How to screen a customer whose owner is on a US sanctions list?

Why checking the customer's name is not enough

Most companies screen customers by comparing their name against sanction lists. If they are not on the list, the business proceeds. However, this procedure only catches companies explicitly listed by authorities. It fails to detect subsidiaries and sister companies owned by a sanctioned person. It is often through these entities that goods reach sanctioned customers, as a new company with no history easily passes a name-based check.

Therefore, both US and European rules work with ownership, not just the name. The 50% rule means that a company owned at least 50% by sanctioned persons is treated the same as the sanctioned persons themselves. Consequently, sanctions also affect companies that are not on any list. For suppliers, this means that responsibility does not end with checking the name. They must know who stands behind the customer, even through multiple intermediaries.

A Czech company must deal with three layers of rules. The first layer consists of European sanctions, which apply directly in the Czech Republic and whose violation is penalized by the Czech state. The second layer consists of US Department of the Treasury sanctions, which affect transactions with links to US banks, companies, and individuals. The third layer consists of US export controls, which track goods, software, and technology of US origin. Each layer has different triggers and different consequences.

Management should know which layers apply to them before signing the first contract. A manufacturer exporting its own machinery without US parts and invoicing in euros primarily deals with European sanctions. An electronics distributor with US chips deals with all three layers. Based on this, the company determines how deep the screening should be and how much it will cost. Without it, the company either screens at an unnecessarily high cost or insufficiently.

The US 50% Rule and the Date of November 10, 2026

The US Department of the Treasury has applied the 50% rule in its current form since 2014. According to its Office of Foreign Assets Control (OFAC), any company owned directly or indirectly, in the aggregate, 50% or more by one or more blocked persons is blocked. The rule does not apply to every entity on any US list, but to persons whose property is blocked. The shares of multiple such owners are aggregated, meaning two owners with a 25% share each are sufficient. Control alone, without such an ownership share, does not automatically block the company, but the office warns against trading with such companies.

The US Department of Commerce adopted a similar principle for export controls at the end of September 2025. Its Bureau of Industry and Security (BIS) issued a rule under which a company owned 50% or more by entities on the Entity List is automatically subject to the same restrictions. The Entity List is a list of companies and individuals to whom US goods can only be exported with a license. The same treatment applies to companies owned by selected military end-users and certain sanctioned persons.

The bureau suspended the rule for one year starting November 10, 2025 (notice in the Federal Register). According to the notice, the suspension ends on November 9, 2026, unless further extended. The US Secretary of the Treasury announced on September 24, 2026, an extension of the trade truce with China until January 10, 2027. According to available information, the bureau has not yet published a formal date change in the Federal Register.

For planning purposes, it is therefore prudent to count on November 10, 2026, rather than January 2027. The suspension resulted from a trade agreement and can end at short notice. A company unprepared for the rule will have to halt pending deliveries within a few days. However, screening the owners of regular customers takes weeks because it requires documentation from the customers themselves. Anyone who starts only after the announcement will not make it in time.

What European and Czech Sanctions Law Requires of Companies

European sanctions apply directly in the Czech Republic, and their violation can be an administrative offense or a criminal offense. In non-binding guidance updated in 2024, the Council of the EU states that the freezing of assets also applies to companies owned at least 50% by sanctioned persons, and that the shares of multiple such owners are aggregated. However, the wording of the specific sanction regulation is binding. Unlike the US approach, the European approach also includes control without a majority share, for example, through front persons or contractual rights.

A company that reliably learns that it holds assets of a sanctioned person must notify the Financial Analytical Office without undue delay. The notification concerns, for example, an advance payment received or goods intended for such a customer. If suspicion arises during contract negotiations and cannot be verified beforehand, the notification obligation arises immediately after the contract is concluded. From the moment the company learns of this, it must not dispose of the assets other than to protect them.

Both obligations are set out in Sections 10 and 11 of the Act on the Implementation of International Sanctions. If a sanction prohibits disposing of assets, the law disregards any legal transaction that violates it (Section 12a). Thus, a contract with a customer subject to asset freezing does not guarantee payment or the return of goods to the company. Both money and goods may remain blocked for the entire duration of the sanctions. The Financial Analytical Office then decides on the next steps and may take the assets under state administration.

