Criminal Defense Lawyers

Unwinding Acquisitions of Sanctioned Entities

In response to Russia’s invasion of Ukraine, the United States, European Union, United Kingdom and other allies have imposed extensive economic sanctions on Russian entities and individuals. These sanctions restrict or prohibit dealings with sanctioned parties, presenting significant challenges for companies that have previously acquired or invested in Russian entities. Unwinding these acquisitions in compliance with sanctions regulations is complex, but failure to do so can result in severe penalties. This article examines key considerations for unwinding acquisitions of sanctioned entities.

Determining Whether an Acquisition is Impacted by Sanctions

The first step is determining whether an existing acquisition or investment is subject to sanctions restrictions. This requires analyzing:

• The scope of relevant sanctions programs and targeted sectors or parties
• The ownership structure of the acquired entity and whether it is majority or minority owned
• Whether the entity is controlled by or acts on behalf of sanctioned parties

Control does not necessarily require a majority interest, so even minority stakes may be impacted if there is evidence of control or influence by sanctioned parties[6]. Companies should review transaction documents, shareholder agreements, governance policies and board composition to assess control.

Freezing or Blocking Sanctioned Assets

If an acquired company is determined to be sanctioned, the first obligation is freezing or “blocking” its assets to prohibit transfers or dealings. This may require:[2]

• Freezing bank accounts, investment accounts and other financial assets
• Restricting transfers of physical assets like property, inventory or equipment
• Suspending business activities like sales, manufacturing or distribution

Companies should implement compliance procedures to detect and prevent any use of blocked assets. Violations can result in civil penalties and criminal prosecution.

Seeking Licenses for Authorized Transactions

While most transactions with sanctioned entities are prohibited, licenses can be obtained in some cases for authorized dealings such as:

• Winding down or divesting sanctioned investments
• Paying taxes, wages or fees incurred prior to sanctions
• Settling legal disputes related to the acquisition

OFAC has indicated it intends to take a favorable licensing approach for unwinding acquisitions, but each license application still requires detailed review[1]. The process can be lengthy so companies should apply promptly. Licensed transactions must comply strictly with the terms and conditions of the license.

Divesting or Unwinding the Acquisition

To fully comply with sanctions, prohibited investments or assets must ultimately be divested or unwound. Strategies may include:

• Sale to a non-sanctioned party – Requires an OFAC license and ensuring proceeds are not returned to sanctioned sellers
• Abandonment – May require writing off remaining investment and absorbing losses
• Liquidation – Selling off assets piecemeal with licenses to transfer proceeds

For minority stakes, options include buyouts, equity transfers or debt repayments. Each approach has pros and cons companies should carefully weigh.

Navigating Differences Between Jurisdictions

While the US, EU and UK sanctions programs largely align, some key differences create compliance challenges[5]:

• EU allows divestment to non-sanctioned parties, US requires licenses
• UK prohibits new equity issuances, EU and US permit with licenses
• Restrictions differ on providing services or software to sanctioned entities

Multinationals must track variations across programs and ensure compliance in all applicable jurisdictions.

Avoiding Secondary Sanctions Risks

In addition to primary sanctions on dealings with blocked parties, secondary sanctions target transactions with non-blocked entities that involve sanctioned sectors or parties. Risks include:

• Facilitating divestment sales that benefit sanctioned sellers
• Providing services that aid sanctioned entities like technology, software, insurance etc.
• Processing payments or transactions that involve blocked parties

Conducting enhanced due diligence is essential to avoid secondary sanctions violations.

Implementing Internal Controls and Procedures

To manage sanctions risks, companies should implement:

• Screening procedures to identify sanctioned entities in investments, customers, suppliers etc.
• Compliance policies clearly prohibiting unauthorized dealings with blocked parties
• Training programs to educate employees on sanctions regulations
• Internal controls for detecting and preventing violations
• Processes for quickly freezing assets and blocking transactions when new sanctions are imposed

Documenting these measures can help demonstrate good faith efforts to regulators if any lapses occur.

Seeking Expert Guidance

Given the complexities of unwinding sanctioned investments, companies should seek guidance from legal counsel, consultants and regulators including:

• Experienced sanctions attorneys to advise on compliance strategies and license applications
• Forensic accountants to trace flows of funds and identify risk exposure
• Corporate investigators to conduct in-depth due diligence on divestment options
• OFAC licensing officers to discuss proposed unwind approaches
• UK and EU regulators to navigate differences in sanctions regimes

This expert input can help build a defensible compliance plan and avoid missteps when divesting prohibited assets. Proactively seeking guidance signals good faith to regulators.

Self-Disclosing Detected Violations

If violations are identified during efforts to comply with sanctions, voluntary self-disclosure to OFAC and other regulators is generally advisable. Key considerations include:

• Disclosing within a reasonable time of detection to show good faith
• Providing a complete account of the relevant facts and circumstances
• Explaining the causes of the violations and remedial measures implemented
• Committing to cooperate fully with any investigations

Self-disclosure does not guarantee leniency, but is viewed favorably and can yield substantially reduced penalties. However, regulators expect prompt and complete disclosures.

Pursuing Advocacy and Guidance from Policymakers

Trade associations and companies impacted by sanctions can also pursue clarification and input from policymakers on unwinding prohibited investments, including:

• Requesting general licenses for broader categories of authorized unwinding transactions
• Advocating for safe harbor provisions to protect good faith compliance efforts
• Seeking guidance on treatment of complex ownership structures
• Asking regulators to coordinate between jurisdictions on key differences

While policy shifts often occur slowly, constructive advocacy can help shape more workable rules over time.

By taking prudent steps to comply in good faith, documenting efforts, tapping expertise, disclosing issues, and engaging policymakers, companies can pragmatically navigate the challenges of unwinding sanctioned investments.