Risks within complex ownership structures
Do you screen all business partners against sanctions lists and observe all applicable licence requirements for your business transactions? Well done. Yet are you really doing all you can to secure your global trade?
Many are not aware that there is more to do. For example: How do you manage bans on indirect provisions in your organisation? Are you even aware of who owns the companies you are trading with?
In today’s politically unstable climate, no company can afford to take its legal obligation to comply with global trade regulations lightly. It is prohibited, for example, to provide economic resources to any individuals or organisations listed on the EU’s official embargo lists.
Conveniently, the EU provides the Common Foreign and Security Policy (CFSP) list. This database allows companies to automatically check their business contacts against a consolidated list of all persons, groups, and entities that are subject to EU financial sanctions. The CFSP list is the official EU database, containing all persons, groups, and entities that are on any lists of names and anti-terrorism regulations at EU level (2580/2001, 881/2002, and 753/2011) and in the embargoes at national level.
The EU’s country-specific embargo regulations include trade restrictions on specific goods as well as bans on provisions to specific persons and organisations. Bans on provisions are also contained in the embargoes against individuals ('anti-terror regulations'), not just in the embargoes against countries. Companies can ensure compliance in this area by screening business transactions against restricted party lists. And most companies engaged in international trade are fully aware and trained in the process – despite the heavy volume of sanctions lists to screen.
However now it gets tricky: in addition to direct provisions, these regulations also prohibit any indirect provisions. Also compliance in this area is a great challenge for businesses in their day-to-day operations – because there is neither transparency nor any government lists to screen against. When it comes to indirect provisions, some companies are not even aware of their obligations.
An indirect provision is present when economic resources do not go directly to a company that is listed on a sanctions list but to another company that is controlled by a listed person or organisation. The EU Council’s document 5993/13 was issued to help businesses understand bans on indirect provisions. It defines “control” as an ownership share of more than 50%. However if the risk assessment in a specific case shows that the resources will not benefit, or be used by, the listed person, then the basic assumption for indirect provisions should be set aside.
Not entirely straightforward, is it? Bearing in mind that the EU doesn’t provide any tools for the automatic screening, it becomes clear why compliance with bans on indirect provisions is highly difficult to achieve in practice.
Also it is not just EU regulations that apply: the US Office of Foreign Assets Control (OFAC), which oversees embargoes in the United States, also calls for compliance. OFAC applies a '50% rule', whereby a company that is not directly listed on the US Specially Designated Nationals and Blocked Persons List (SDN) but is owned to at least 50% by a person or company that is listed, it must be dealt with in the same way as the listed company itself.
An example makes it clearer:
- Company A owns 50% of both company B and company C. If company A is sanctioned, company B and company C are sanctioned by extension, too, even if they are not directly sanctioned themselves.
- Company D has a more complex ownership structure: company A owns 15%, company B 25%, and company C 20%. This example shows that the 50% rule also applies to accumulated ownership shares. If company A is sanctioned, then company D will be sanctioned as well because it holds an accumulated ownership share of over 50% by sanctioned companies, directly or by extension.
So, even if a business screens all its direct business partners and applicable transactions against all the relevant sanctions lists, it might still not be completely safe – nor fully compliant. To apply due diligence in this area, a company needs to understand the ownership structures of all business partners, starting from the very top in the chain, from parent companies right down to the shareholders. In addition, once the 50% rule applies, all relevant parties must be screened, too. Only a business transaction with the original trading partner is safe and in compliance with the law.
Ownership structures of companies have grown very complex through globalisation and they’re not exactly transparent either. It requires serious and repeated research to identify a company’s ownership structure and there are dynamic changes to consider, too. It’s truly a great effort to ensure compliance in this area. Thank fully, there are smart IT solutions available today that automate the task and support companies in mastering the challenge.