Violation of a sanction order or prohibition carries a fine of up to CZK 50 million or 10% of annual turnover, whichever is higher. The law also allows for a fine of up to twice the benefit obtained or damage caused. The same upper limit applies to non-compliance with the notification obligation, while the ceiling for disposing of frozen assets in violation of the prohibition is CZK 1 million (Section 19 of the Act). Whether a specific customer falls under the European asset freeze depends on their ownership structure as well as contractual links. Therefore, the Prague-based ARROWS legal team assesses this issue individually for each customer.

US sanctions do not fall under the Czech definition of international sanctions. The law only considers measures of the UN Security Council, the European Union, and the national sanction list as international sanctions (Section 2 of the Act). Therefore, a violation of the US 50% rule is not in itself a Czech administrative offense. However, the company faces consequences elsewhere: in access to US suppliers, banks, and the market, and in potential penalties from US authorities.

When US Rules Apply to a Czech Company

Czech companies often assume that US regulations do not apply to them because they do not export to the United States. However, US export controls track goods, not the exporter's headquarters. They apply to goods, software, and technology of US origin, as well as products containing US components above a specified threshold. If a Czech company supplies a machine with a US control unit, the US regime may apply to it even when selling to a third country.

The second trigger is payments in US dollars and US banks. Payments in dollars usually route through banks in the United States, thereby falling within the reach of US Department of the Treasury sanctions. What matters is the specific payment path and the involvement of a US bank or other US person, not the currency on the invoice itself. A bank that intercepts a payment in favor of a blocked company will usually freeze it. The Czech company then does not get paid and may have its money blocked for a long time.

The third trigger is contracts with one's own suppliers and customers. A US component manufacturer usually requests a commitment that the parts will not end up with persons subject to US restrictions. Banks and insurance companies often demand the same commitment. Violating such a commitment then risks not only a fine from the authority but also the loss of the supplier or financing. Therefore, it makes sense to understand the 50% rule, even if the company itself does not export to the United States.

The European export control regime applies alongside the US regime, not instead of it. A European export license does not mean that the export will pass under US rules, and vice versa. An overview of Czech and European export obligations is discussed in the article Export of Dual-Use Goods from the Czech Republic in 2026. The 50% rule adds another question to these obligations: who owns the customer.

How to Screen the Customer's Owners

Screening begins with a questionnaire in which the customer lists its direct and indirect owners and ultimate beneficial owners. The company requests ownership shares in percentages and the identification of persons who have the right to appoint management or veto decisions. The questionnaire is signed by the customer's statutory body. The company compares this data with extracts from commercial registers in the countries where the individual intermediaries are based. How to integrate screening into corporate procedures is described in the article on the internal compliance program (ICP) for export control.

The second step is to compare each owner with sanction lists, not just the customer itself. The company checks the European consolidated list, the US Department of the Treasury sanction list, and the Entity List. For each listed owner, it records their share and aggregates the shares of sanctioned persons in a single company. It does not calculate indirect shares by simple multiplication: according to the US authority, an intermediary owned at least 50% by a blocked person is also blocked, and its share in the next company is counted in full. The company then compares the result against the threshold of each regime separately.

The third step is to look for signs of control without a majority share. Red flags include recent transfers of shares to just below the 50% threshold, trustees and trusts in the structure, or an disproportionately complex structure. A company established shortly before the first order or an unusual delivery route is equally suspicious. These signals do not automatically mean a ban on trade. However, they mean that the screening must go deeper and that the decision should be made by management, not the sales representative.

Screening needs to be repeated, as a one-time check is no longer valid after a few months. The customer's owners change, and sanction lists are continuously updated. It is prudent to repeat the screening before each major delivery and regularly for long-term customers. Which depth of screening to choose depends on the goods, the country of destination, and the customer's willingness to provide documentation, which is why the Prague-based ARROWS legal team sets it up individually for each type of transaction.

The final step is to document the decision. To apply for a dual-use export license, the exporter must provide an import certificate or an end-user statement (Section 8 of Act No. 594/2004 Coll.). In it, the end-user states the intended use and declares that they will not re-export the goods without the consent of the exporter's country. Under the European Dual-Use Regulation, the exporter must keep export records for at least five years from the end of the year in which the export took place. It is worth keeping the owner screening documentation for the same period.

