Sanctions research beyond the list: ownership, control and the 50 per cent question

Screening a counterparty against sanctions lists is a necessary step, and for many routine checks it is the main one. It answers a narrow question, which is whether a particular name appears on a list. Sanctions regimes reach further than their lists. An entity that is never named can still be subject to restrictions because of who owns or controls it. Establishing whether that is the case is a research task, and it depends on evidence that screening software does not hold.

How the main regimes treat ownership and control

In the United States, the Office of Foreign Assets Control (OFAC) applies what it calls the 50 Percent Rule. An entity owned 50 per cent or more, directly or indirectly, individually or in aggregate, by one or more blocked persons is itself treated as blocked, whether or not it appears on a list. The rule turns on ownership. Control without ownership does not trigger it automatically, although OFAC has advised caution in dealing with such entities, which may be designated in their own right.

The European Union and the United Kingdom go further in one respect, since their asset freezes extend to entities controlled by a designated person as well as to those it owns. Their ownership tests are not identical. EU guidance treats a holding of 50 per cent or more as ownership and adds together the holdings of different designated persons. The UK test refers to more than 50 per cent of shares or voting rights, generally assessed for each designated person separately, and the UK government has been reviewing its approach. Control is assessed on a range of indicators, such as the ability to appoint or remove a majority of the board, control of a majority of the voting rights, or the ability to ensure that the entity's affairs are conducted in accordance with the designated person's wishes. Guidance and case law are revised from time to time, and the current position should be confirmed at the time of each review.

The research questions

A list check stops at the name. Ownership and control research follows the structure upward and the relationships outward.

• Full ownership chains. Each layer should be traced through its own registry to the natural persons at the top, with the holding at every level recorded so that counsel can apply the relevant rules.
• Aggregation. Stakes held by different sanctioned owners may need to be considered together, and a structure with no single majority holder can still cross a threshold.
• Control indicators. Board appointments, voting or veto rights, shareholder agreements, financing arrangements and family relationships can show control that the share register does not.
• Timing of transfers. Stakes moved to just below a threshold, or to relatives and associates, around the date of a designation deserve close examination.
• Nominee arrangements. Holdings recorded in the name of nominees, trustees or corporate service providers may conceal the person on whose behalf they are held.

Timing, transfers and the limits of the record

Designations can be anticipated. Stakes may be sold, diluted or transferred to family members, associates or trusts shortly before or after a designation, sometimes to a level just below a threshold. A transfer of this kind is not necessarily improper, and it may be genuine. US and EU guidance, however, treats transfers to connected parties close to a designation, and continued involvement by the previous owner, as warning signs that a designated person's interest or control may not have ended. The research task is to establish what changed, when and to whom, and whether the previous owner appears to retain influence through funding, board seats, informal authority or continued use of assets.

The record has limits. Registries in different jurisdictions publish different information, and some publish very little. In recent years Russian rules have allowed some companies to restrict what they disclose publicly, and access to some Russian registries and data sources from outside the country can be unreliable. Historical filings, court records, procurement data, media reporting in the original language and corporate disclosures in other jurisdictions can help to fill the gaps. Where they cannot, the gap should be stated.

The research must itself be lawful. Paying a sanctioned data provider, or engaging a sanctioned intermediary, can raise compliance questions of its own. Data protection rules apply to information gathered about individuals, and the safety of local researchers and sources must be considered at every stage.

Working alongside counsel

Research establishes facts. Whether those facts mean that an entity is owned or controlled for the purposes of a particular regime is a legal judgement. The two work best together. Counsel can define the questions that matter under the regime in issue, and research can return evidence in a form that answers them, with sources, dates and a stated level of confidence for each finding.

Research establishes the facts, and whether they amount to ownership or control under a particular regime is a question for counsel.

We approach sanctions research as the mapping of structures and relationships over time. We trace ownership to the top of each chain, record control indicators separately from shareholdings, note every change around relevant dates and state plainly where the record runs out. Our findings are written to inform legal advice, and we work alongside counsel throughout.