Criminal Defense Lawyers

Due Diligence on LCs Involving Sanctioned Areas

When banks issue letters of credit (LCs) involving parties or goods from sanctioned areas, they need to take extra precautions. Conducting proper due diligence can help avoid penalties and legal issues down the road.

Here’s an overview of key due diligence steps banks should take when handling LCs with ties to sanctioned areas:

Screen All Parties Against Sanctions Lists

Banks must screen the applicants, beneficiaries, and any other parties involved against relevant sanctions lists like OFAC’s SDN list. This helps identify prohibited parties or transactions early on[1].

Sanctions lists change frequently, so screening should occur at multiple points – when receiving the LC application, before issuing or confirming the LC, before making any payments, etc. Automated screening systems can help streamline this process.

Conduct Enhanced Due Diligence on High-Risk Areas

LCs involving certain countries or regions deemed high-risk for sanctions violations warrant extra scrutiny. For example, companies operating in Syria have faced issues like Lafarge did[2].

For high-risk areas, banks should:

• Gather more details on the underlying trade transaction
• Verify goods aren’t dual-use or prohibited
• Review ownership structures for front companies
• Require extra certifications from applicants

The goal is understanding who the parties are and what they’re actually up to.

Watch for Red Flags

Certain red flags may indicate sanctions evasion or other suspicious activity:

• Complex corporate ownership structures
• Shell or front companies
• Goods transiting through multiple countries
• Unusual shipping routes
• Discrepancies in documents

Banks need to investigate any red flags and decide if transactions should proceed. Having clear escalation procedures is key.

Document Due Diligence Steps

Keep detailed records of all due diligence performed, including:

• Party and transaction screening results
• Background research conducted
• Any enhanced due diligence steps taken
• How red flags or issues were resolved

Thorough documentation provides an audit trail demonstrating the bank’s compliance efforts.

Monitor for Changes

Sanctions lists and geographic risks evolve constantly. Banks should:

• Screen parties/transactions again before final payments
• Update screening filters to catch new designated parties
• Review due diligence procedures periodically

Regular monitoring helps reflect new developments that may impact LCs.

Conduct Ongoing Staff Training

Make sure LC operations, compliance, and other relevant staff understand:

• Sanctions regulations and risks
• The bank’s due diligence policies and procedures
• How to identify and escalate red flags

Training ensures personnel have the knowledge to handle LCs properly.

Assess and Address Risks in M&A Deals

Mergers and acquisitions involving high-risk areas also require sanctions due diligence. The Lafarge case highlights this[4].

Banks should:

• Review target’s location, partners, supply chains, etc. for sanctions exposure
• Perform risk-based due diligence on all parties
• Develop integration plan to strengthen compliance

Proactively evaluating sanctions risks allows informed decisions on deals[6].

Watch for Virtual Currency Red Flags

Virtual currencies are an emerging sanctions evasion method. Banks should watch for:

• Parties connected to blocked digital currency addresses
• Use of mixers and tumblers to obscure transactions
• Unexplained funds from exchanges or adminstrators

Enhanced due diligence like verifying wallet addresses can help mitigate risks[5].

Implement Strong Compliance Programs

A solid sanctions compliance program enables effective due diligence. Key elements include:

• Documented policies and procedures
• Ongoing training initiatives
• Experienced staff overseeing compliance
• Robust auditing and reporting
• Escalation protocols for red flags

A strong program provides the foundation for managing sanctions risks.

Seek Legal Guidance When Needed

Sanctions regulations are complex. Consulting external legal counsel is prudent when:

• Facing unclear or ambiguous situations
• Transactions involve high-risk parties or locations
• Significant red flags remain unresolved

Experienced attorneys can help interpret regulations and provide advice on handling tricky LCs.

Stay Up-To-Date on Regulatory Changes

Sanctions rules frequently change. Banks need to:

• Monitor OFAC/regulator announcements for updates
• Review new legislation, directives, advisories, etc.
• Update policies, procedures, and training accordingly

Keeping current ensures compliance with the latest requirements.

Conclusion

Conducting proper due diligence on LCs linked to sanctioned regions requires vigilance. But banks can manage the risks by screening parties, monitoring transactions, documenting processes, and staying up-to-date on regulations. Robust know your customer and compliance programs provide a solid foundation for this effort. With sufficient care and caution, banks can handle these complex LCs while still meeting their compliance obligations.

References

1. Implementing sanctions screening and due diligence methods for products and payments
2. Lafarge & Acquisition Due Diligence – Beware of Sanctions Risk in High-Risk Jurisdictions
3. Frequently asked questions on circumvention and due diligence concerning sanctions adopted following Russia’s military aggress
4. Lafarge Pleads Guilty to Conspiring to Provide Material Support to Foreign Terrorist Organizations
5. OFAC’s Sanctions Compliance Guidance for the Virtual Currency Industry
6. DOJ Brings First Terrorism Material Support Charge Against a Corporation, Underlining the Importance of Sanctions and Export Controls Compliance