What to Address in the Contract with the Customer

The contract should complement the screening, not replace it. In it, the customer declares that neither they nor their owners are sanctioned persons and that they are not owned or controlled by such persons. The declaration should cover both European and US lists and explicitly include the 50% rule. Without this, the customer may argue that their declaration only applied to themselves.

The second provision is the obligation to report changes in the ownership structure. The customer commits to notifying the supplier of any change in owners above a specified share and any listing of an owner on a sanction list. It is advisable to set the deadline in business days. This way, the supplier receives the information before discovering it through their own checks, and the contract provides a basis for the next step.

The third provision is the supplier's right to suspend performance and withdraw from the contract if a subsequent delivery would violate applicable sanctions. The contract should also regulate who bears the consequences of such suspension. However, the law does not allow excluding liability for damage caused intentionally or by gross negligence in advance. A clause prohibiting re-export to specified countries is also appropriate. How Czech exporters choose these clauses is described in the article on what exporters base their cooperation with ARROWS on in international law.

A contractual clause does not protect the company if it knows or should have known that the customer is subject to sanctions. Authorities assess what the supplier actually found out and what they could have found out. Therefore, the contract functions as a second line of defense behind the screening, not as a replacement. Clauses make sense mainly for long-term customers whose owners may change during the term of the contract.

Mistakes That Render Screening Worthless

The first mistake is checking only the customer's name. The company goes through the lists, finds nothing, and delivers. Later, it turns out that the customer is majority-owned by a sanctioned person through a holding company in another state. Such screening will not hold up before the authority because it did not map the owners. Yet, the remedy is inexpensive: a questionnaire and register extracts are sufficient.

The second mistake is failing to aggregate the shares of multiple sanctioned owners. The company finds that two sanctioned owners hold 30% each, and since neither exceeds half, it permits the transaction. However, both US and European approaches aggregate shares, meaning the customer is blocked. This mistake is repeated mainly by companies that adopted procedures from other jurisdictions where shares are not aggregated.

The third mistake is a one-time screening. The customer passed the check when the framework agreement was concluded two years ago, and since then, no one has examined whether the owners have changed. The fourth mistake is failing to document the result. The company performed the screening but has no record of what it found, and cannot prove it to the authority. Both mistakes only come to light during an audit or a blocked payment.

The fifth mistake is underestimating negligence regarding dual-use goods. The Criminal Code penalizes the violation of an international sanction concerning dual-use goods or technology or military material, even when caused by gross negligence (Section 410a). This carries a penalty of imprisonment for up to one year or a ban on activity, and up to three years in aggravating circumstances. Thus, penalties can also threaten those who grossly neglected a screening that could have been reasonably required of them.

Intentional violation of such a sanction on a larger scale is punishable by imprisonment from six months to five years (Section 410 of the Criminal Code). What kind of screening will suffice for defense depends on the nature of the goods and the signals the company had. Therefore, the Prague-based ARROWS legal team evaluates this based on the business history of the specific customer.

Risks of Trading with a Customer with Unclear Owners

Conclusion: Three Decisions for Company Management

This article has shown that screening a customer by name is no longer sufficient. Both the US Department of the Treasury and the European Union also assess companies owned at least 50% by sanctioned persons. A similar rule for US export controls may return on November 10, 2026. Furthermore, a Czech company must report any suspicion of European sanctions to the Financial Analytical Office.

For management, this results in three decisions. The first is to determine which layers of sanctions apply to the company based on goods, payments, and suppliers. The second is to implement owner screening with share aggregation and regular repetition. The third is to supplement contracts with customers with declarations, the obligation to report changes, and the right to suspend performance.

Delay does not pay off. If the US rule returns in November, a company without prepared screening will halt deliveries and scramble for documentation under time pressure. Under European sanctions, a single unscreened delivery can mean blocked money, a fine, and criminal proceedings. The costs of screening are negligible in comparison.

Lawyers of the Prague-based ARROWS law firm screen business partners, draft contracts with customers, and represent companies before the Financial Analytical Office and other authorities. They also help companies set up their own screening procedures and train sales teams. Write to us at consultation@arws.cz or explore our international law services.