Editorial by: John Black
I certainly do not know if it is poor government, irresponsible government, superficial government or naïve government. I do know that OFAC’s 50% Aggregation Rule cannot be complied with, as a practical matter. Some observers have assumed that Export Control Reform means that the US Government is committed to putting in place export control and trade sanction rules that are practical and practicable and focus on the most important issues to promote US national security and foreign policy. If that is true, OFAC’s 50% Aggregation Rule is a glaring exception. I cannot remember any worse rule in my 11,130 plus days in export compliance.
In August, 2014, OFAC issued a notice on its website informing those who frequent the OFAC site or those who subscribe to the OFAC email service, that it has a new interpretation of the 50% rule. Prior to August, OFAC said that if Company A is not on one of its prohibited party lists but another entity, Entity B, is on an OFAC list and owns 50% or more of Company A, then everybody has to apply the same rules that apply to Entity B to Company A. The pre-August interpretation irritated me a bit, because it reflected an OFAC policy based on the premise that OFAC is not going to do the work to gather the information, or, if it has the information, is not going to share the information with compliance oriented parties that Company A needs to be subject to OFAC controls. OFAC, with the vast resources of the US Government at its disposal, decided to dump the burden of figuring out the status of Company A on those of us who want to comply. And, as a result, each individual compliance company does its own private research on Company A, so, if there are one-hundred compliant companies, then the same research is done 100 times to yield the same result (or almost the same results).
That is without a doubt a ridiculous waste of the limited compliance resources and budgets of companies who want to comply. If OFAC thinks it is important that rules apply to Company A, it should do the research instead of forcing compliant companies to waste compliance resources they could apply elsewhere to serve US national security and US foreign policy interests that are at stake with non-superficial export controls and sanctions. Every dollar companies spend on redundant research about Company A’s status is a dollar that is not spent protecting US national security and foreign policy. OFAC is selfishly requiring companies to waste money on OFAC’s programs when OFAC itself could just publish a list of everybody it wants to be caught by the controls. If OFAC does not think it is important to list a party, it shouldn’t make compliant companies list them.
But, so far I have just been talking about the pre-August 50% Rule. In August, OFAC announced that unlisted Company A should be treated as being on a list if listed parties in aggregate own 50% or more of Company A. For example, Ukraine SDN Entity B owns 32% of Company A and Ukraine SDN Entity C owns 19% of Company A. Since the combined ownership is greater than 50%, you have to treat unlisted Company A as a Ukraine SDN. Wow. I lack the vocabulary to describe what I think about the 50% Aggregate Rule. It was one thing to require compliant companies to spend money trying to find a single owner of 50% or more. It is many multiples worse to require compliant companies to search far and wide to find an unknown number of minority owners on a list and add together their ownership shares to see if it reaches 50%.
Note: I use the words “compliant companies,” because many companies do not comply with any version of the 50% Rule, which gives them an advantage over compliant companies, unless they get caught. As we all know, the odds are they will not get caught, even though a few might. Thus is the life of those who tried the hardest to comply.
Frankly, I do not know how much it costs to research Company A to find out if an aggregate of one or more listed entities own 50% or more. In talking to people who are doing this, it is an expensive endeavor. It is not just the price per search, but is also the fact that any unlisted entity anywhere in the world could be caught by the 50% Aggregate Rule, so there is almost an infinite number of entities that need to be researched. This is a compliance burden with which compliant companies cannot comply. Even the most compliant of the compliant have to decide to comply only partially with the 50% Aggregate Rule, because they simply do not have sufficient resources.
Of course, if we found that we had researched 1000 unlisted entities and found only two caught by the 50% Aggregate Rule, maybe we would all agree that the money spent researching is not worth the miniscule compliance risk. The trouble is the relatively new Russia/Ukraine OFAC sanctions mean that the compliant companies are finding many hits on unlisted entities. One person told me that there are 260 listed Ukraine/Russia entities and their research has discovered 1,500 unlisted parties that are caught by only the 50% Single Party Rule (not including the 50% Aggregate Rule). We see more unlisted parties caught now, because the Russia/Ukraine lists include large and important Russian companies and wealthy Russian oligarch-types who are involved in many, wide ranging business activities. Many of the previously created lists did not include a lot of entities that are likely to be involved in significant global business activities.
OFAC’s Ukraine/Russia policy is this: There are far more than 1760 parties OFAC does not want you to deal with, but OFAC will tell you the names of only 260.
That is poor government if OFAC has intentionally shifted to compliant companies the compliance burden with which they cannot comply, which forces companies to divert their resources from compliance with other important aspects of US export controls and sanctions.
That is irresponsible government if it is critical to US national security and foreign policy that we not deal with the unlisted entities, but OFAC decides not to list them.
That is superficial government if OFAC really does not care if we deal with most or some of the unlisted parties, or if OFAC just wants to be able to apply the 50% Aggregate Rule in certain cases when it sees fit.
That is naïve government if OFAC does not understand the burden it is creating.
I do not know why OFAC decided not to list all of the parties and to shift the expensive, risky and wasteful burden to compliant companies, but I do see a long list of better approaches. Heck, OFAC could just constantly put updates on its websites with the names of parties as it discovers them and informally say they are subject to the sanctions, and we (compliant companies and less than compliant companies) would follow their informal advice.
If OFAC is worried about some kind of official regulatory review process according US legal requirements before it names a party, I find that to be hypocritical. It is hypocritical, because OFAC can impose an expensive and impossible to comply with burden on compliant companies with a simple website notice such as the 50% Aggregate Rule, but it cannot name people against which it wants to apply its important US trade sanctions. All apologies to OFAC if hypocritical is not the correct word to describe the government’s willingness to impose burdens on the compliant with website notices, but not to name the problem entities with the same less-than-formal process.
Compliant companies would be better off if OFAC just charged a 50% Aggregate Rule research tax on all US persons to fund OFAC’s research to find unlisted entities and then named the entities on its website. Even if they just taxed the compliant companies, it would probably cost compliant companies less and they would have confidence they are being compliant. Or, perhaps, the US Government could look at its resources and decide how much of its vast resources should be spent to research unlisted entities and add them to the list in order to promote US policy interests that the prohibited party listings are designed to serve. Once the US Government decides it should spend X, it could list all of the parties it discovered and we all could comply with the list. If the US Governments thinks the US policy at stake justifies using only X amount of its resources, it should stick with that and not dump an unquantifiable burden on compliant companies.
By the way, speaking of OFAC lists, stay tuned to the OFAC website and email service for the upcoming SDOC list. I expect I will be the first “Specially Designated OFAC Critic.” Fortunately, for compliant companies, nobody owns 50% or more of me.