OFAC's 50% rule — what "indirectly owned" actually catches

What the SDN list is

The Office of Foreign Assets Control’s Specially Designated Nationals and Blocked Persons List (“SDN list”) is the US Treasury’s primary sanctions list. Persons and entities on the SDN list are blocked — meaning US persons cannot transact with them, their assets in US jurisdiction are frozen, and engaging in a transaction with them is a violation of the sanctions program that named them.

The list is publicly searchable at sanctionssearch.ofac.treas.gov and downloadable in bulk in machine-readable formats (CSV, XML, JSON) at home.treasury.gov/policy-issues/financial-sanctions. Most KYB and OFAC-screening tools work by matching the entity or principal name against the SDN list. A clean match returns “no SDN hit” and the transaction proceeds.

The problem is that a clean SDN screen is necessary but not sufficient for OFAC compliance.

The 50% rule, in plain language

OFAC’s “50 Percent Rule” was first articulated formally in a guidance document published in 2014 and is interpreted under Recent Actions, including the 2024 updates clarifying aggregate-ownership treatment. The rule says, in substance:

Any entity that is owned 50% or more, in the aggregate, directly or indirectly, by one or more blocked persons is itself blocked — even if the entity is not specifically listed on the SDN list.

Three points to unpack:

1. The owned entity does not have to be named on the SDN list. It is automatically blocked by virtue of the ownership relationship. A search of the public SDN list will return no result. The entity is still blocked.

2. “50 percent or more” includes aggregate ownership. If Blocked Person A owns 30% and Blocked Person B owns 25%, and they together own 55%, the entity is blocked. The individual ownership stakes don’t have to clear 50% — the aggregate does.

3. “Indirectly owned” includes ownership through other entities. Blocked Person A owns 100% of Entity X. Entity X owns 60% of Entity Y. Entity Y is blocked because it is indirectly owned 60% by a blocked person — even though Entity Y has never been named or screened.

Why this matters for KYB

For a commercial-finance processor, the 50% rule creates a verification problem that an SDN-name match cannot solve. Consider:

• The credit applicant is “Acme Trucking LLC,” a Wyoming entity.
• A search of Acme Trucking against the SDN list returns no match.
• A search of the named principal (per the credit application) returns no match.
• Acme Trucking is 60% owned by a Cayman Islands holding company. The holding company’s beneficial owner is on the SDN list.

Acme Trucking is blocked. Funding the deal is an OFAC violation. The SDN search returned no hit because the relationship was at the indirect-ownership level, two layers up from anything publicly visible. The transaction is still sanctionable.

What you can actually do about it

Honest answer for non-bank processors: less than you’d like, in most cases.

The ownership chain that triggers the 50% rule is typically not publicly recorded. The CTA Beneficial Ownership Information regime requires entities to report 25%+ owners to FinCEN, but those reports are not publicly accessible — they’re available only to law enforcement and certain financial institutions for AML purposes. State SOS records rarely capture the upstream ownership chain. The operating agreement is private.

What you can do:

Screen all known principals against SDN, not just the entity name. The named manager, listed owners on the operating agreement, the credit applicant individual — all of them.

Watch for ownership-chain red flags. Multiple layers of holding companies, particularly across jurisdictions known for opacity (Cayman, BVI, Panama, Liechtenstein), shifts the 50% rule risk from “very low” to “non-trivial.” Not every layered structure is sanctioned, but the probability ratio is meaningfully different.

Document your screening as of a specific date. The SDN list updates frequently. A screen done today is good as of today; it isn’t a permanent clearance. For ongoing-relationship deals, periodic re-screening is the standard practice.

Use OFAC’s licensing system when a screen turns ambiguous. OFAC publishes “Interpretive Guidance” and processes specific license requests when a transaction is potentially blocked but you have grounds to believe it should be permitted. A licensed transaction is OFAC-compliant; an unlicensed one is the violation.

Sectoral sanctions vs. SDN

A related point. The SDN list is one OFAC list among several. Others include:

• Sectoral Sanctions Identifications List (SSI). Persons and entities subject to limited-purpose sanctions — e.g., debt or equity restrictions, but not full asset-blocking.
• Foreign Sanctions Evaders List. Persons that have been found to have evaded sanctions.
• Non-SDN Menu-Based Sanctions List. Persons subject to specific menu-of-measures sanctions under particular statutes.
• Specially Designated Global Terrorist (SDGT) Listings, which are a subset of the SDN list under a particular executive order.

A complete OFAC screen runs against all of these, not just the SDN list. Most consumer-grade “OFAC check” tools run against the SDN only. For credit-decision use, that’s usually adequate — most sectoral-sanctioned entities also appear in some form on SDN — but it’s not exhaustive.

What this means for you

Treat OFAC screening as a necessary but not sufficient check. A clean SDN screen plus a clean principal screen plus a documented effort to identify the beneficial ownership chain (via CTA BOI when accessible, operating agreement when supplied, credit-application disclosures) is the standard. A clean SDN screen alone is the floor, not the ceiling.

A VerifySOS lookup runs an SDN screen on the entity and on the named principals from the SOS record automatically. Developers get the SDN screen result and a name_matches array on /api/v1/lookup. The 50% rule indirect-ownership exposure remains beyond what any public-data tool can fully resolve.