Companies that may count wealth Russians among their investors should be concerned that any stake they hold could be frozen if that investor is sanctioned, an expert said this week.
Luciano Racco, counsel and co-chair of the trade sanctions and export controls practice at law firm Foley Hoag, told TheStreet in an interview that many American companies have no idea that oligarchs — sanctioned or otherwise — hold stakes in their business.
That means that companies who have accepted outside investment look very closely at anything that looks even slightly opaque.
Then they need to have a contingency plan in place for having chunks of their business locked up by regulators if they have accepted Russian investment.
Thus far, the UK, EU and the U.S. have already sanctioned more than 400 people, including most of the Russian parliament, the Duma, but that is estimated to be only half of Russia's billionaires.
Related article: What Happens When a Sanctioned Oligarch Owns Part of Your Company?
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Can That Oligarch Lose Their Stake?
While American regulators have not yet started confiscating assets only tangentially related to oligarchs, the likelihood that they might eventually do so is still possible.
"Worse for companies, however, is that the stake is frozen and government approval is now needed to do anything with that interest," Racco said.
"This could make it very difficult to sell the company as government approval would be required to include the sanctioned investor’s stake and that process could take many months if not years with no guarantee of success."
Can Your Company's Assets Be Frozen?
America uses what's known as the "50% Rule," which means that if an oligarch owns 50% or more of something, that entity itself then becomes blocked and can be sanctioned, even though it might not appear of a sanctions list.
The application of the 50% Rule is painful for business, and it's meant to be. If something is affected by it — be it real estate, a business stake or even just a Gucci bag — it is immediately subject to the same freezing prohibitions as the sanctioned person.
So could your company's assets be frozen if it turns out a sanctioned oligarch has invested in your business or idea?
"Yes, if the 50% Rule is triggered. However, having any ownership interests held by sanctioned persons is risky, even if the interest remains below the 50% threshold," Racco said.
But perhaps more complexly, if a business has a few sanctioned investors and they each hold small portions, if those portions add up to 50%, then sanctions can kick in and that liquidity unexpectedly sanctioned.
"Additionally, in situations where sanctioned persons have control of an entity, even absent ownership interests that would trigger the 50% Rule, such entities are at risk of becoming the subject of future designations or enforcement actions by the Office of Foreign Assets Control," Racco said.
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What if An Oligarch's Stake is Under 50%?
Racco called structures like that "incredibly problematic," because even if a sanctioned investor's interest is less than 50%, it can cause a lot of regulatory headaches for businesses that find themselves hobbled by regulators.
"While in these scenarios the entity itself is not blocked, it may be unable to engage in many corporate actions without a license from OFAC," Racco said..
That is because Americans as prohibited from engaging in "most transactions with SDNs," unless they have a license from OFAC, and anything that is blocked but attempting to be accessed must be reported to the agency as well.
"In addition, under most U.S. sanctions programs, any person, including a non-U.S. person, may be designated for materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, these SDNs," Racco said.
