SANCTIONS ENFORCEMENT: U.S. COMPANY FINED FOR "50% RULE" VIOLATIONS

A U.S. insurance company settled with the U.S. Department of the Treasury for apparent violations of OFAC's 50% Rule by insuring a company owned by a sanctioned Russian individual, underscoring the critical need for robust compliance mechanisms to adhere to sanctions regulations.

VIDEO

• https://www.kharon.com/brief/sanctions-enforcement-us-company-fined-for-50-rule-violations?utm_content=283779939&utm_medium=social&utm_source=linkedin&hss_channel=lcp-11688499
• THE VIDEO STORY IS ALSO BELOW

WHAT IS THE 50 Percent, Rule?

1. OVERVIEW
• The 50 Percent Rule states that the property and interests in property of entities directly or indirectly owned 50 per cent or more in the aggregate by one or more blocked persons are considered blocked.
• In other words, if an entity is 50 per cent or greater directly or indirectly owned by one or more blocked individuals, it is treated as a blocked entity.
• U.S. companies [and non-US companies] are generally prohibited from dealing with such entities, even if OFAC does not specifically list them
2. Complex Ownership Structures:
• When determining indirect ownership, OFAC considers aggregated ownership stakes of all blocked persons.
• For example, if Blocked Person X owns 25 per cent of Entity A, and Blocked Person Y owns another 25 per cent of Entity A, Entity A is considered blocked.
• This aggregation applies even if the blocked persons are under different OFAC sanctions programs.
3. Cautionary Notes:
• While the 50 Percent Rule focuses on ownership, control is also crucial.
• Entities controlled (but not necessarily owned 50 per cent or more) by blocked persons are not automatically blocked under the rule.
• However, OFAC may designate such entities if they are controlled by designated persons.
• Transactions with non-blocked entities where blocked persons have significant ownership or control should be approached with caution.

Non-U.S. companies can indeed fall under the jurisdiction of the Office of Foreign Assets Control (OFAC) rules, even if they are not based in the U.S. Here’s how it works:

1. Primary Sanctions:
• U.S. primary sanctions generally apply to transactions and entities that have a “nexus to U.S. jurisdiction”. This includes:
• All entities organized in the U.S.
• U.S. citizens and permanent residents (regardless of their location).
• All persons physically located in the U.S., regardless of nationality.
• All U.S.-incorporated entities and their foreign branches.
• Transactions conducted through the U.S. financial system (including those in U.S. dollars).
• If a proposed transaction does not involve any nexus to U.S. jurisdiction and an SDN-listed entity or individual is subject to primary sanctions only, the sanctions will not apply to that transaction or activity, allowing non-sanctioned entities to engage in business with the SDN-listed entity or individual.
2. Secondary Sanctions:
• Secondary sanctions, on the other hand, do not require a U.S. connection. They are imposed on non-U.S. persons directly or indirectly engaged in certain significant transactions related to countries like Iran, Russia, North Korea, and Syria.
• Non-U.S. companies engaging in such transactions may face penalties or restrictions, even if the transactions occur outside U.S. jurisdiction.
3. Expansive Theory:
• Recent enforcement actions by OFAC have pushed the limits of jurisdiction.
• Non-U.S. clients conducting transactions with sanctioned persons or countries should assess their jurisdictional assumptions carefully.
• The U.S. government continues to assert these theories in enforcement actions against non-U.S. individuals and companies

In summary, while non-U.S. companies may not be prohibited from certain activities outside U.S. jurisdiction, they should be aware that U.S. persons (wherever located) fall within U.S. sanctions jurisdiction.

VIDEO STORY HERE:-

• A New York-based insurance company, PRIVILEGE UNDERWRITERS, RECIPROCAL EXCHANGE, OR PURE, agreed in December to pay over $460,000 to settle his potential civil liability for 39 apparent violations of OFAC, Ukraine and Russia-related sanctions.
• According to the Treasury Department, the violations occurred between 2018 and 2020 when
• PURE collected payments on four policies that held for a blocked Panama based company, MEDALLION INC, which is owned by US sanctioned Russian businessmen, VICTOR WEXBERG.

• Wexberg was added to OFAC list of specially designated nationals and blocked persons in June, 2018.

• Although Medallion Inc. Itself was not named, it was considered blocked under Vex Berg's designation.
• Per OFAC, 50% rule guidance issued by the Treasury makes it clear that
• The property and the interests in property of any entity owned 50% or more by at least one blocked person are considered blocked.
• Regardless of whether the entity itself is listed the aggravating and mitigating factors cited by OFAC and its determination of penalties imposed on Pure, which had a statutory maximum of nearly $14 million ARE AS FOLLOWS
• Pure began to Insure Medallion and its property in 2010 and according to documents, was aware at the time that Vekselberg was the owner of the company and of the property being insured.

• OFAC determined that Pure did not incorporate ownership information about its customer into its sanction screening program even alter guidance on the 50% rule was published in 2014.

• Although Wexberg was sanctioned in 2018 and Medallion Inc was then considered sanctioned by law under the 50% rule.

• Pure continued to provide services to Medallion and a block person for more than two years due to an identification gap during the enforcement settlement. OFAC stated that Pure should have understood the connection between its customer and its customer's designated owner.
• OFAC highlighted mitigating factors considered in the case, including that the firm had no prior violations in the proceeding five years, and that pure later undertook remedial measures including the screening of its entire customer base through third party vendor tools as cited by treasury, this case demonstrates the importance of implementing and maintaining effective risk-based sanctions compliance controls, to capture and incorporate all relevant available information and to conduct responsive and regular screening, including risk-based steps to comply with OFAC 50% rule.

SOURCE:

https://www.akingump.com/en/insights/alerts/ofac-pushes-new-limits-on-jurisdiction-of-u-s-sanctions-by

https://www.shlegal.com/news/us-sanctions---who-do-they-apply-to-and-what-steps-can-you-take

https://www.bclplaw.com/en-US/events-insights-news/ofac-to-companies-dont-forget-your-us-persons.html

https://www.kharon.com/brief/sanctions-enforcement-us-company-fined-for-50-rule-violations?utm_content=283779939&utm_medium=social&utm_source=linkedin&hss_channel=lcp-11688499