Dilution of Sanctioned Ownership
Definition & Overview
“Dilution of sanctioned ownership” refers to techniques and structures designed to reduce the visible ownership percentage of a sanctioned person or entity in a company so that the sanctioned party falls below legal or regulatory thresholds for prohibited ownership.
The purpose is to evade sanctions or export–control obligations by making the sanctioned party appear as if they no longer hold enough ownership to trigger automatic prohibitions, while often still retaining de facto control.
In an AML/CFT context, this concept is a significant red flag because it often signals attempts to conceal involvement of sanctioned or high-risk parties and to facilitate illicit financial flows.
Detailed Explanation & Key Components
Mechanics of dilution
The dilution of sanctioned ownership typically involves layering of corporate entities, nominee shareholders, or transfers of stakes to affiliates and intermediaries.
For example, a sanctioned individual may reduce their direct shareholding in a business from 60 % to 40 % by transferring shares to a trust or shell company in which they still exert control, but because the legal shareholding drops below the regulatory trigger threshold (often 50 %), the entity may appear compliant on face value.
Another tactic is splitting shareholdings across multiple entities so that none individually reaches the threshold, but collectively the sanctioned person maintains substantive influence.
Thresholds and rules
In sanctions regimes such as that of the Office of Foreign Assets Control (OFAC), the “50 percent rule” means any entity owned 50 % or more, directly or indirectly, by one or more blocked persons is itself treated as blocked. However, where the ownership falls below this threshold, the entity may avoid automatic blocking even though control remains. This creates a gap that can be exploited via dilution. In parallel, AML frameworks may use lower beneficial-ownership thresholds (e.g., 25 % or 10 %) for identifying ultimate beneficial owners, meaning that dilution can also aim to keep the ownership level below those thresholds to avoid detection.
Control vs ownership
Dilution schemes often rely on the fact that while ownership appears reduced, control remains. A sanctioned person may retain voting rights, board influence, or beneficial entitlement to dividends and profits even though their legal share appears minimal.
This hidden control is critical because sanctions and AML laws consider not only ownership but also control and benefit. Thus, a diluted shareholding does not necessarily mean the risk is eliminated.
Sanctions evasion link
Dilution of sanctioned ownership is inherently tied to efforts to circumvent sanctions or export-control regimes.
By reducing visible ownership below jurisdictional thresholds, a sanctioned individual can seek to continue business activities, access financial services, or facilitate transactions with restricted goods or regions.
In doing so, they may also create pathways for money laundering, asset-hiding, or other illicit financial flows.
Regulatory & Compliance Relevance
Screening and enhanced due diligence (EDD)
Regulated entities must be alert to ownership dilution as a red flag during sanctions screening and beneficial-ownership verification.
When a counterparty’s ownership structure is opaque, complex, or involves multiple jurisdictions and shell vehicles, the risk of hidden sanctioned ownership and control is heightened.
Enhanced scrutiny, ongoing monitoring of ownership changes, and linking to available sanctions lists become essential.
Risk-based approach and governance
Dilution of sanctioned ownership increases the risk rating of a customer or relationship because it suggests potential attempts to hide sanctioned participation.
Institutions should integrate this into their risk models and governance frameworks, applying more intensive due diligence for structures involving multiple layers, nominee arrangements, or unusual share transfers.
Legal and liability implications
Failure to identify a sanctioned party’s control through diluted ownership structures can expose financial institutions and other obligated entities to serious regulatory and legal consequences. Sanctions enforcement authorities often hold entities strictly liable for dealing with blocked persons—even unknowingly—if the business did not exercise adequate due diligence. Thus, an overlooked dilution scheme could mean a violation of both sanctions laws and AML obligations.
Global and cross-border dimensions
Because ownership dilution may involve entities in multiple jurisdictions, financial institutions operating globally must consider extraterritorial risk.
If a sanctioned person has indirect control of an entity via foreign sub-companies, transfers or trusts, even a business outside the primary jurisdiction may fall within the scope of sanctions or AML risk. Cross-border diligence is therefore critical.
Real-world Examples / Applications
Example 1: Corporate structuring to evade sanctions
A sanctioned individual holds 60 % of a company in one jurisdiction. To evade detection, the individual transfers 15 % of the shares to a shell company and another 10 % to a family-owned entity.
