Criminal Defense Lawyers

Disclosing OFAC Issues During Deals and Transactions

When companies are considering mergers, acquisitions, investments, joint ventures, exports, financing transactions, or other business deals, it’s important to conduct thorough due diligence to uncover any sanctions-related issues. Failure to identify and address Office of Foreign Assets Control (OFAC) compliance problems prior to closing a deal can lead to significant legal risks and penalties down the road.

OFAC administers U.S. economic sanctions programs and maintains lists of sanctioned individuals, entities, and countries. U.S. persons, including companies subject to OFAC jurisdiction, are prohibited from conducting unauthorized transactions or dealings with sanctioned parties. This means U.S. companies need to screen their business partners, vendors, customers, and transactions to ensure they don’t inadvertently violate OFAC regulations.

While OFAC due diligence is standard practice for U.S. companies, many deals end up running into OFAC compliance problems that weren’t caught during the initial review process. This article will examine common pitfalls in OFAC due diligence, best practices for identifying and remediating OFAC issues pre-closing, and options for voluntary self-disclosure when violations are discovered post-closing.

Common Pitfalls in OFAC Due Diligence

When evaluating a potential deal or transaction, there are several areas where inadequate OFAC due diligence frequently occurs:

• Not screening all relevant parties – Failure to conduct OFAC searches on all entities involved, including subsidiaries, parents, affiliates, partners, key executives, board members, major shareholders, etc.
• Focusing only on the target company – Conducting OFAC diligence only on the target asset or entity being acquired, rather than all involved parties.
• Failing to identify hidden owners – Not uncovering concealed beneficial owners who may be sanctioned parties.
• Not checking for blocked property – Neglecting to identify whether the target company has any property or interests subject to OFAC blocking requirements.
• No post-signing verification – Not re-screening for OFAC issues between signing and closing to catch any new designations or compliance problems.

While these examples reflect common missteps, there are many other potential gaps that can lead to OFAC violations if not properly addressed before completing a transaction.

Conducting Comprehensive OFAC Diligence

To avoid overlooking OFAC concerns, companies need to take a rigorous, systematic approach when evaluating deals. Here are some best practices for OFAC due diligence:

• Develop a detailed OFAC screening procedure and checklist.
• Screen all parties involved in the transaction, including entities, parents, subsidiaries, affiliates, partners, key executives, major shareholders, board members, etc. Cast a wide net.
• Verify identities through government IDs, passports, or other documentation.
• Research names, addresses, jurisdictions, relationships, and background information for red flags.
• Run all names through OFAC’s Search Tool and other sanctions lists.
• Conduct negative news searches to identify any problematic activities, relationships, or allegations involving the parties.
• Review transaction history and client lists for any high-risk patterns.
• Perform due diligence at multiple stages – before signing agreements, before closing deal, right before finalizing transaction.
• Ask partners to certify they have conducted OFAC searches and not identified any prohibited parties or transactions.
• Include OFAC representations and warranties in transaction documents.
• Maintain detailed documentation of all OFAC due diligence efforts.

This level of scrutiny requires significant time and resources. However, it’s essential for properly identifying potential OFAC issues, allowing them to be addressed upfront rather than unexpectedly surfacing down the road.

Remediation Options for OFAC Concerns

When OFAC diligence uncovers sanctions-related issues prior to closing a deal, companies have several options to consider:

• Obtain an OFAC license – Apply for a specific license from OFAC to authorize the transaction if it involves a sanctioned party or prohibited activity.
• Remove problem parties – If beneficial owners, key executives, or other non-essential parties raise OFAC concerns, remove them from the deal.
• Isolate entity/assets – Separate and exclude any subsidiaries, assets, or operations that are linked to OFAC issues.
• Unwind/terminate deal – If OFAC concerns are pervasive and unresolvable, unwind the transaction pre-closing.
• Delay closing – Postpone finalizing deal until OFAC problems can be addressed and resolved.

The appropriate remediation plan will depend on the specific circumstances. In some cases, relatively simple steps like removing a concerning party from the transaction or divesting a small subsidiary may be sufficient. However, if sanctions issues are extensive, terminating the deal altogether prior to closing may be the best option to avoid future OFAC violations.

Self-Disclosure of Post-Closing OFAC Violations

If improper or inadequate due diligence results in OFAC issues being discovered after a deal has closed, companies must evaluate whether to make a voluntary self-disclosure to OFAC. Potential sanctions violations can be self-reported using OFAC’s online form.

According to OFAC’s Enforcement Guidelines, voluntary self-disclosure is considered a mitigating factor that may reduce potential penalties. However, the decision whether to self-disclose is complex:

• Weigh potential penalty reduction against legal costs of internal investigation required for disclosure.
• Consider likelihood of OFAC uncovering the violation independently.
• Assess damage to reputation and share price from public disclosure.
• Determine whether disclosure will lead to additional scrutiny and consequences from OFAC or other agencies.
• Evaluate ability to remediate or exit problematic activities and partners to prevent future violations.

Recent OFAC enforcements indicate that companies allowing violations to continue after closing often receive harsher penalties compared to those who voluntarily self-disclose and take corrective actions. However, the incentives around disclosure can be ambiguous. Engaging legal counsel to perform a detailed risk assessment is key.

OFAC Penalties and Enforcement Actions

Under the International Emergency Economic Powers Act, civil penalties for OFAC violations can reach up to $302,584 per violation, with each prohibited transaction counting as a separate violation. Criminal penalties can also apply in certain cases, with fines up to $1 million and up to 20 years imprisonment for willful violations.

In recent years, OFAC has aggressively pursued enforcement actions related to sanctions violations uncovered during mergers, acquisitions, and other deals:

• In 2019, OFAC reached a $8.3 million settlement with Cobham Holdings for acquiring a company with ongoing business in sanctioned jurisdictions which continued post-acquisition.
• In 2014, OFAC penalized Zimmer Biomet Holdings $6.5 million for importing dental implants from a distributor partially owned by a sanctioned Cuban company.
• In 2010, OFAC imposed a $2 million penalty against Natco Group for sales of petrochemical equipment to a distributor with ties to an Iranian company.

These cases illustrate OFAC’s willingness to hand down substantial fines even when violations arise indirectly through a counterparty’s misconduct rather than a company’s own active sanctions evasion. Thorough due diligence and remediation efforts are essential.

Mitigating OFAC Compliance Risks in Deals

With proper precautions, companies can significantly reduce the likelihood of encountering OFAC issues on transactions:

• Develop and follow detailed OFAC screening procedures.
• Conduct extensive due diligence on all parties associated with the deal.
• Continuously re-screen for new OFAC designations prior to closing.
• Review transaction history for any high-risk patterns.
• Isolate any sanctioned subsidiaries or partners.
• Obtain OFAC licenses where required.
• Include OFAC representations in deal documents.
• Consult legal counsel when issues arise to assess disclosure risks.

Uncovering and resolving OFAC problems proactively, before completing transactions, is the best way companies can avoid becoming subject to OFAC enforcement actions and penalties down the road.