Sanctions are hardly new.
In fact those of the Megarian Decree stretch back nearly two and a half millennia, as referenced by the US State Department's Dr Daniel Ahn at our recent AML4 and sanctions compliance forum. But they've evolved to become far more sophisticated – and with that, harder to comply with.
This has been indisputable in recent years, since the US Treasury's Office of Foreign Asset Control (OFAC) has been issuing Specially Designated Nationals (SDN) and Sectoral Sanctions Identification (SSI) lists. The European Union (EU) publishes similar lists of "persons, groups and entities subject to EU financial sanctions", which overlap but don't fully coincide with OFAC's lists.
The situation has intensified in the unfinished aftermath of the Crimea crisis of 2014: the lists have started growing more quickly; sanctions have become even more targeted; and enforcement agencies have moved up a gear in their work – much of which our databases have helped to demonstrate the economic efficacy of, as demonstrated in US government-sponsored research.
And, crucially, this is on top of the OFAC and EU "50% rule" and the concept of being "sanctioned by extension", the focus of this blog post.
Companies that are sanctioned by extension don't appear on any of these lists. But the embargo on trading with them is just as real and the consequences are as severe if you're caught.
Given the cross-jurisdictional and complicated nature of corporate ownership structures – many of them with periodically changing ownership percentages between layers – it's hard enough just identifying companies that have been sanctioned by extension, let alone monitoring those that slip in and out of the critical parameters for inclusion.
But we've developed a dynamic new tool that does just this.
First, though, a quick explanation of what the 50% rule is.
What is the 50% rule?
The basic concept is relatively straightforward, as illustrated in the diagram below.
A company is sanctioned by extension if each of the ownership links in an unbroken chain between it and an explicitly sanctioned person or entity is 50% or more.
The number of layers between the explicitly sanctioned entity and the focus company determines whether the sanctioning by extension is direct (one level), indirect (two levels – or more if the "integrated ownership" still exceeds 50%) or indirect but through the "cascade-down effect" (three or more levels, where "integrated ownership" is less than 50%).
The exception to the "straightforward" explanation relates to "aggregation", as shown by Company F in the diagram. Here, neither of the sanctioned owners owns 50% of Company F individually. But they exceed the threshold in combination, hence Company F is sanctioned by extension despite A and I having nothing to do with each other apart from their shared ownership of Company F.
Given the potentially unlimited number of links in a chain, each reducing "integrated ownership" (see the resources below), it's interesting to note that a sanctioned person or entity's total indirect ownership of another company is not that important. What is important is control.
So how difficult is it to establish control and monitor it?
The scope and complexity of the problem
- Change in the names of explicitly sanctioned persons and entities on the lists – according the US Treasury website, the SDN list, for example, is "frequently updated. There is no predetermined timetable, but rather names are added or removed as necessary and appropriate"; and
- Change in corporate ownership structures, i.e. the existence of links, the way they're structured, and the percentage shares – Bureau van Dijk's global Orbis database of more than 220 million companies across all countries worldwide registers millions of subtle ownership changes every month.
So we're looking at a situation that, for companies with many clients and third-party companies in their portfolio, is extremely difficult to manage either without occasionally letting rogue clients and third parties slip through the net or without investing a lot of your researchers' time into screening companies using often hard-to-refine risk-based approaches.
Put simply, we're dealing with moving targets.
But help is at hand.
How Bureau van Dijk can help
Tapping into our vast repository of structured corporate ownership information, we've developed a computation that generates snapshot lists of companies that at that point in time are sanctioned by extension.
We cover OFAC's SDN list and its SSI list, as well as the EU's sanction list. But, in line with OFAC's rules, we process them separately to produce three separate spreadsheet lists of companies sanctioned by extension.
We can then bundle these together in zip files on an FTP server for customers who order them, with each spreadsheet including:
- General company information, such as addresses and other names, and the linked explicitly sanctioned entity (or entities) for each;
- Information on the date and time the list was generated, the number of entities retrieved, the version of ownership tree used to compute the result and which sanctions list was used, along with its date; and
- Each entity's BvDID – or unique identifier – so you can peg it to your own portfolio data and, all importantly, filter by those that are on your system.
As the customer you can choose the frequency of list update, and your screening tool – which also has access to your portfolio data of matched entities – can be set up to automatically access the latest update.
You can also feed selected datasets into Ownership Explorer on the new Orbis interface to better visualise how each indirect sanction has arisen.
All of which delivers a welcome switch from pro-active to partially reactive and automated initial sanctions screening.
Other sanctions-related resources
We have a number of related resources, which you can download for free:
Measuring smartness: understanding the economic impact of targeted sanctions is a working paper co-authored by Daniel Ahn (see above).
Tasked by the US State Department and equipped with a rich bank of structured data from Orbis, the Office of the Chief Economist set out to address whether sanctions imposed on targeted companies had a measurable effect on their financials.
As well as demonstrating the power of Bureau van Dijk's databases in identifying sanctioned entities and individuals across borders, the working paper that arose from their rigorous work makes fascinating reading, and among other thing includes:
- A detailed introduction, setting the context of the research
- A discussion of different types of international sanction and lists that publish sanctioned entities and individuals
- An explanation of the paper's methodology, along with charts and graphs
Q&As on sanctions compliance
From our "InFocus" strand, Sanctions compliance: essential Q&As for corporates and financial institutions features the independent expertise of sanctions solicitor David Savage, then a senior associate at Eversheds LLP, now Kleinwort Hambros's senior sanctions officer.
We ask what sanctions exactly are, who controls them and how you can find out whether the companies you're working with are sanctioned, either directly or indirectly.
- Discuss complications and special cases
- Look at who polices the rules
- Explain the concept of controlling ownership with worked examples
- Outline the basic steps you should take when screening for sanctions
- Provide recommendations on other useful resources
Download the Q&A document.
A-Z guide and integrated corporate ownership poster
These twin resources are available digitally and you can also order free printed copies.
A pocket-sized booklet, our A-Z guide of corporate ownership and compliance terms covers themes such as third parties, AML4 and sanctions. It defines and discusses types of corporate ownership, outlines associated considerations, and includes related terms in the complex world of risk and compliance.
Our Integrated corporate ownership and related risk poster helps you understand complex corporate ownership structures within the context of different fields of compliance. The poster, which is A2 in size (42.0 x 59.4cm), sticks to any flat surface using static electricity, so it doesn't need pins or Blu-Tack, and can be easily moved.
Order and/or download your free corporate ownership resources.