On paper, their direct shareholding is now 35 %, which is below the 50 % threshold of the relevant sanctions regime.
However, through informal agreements, board appointments, and dividends, the sanctioned person continues to exercise control and receives economic benefit.
Example 2: Financial institution engagement with layered ownership
A bank is onboarding a corporate client whose ownership is split across five holding companies in different jurisdictions.
None of the individual holding companies shows more than 25 % ownership by a sanctioned individual; however, due to layering, the sanctioned individual still retains cumulative control.
Because the bank’s screening system only checks direct ownership above 25 %, the risk passes through initial checks.
The institution later faces regulatory scrutiny when the scheme is uncovered.
Example 3: Trade finance and sanctions avoidance
A trade-finance provider finances shipments for a company whose direct owner appears to be a non-sanctioned person.
A deeper review reveals that the non-sanctioned owner is a proxy for a sanctioned individual who holds economic interest through trust vehicles and indirect ownership.
The provider’s compliance system did not detect the hidden link because the legal shareholding appeared clean, and the “dilution” obscured the sanctioned ownership.
Challenges & Considerations
Complex ownership structures
Dilution schemes often involve multiple jurisdictions, nominee shareholders, trusts, shell companies, and frequent changes in ownership percentages.
Unpacking these structures and determining ultimate beneficial ownership (UBO) or control can be resource-intensive and technically challenging.
Threshold and control ambiguity
Different jurisdictions apply different thresholds for ownership (25 %, 10 % etc.) and have varied definitions of control.
Thus, what qualifies as a diluted structure in one regime may not trigger obligations in another.
Compliance teams must be familiar with thresholds across relevant jurisdictions and recognise that control may occur with less than a majority shareholding.
Management of dynamic changes
Ownership structures can change quickly in response to sanctions risk or regulatory action.
Institutions must not rely solely on onboarding review but must maintain periodic monitoring and update ownership data.
Failing to detect a newly diluted sanctioned owner can expose the institution to retrospective liability.
Nominee and beneficiary arrangements
Even where ownership is diluted, the sanctioned person may retain beneficial interest through dividends, voting rights, or proxy appointments.
Identifying beneficial links beyond legal ownership requires robust due diligence frameworks and sometimes external investigative resources.
Coordination across compliance functions
Ownership dilution implicates sanctions compliance, export control, trade-finance, and AML functions.
Without coordination across these teams, risk can fall through gaps.
For example, a trade-finance division may focus on export-control risk while the AML team overlooks hidden ownership because of diluted shareholding.
Best Practices & Implementation Insights
- Map and document ownership and control structures for all clients, including layered entities, trusts, and nominee shareholders.
- Implement dynamic screening logic that considers cumulative ownership and indirect control, not just nominal percentages.
- Set threshold triggers tailored to sanctions, trade-control, and AML regimes (e.g., more than 25 %, control via voting rights, ability to appoint directors).
- Maintain a proactive monitoring regime to detect changes in ownership, control, and beneficial interest over the lifecycle of the relationship.
- Provide scenario-based training to compliance staff on dilution tactics, red flags (e.g., frequent share transfers, nominee directors, complex multi-jurisdiction entity chains).
- Coordinate between sanctions, trade-finance, and AML compliance teams to ensure holistic coverage of dilution risks.
- Keep clear audit trails of Ownership-Due-Diligence (ODD), decisions made, and actions taken when hidden ownership or sanctioned connections are suspected.
Related Terms
- Ultimate Beneficial Ownership (UBO)
- 50 Percent Rule
- Sanctions Evasion
- Beneficial Ownership Dilution
- Nominee Shareholder
- Shell Company
- Trust Arrangement
References
- AMACS – AML Glossary: Dilution of Sanctioned Ownership
- FOCAL – Sanctioned Ownership Structures and Hidden Control Risks: Dilution of Sanctioned Ownership
- Estonian Financial Supervisory Authority (FI) – Guidance on business relationship sophistication and sanction-related risk.
- Themis – Beyond the Surface: Why OFAC’s 50 Percent Rule Demands Deeper Due Diligence. https://www.wearethemis.com/uk/resources/spotlight/beyond-the-surface-why-ofacs-50-percent-rule
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