The 49 Percent Question: Aggregation Under the OFAC 50 Percent Rule
Volga Petrochemical Trading FZE, a Jebel Ali free-zone company, presents a $3.2 million standby letter of credit reimbursement to Northgate Bank's trade finance desk. The payment is in US dollars, routed through Northgate's New York correspondent, and relates to polymer resin (HS 3901) shipped from India to Turkey. Volga is not on any sanctions list. A vendor screening report flags that Soyuz Energy Group, designated as an SDN eight months ago, owns 49% of Volga directly. A separate, older share register shows that Soyuz's wholly owned subsidiary holds another 2% of Volga; Delta Commodities Ltd (Cyprus) holds the remaining 49%. The goods are not embargoed, the port calls are not in restricted territory, and Volga's account officer describes the company as 'clean, just unlucky shareholders'. The reimbursement has already been credited to Volga's Northgate account. Northgate is a US bank; its policy says 'screen names, not ownership' because its vendor does not provide ownership data.
1. Is Volga a blocked entity? Apply the relevant ownership rule and explain what evidence the bank needs.
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Apply the 50 Percent Rule, not the name list. OFAC blocks an entity when one or more blocked persons own, directly or indirectly, 50% or more of it in the aggregate. Soyuz is an SDN. Its direct 49% plus the 2% held through its wholly owned subsidiary equals 51% in aggregate. The subsidiary's stake is indirect ownership by Soyuz because Soyuz owns the subsidiary; OFAC looks through the chain. Volga is therefore a blocked person even though its own name is not on the SDN List.
Evidence issue: The 2% appears in an older register. The bank should obtain a current share register and certificate, but it cannot ignore a credible indication while it waits. If the current register confirms 51%, block. If the 2% was genuinely sold before designation to an unrelated party, re-run the analysis. A sale after designation to an unknown BVI buyer is itself a red flag, not a cure. The account officer's 'clean, just unlucky' view is irrelevant to the legal test.
2. What are Northgate's immediate obligations because the reimbursement is already credited, and how would the answer differ if the funds had not yet been credited?
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Because the reimbursement is already credited, this is a blocking event, not a rejection. The bank should place the funds in a blocked, interest-bearing account, report the blocked property to OFAC within 10 business days, and make the annual blocked-property report. It should file a SAR within 30 calendar days and consider a continuing-activity review. It should not return the funds or notify Volga without authorization.
If the funds had not yet been credited, the correct action would generally be to reject the incoming transfer and report the rejection as required, rather than allow the funds to enter a blocked account. The distinction matters: 'reject' stops the transaction; 'block' immobilizes property already within US jurisdiction.
Correspondent issue: Northgate's New York correspondent may also have a blocking obligation. The trade desk should not release documents or make any offsetting payment until sanctions compliance clears the file.
3. Volga later produces a new register showing Soyuz sold its 2% stake to an unknown BVI company two weeks ago. How should the bank respond?
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Do not accept the new register at face value. Obtain the sale agreement, consideration, settlement evidence, buyer identity and ultimate beneficial ownership, and bank statements. Check timing: a sale to an unknown BVI company shortly after designation is consistent with evasion. If the buyer cannot be identified or the sale is not registered, continue to treat Volga as blocked pending verification.
Decision rule: If the evidence shows a bona fide pre-designation sale to an unrelated party at arm's length, the 50% calculation may change and the bank may seek OFAC guidance or authorization before releasing anything. If the evidence is incomplete, keep the block, file or update the SAR, and document the analysis. Processing the payment after notice of 51% ownership would expose the bank to civil and potential criminal liability.