Using Corporate Intelligence to Ensure that Your Company Does Not Inadvertantly Violate International Sanctions

On July 8, 2014 an article was published in the online journal IFLR that caught our attention as it deals with customer due diligence. It is called “Sanction clauses in Russian Syndicate Loans.” It was written Michael Bott and associate Ryan Ayrton of Linklaters in Moscow. In two of the situations described it is clear that proper background due diligence and a well functioning corporate intelligence group will substantially reduce the risk of violating the sanctions.

The article examines the responsibilities of financial institutions with respect to their dealings with individuals who are sanctioned by the European Union and the United States. The article focuses on sanctioned individuals from Russia and on the finance sector, but clearly there are sanctioned individuals from all over the world and these sanctions affect technology, manufacturing other industries as much as the finance sector. The information described in the article has far broader implications.

The first risk that caught our attention is “facilitation risk”. In the scenario described a financial institution lends money to a borrower. The borrower is not itself sanctioned, but they are in-turn dealing with entities that are. The initial borrower may then lend the money to the sanctioned entity (i.e. forward the loan on) which would be an indirect violation of the sanctions laws. This first borrower is “facilitating” the loan and the lender should have known better.

The application of this concept goes well beyond finance. According to the Fact Sheet on Ukraine Related Sanctions issued by the White House on March 17, 2014 the sanctions extend to “any individual or entity that operates in the Russian arms industry, and any designated individual or entity that acts on behalf of, or that provides material or other support to, any senior Russian government official.

According to the Australian Government’s Department of Foreign Affairs and TradeAustralian law prohibits: the use of or dealing with an asset that is owned or controlled by a ‘designated person or entity’ for Ukraine; and making an asset available directly or indirectly to, or for the benefit of, a ‘designated person or entity’ for Ukraine without a sanctions permit.”

The reference to “directly or indirectly” is a common theme in legislation dealing with sanctions, including in Canadian legislation. Therefore it is incumbent upon exporters and companies providing services internationally to ensure that they are not “indirectly” breaking the law by selling their goods to organizations that are simply forwarding the products on to sanctioned individuals or entities.

The article suggests terms which can be included in loan agreements to help protect lenders in these situations; however, proof that some level of due diligence was done of a customer’s counter-parties would be helpful in a defense, should it be found out later that a company was in fact dealing indirectly with a sanctioned individual or country.

Reptuational concerns were also identified in the article.  It describes a situation where a Russian borrower, is not sanctioned, but one of its officers, directors or associates is sanctioned. The authors argue that as a strictly legal matter the lender won’t be violating any law; however, as a reputational matter they may have some concerns.

They reference a control that a lender may include in a loan facility. The lender may require a representation by the borrower that ” none of its officers, directors and affiliates are sanctioned.” If it is found that they are sanctioned, the borrower may call the loan, if they choose to do so. But what if the borrower fails to disclose their association with the sanctioned individual. Corporate intelligence would assist in identifying the association in this case.

In the current geopolitical climate it is important to seek assurances from your business counter-parties that they are not dealing inappropriately with sanctioned individuals or countries. If they are, they may cause your organization to inadvertently violate sanctions laws. It is equally important to learn if your partners and customers are telling you the truth when they make those representations and to learn if they have omitted anything significant.

We have been assisting clients in conducting anti-money laundering and corruption of foreign officials due diligence for years. In the near future, we expect that this type of “anti-sanctions” due diligence will become more important.


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