Closing a deal with a foreign business often feels like a milestone for your NYC company. However, if your partner has hidden ties to individuals on the Specially Designated Nationals (SDN) List, you could face frozen assets or heavy fines.
The Office of Foreign Assets Control (OFAC) 50 Percent Rule blocks an entity if one or more blocked persons own 50% or more of it, whether directly or indirectly. You must look beyond the names on a basic watch list to avoid an illegal transaction.
Look for layered shell companies
Be wary if your partner uses a complex web of holding companies across several countries. Blocked individuals often hide behind shell companies to obscure their true ownership.
If the corporate structure seems unnecessary for the business size, it is a major red flag. This complexity often serves to dilute the visible stake of a person whose property the law requires you to freeze.
Watch for aggregate ownership stakes
The rule applies to more than just a single owner. If two different blocked people each own 25% of the company, the law automatically blocks the entity.
You cannot simply check for a single majority shareholder. Instead, you must add the stakes of all blocked persons together to determine if they reach the 50% threshold.
Identify recent ownership transfers
Check for sudden changes in the corporate registry that occurred just before or after the government announced sanctions. Blocked persons often “sell” their shares to family members or close associates to drop their ownership below 50%. These transfers are frequently superficial, and the blocked individual may still hold a beneficial interest.
Check for blocked signatories
Pay attention to who actually signs your contracts. Even if an individual owns less than 50% of a company, their personal status as a blocked person can halt your deal. OFAC sanctions generally prohibit U.S. persons from engaging in transactions where a blocked person acts as the signatory. While this does not freeze the entire company, it makes the specific contract illegal to execute.
Research the physical business address
A company might share a physical office or mailing address with a known blocked entity. This commonality suggests the businesses are not truly independent. If the address is a residential home or a known “incorporation mill” in a high-risk jurisdiction, proceed with extreme caution.
Protect your international business interests
The 50 Percent Rule is not a safe harbor, and the government often investigates cases where control exists without majority ownership. Relying on basic name-matching software is rarely enough for high-stakes international law deals.
Strategic due diligence helps you identify these pressure points before the Department of the Treasury does. Consider speaking with a local attorney to learn how these laws apply to your case.