Eric Sohn, the head of partnerships Dow Jones Risk & Compliance, laid out the basics of the US financial sanctions regime in a recent webinar hosted by Encompass, the compliance software firm.

There are many US sanctions lists. A lot of us like to think that it's just the SDN (Specially Designated Nationals) list but that unfortunately is not the case.

OFAC, the Office of Foreign Assets Control, the primary enforcement agency for financial sanctions in the United States, administers nine different lists.

US sanctions lists at-a-glance

The first two require assets to be frozen and put into an interest-bearing account. One is the SDN list. The other is the executive order 13599 list, which will go away in November. That was created as part of the JCPOA with Iran. These are the two lists that everybody has heard of.

It is important to note that some of the listings within these lists have 'secondary sanctions' attached to them. This means that it's not just incumbent on US persons to obey them; if a non-US person does business with people that have secondary sanctions, he himself may have restrictions placed on him in terms of dealing with the US economy, up to and including the loss of his ability to get a correspondent account. It includes such things as the loss of export-import privileges, or financing through the export-import bank, plus an inability to be a primary dealer for securities if you're a bank.
 
Then there is the Consolidated Sanctions List, which contains five sub-lists, one of which is the Sectoral Sanctions Identification List or SSI. The sublists all have different meanings but none of them is an asset-freezer. Generally speaking, they are things that banks are prohibited from doing. You can basically say no to that business. The SSI list is the most famous. That is the equivalent of the EU list 2014/847, which imposes sectoral sanctions on the financial, military and energy sectors of the Russian Federation.

Lastly, and these two are new, courtesy of President Trump, we have two lists that live on the State Department website: the Cuba Restricted List and the CCTSA Part 231 list. They are also prohibition lists; you are not supposed to deal with them. In the case of the latter, secondary sanctions are attached.

Commercial problems

One interesting thing to note about the Consolidated Sanctions List and the State Department lists is that even if the US Government does not fine a firm for flouting them, that firm can still suffer from commercial problems if it runs afoul of them. For example, if it is a non-US firm dealing with a US bank and it sends the US bank an item that causes it to do some work or causes it to reject the item back, the US firm might decide that the non-US firm is too much trouble to deal with and might cut it off. This does happen; I had a bank in Vietnam, for example, that ran afoul of a Sudanese sanctions listing.

Even if it does not do that, if the non-US firm falls afoul of the asset-freezing list and its customer's money is frozen at a US bank, its customer is going to be out of pocket and it will have to "make him whole again" if it wants to keep him as a customer.

Even if that doesn't happen, if perhaps the US bank merely rejects the transaction, it may take three days to research it and return the money, so the non-US institution has an unhappy customer on its hands because somebody has lost them some funds for three days and they couldn't get their transaction done, whereas in theory if the non-US bank had done screened the sanction on its own side, it could have handled the situation much better.

The US lists are therefore far more varied than most regulators' sanctions lists around the world.

The OFAC and EU 50% rules

The OFAC 50% rule is significantly more detailed than its EU equivalent. If one or more sanctioned owners together owned exactly 50% or more of a company, then that company itself is sanctioned. You might start with that company being sanctioned but you must then look at its subsidiaries and all the things that it owns. The mathematics start again. So if A and B own 50% of C and C owns 50% of D, then D is sanctioned because C is sanctioned.

If you are sanctioned but your name doesn't appear on a list, you are also subject to the 50% rule. So, for example, since under US regulation Cuba, Iran, North Korea, Syria and the Crimea are considered comprehensively sanctioned, you can't deal with their governments, so you therefore need to know what those governments own. They are not on the SDN or SSI lists.

Additionally, OFAC recommends that you proceed cautiously for large stakes less than 50%. So, for example, there is a German firm called GASCADE Gastransport GmbH which is 49.98% owned by Gazprom, as of one point in time. What if that firm did a share buyback and the shares that it bought back weren't from Gazprom? Now Gazprom might be over 50% and subject to sanctions, so OFAC wants you to tread carefully.

The EU 50% rule

Let us look at the European Union's equivalent, which is simpler. Majority ownership by a single sanctioned party that is greater than 50% imposes a sanction on a company. This is a pure majority. There is no guidance about whether or not the mathematics 'reset' themselves as they do for OFAC. This is for all EU sanctions programmes, whatever a 'programme' is.

There is also a 'control' prong, containing a list of conditions under which the EU considers a company to be 'controlled' by a sanctioned party. Companies with sanctioned parties in their senior management or on their boards of directors are not part of the OFAC definition of a party to be sanctioned, but they are part of the 'control' prong of the EU definition. Outside Russia and Iran, your sanction screening will find almost everything if you check to see if your customer owns Company A, if company A owns company B and if company B owns company C. Iran tends to go to the next level down and Russia goes many, many levels down.

* Eric Sohn can be reached at eric.sohn@dowjones.com; Encompass can be reached at www.encompasscorporation.com

Eric Sohn is the Global Market Strategist and Product Director for Dow Jones Risk & Compliance, a global provider of regulatory compliance and third-party risk management solutions. Sanctions Ownership Research data from Dow Jones covers companies owned or controlled by individuals, entities, countries or regions sanctioned by OFAC and/or the EU. Contact risk@dowjones.com for more information.