the following offers a summary of what needs to be considered.

EU.

The EU has issued guidance in the form of its

1. "EU Best Practices for the effective implementation of restrictive measures", which states
   • If a non-designated person is more than 50% owned or controlled by a designated person, there is effectively a presumption that the making available of funds or economic resources to that non-designated person will amount to making them available indirectly to the designated person.
2. The EU guidance sets out
   • criteria to be taken into account when assessing whether a person is owned or controlled by a designated person for these purposes and
   • states that the presumption may be rebutted where facts support the conclusion that funds or economic resources will not be channelled to, used by, or be for the benefit of a designated person.

The UK.

Under the new UK sanctions regime, the presumption is no longer rebuttable.

Instead, the UK SIs codify the circumstances in which a legal entity will be deemed to be "owned or controlled directly or indirectly" by a designated person (which are similar but not identical to the criteria in the EU guidance).

Where these criteria are met, even though not listed in its own right, an asset freeze and the prohibition on making funds or economic resources available without a licence will apply automatically, in a manner similar to the so-called 50% rule in the US.

OFAC

The US Treasury's Office of Foreign Assets Control (OFAC) 50 Percent Rule imposes sanctions on companies with combined ownership by sanctioned parties of 50 per cent or more.

OFAC also recommends "caution" in dealing with companies in which sanctioned entities hold large stakes that are close to 50 per cent. For example, some companies may be 49-per cent-owned by a sanctioned Russian company, technically just below that magic 50-per cent.

State-owned companies of blocked governments may be subject to the 50 Percent Rule, which means organizations have to know what those companies are, even though they themselves don't appear on any lists.

Sources

1. https://www.dowjones.com/professional/risk/glossary/sanctions/ofacs-50-percent-rule/?mod=FOEFestival/
2. https://data.consilium.europa.eu/doc/document/ST-8519-2018-INIT/en/pdf
3. https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2020/12/sanctions-client-briefing-final.pdf
4. https://jdowsett.medium.com/russian-dolls-the-biggest-scandal-never-reported-f8f62a8f66d7