Overview of OFAC aims and processes

As the war in Ukraine rages on, the Office of Foreign Asset Control (OFAC) of the United States (US) has imposed increasing sanctions on global individuals and entities. In a bid to avoid the increasingly aggressive enforcement activity of OFAC and the Bureau of Industry and Security (BIS), Russian and Belarussian entities have utilised intermediaries and various company structures to evade sanctions. This has led to further designations of entities across Europe, Africa and Asia.

Provided the increasingly wide net of sanctioned intermediaries, mergers and acquisitions (M&A) transactions require careful consideration by both seller and purchaser. This article considers the OFAC guidance and enforcement actions in the M&A context and outlines a South African (SA) perspective to mitigate OFAC risks.

Impact of OFAC listings

OFAC is mandated to enforce sanctions in order to protect US foreign policy and national security goals. It does so by identifying entities which may be engaging in activities subject to sanctions, based on US intelligence. Following an investigation into an entity’s activities, and necessary reviews by other government departments, OFAC publishes an entity’s details on the Specially Designated Nationals and Blocked Persons (SDN) List.

The consequences of being added to the SDN List (a Listed Entity) are significant, since a US person or entity cannot transact with a Listed Entity. If any goods are possessed by a Listed Entity in US territories, those goods must be blocked and reported to OFAC. As a result, OFAC listings have all US accounts and properties of Listed Entities blocked, along with most financial institutions, which block Listed Entities from accessing any US dollar (USD) denominated accounts or their accounts entirely, whether or not in the US. Further, USD transactions either by or for the benefit of Listed Entities are likely to be blocked by any bank, whether the bank is situated in the US or internationally.

Framework for OFAC Compliance Commitments (Framework)

In the regulation of M&A transactions, OFAC has published a framework in which it strongly suggests a risk-based approach to ensure sanction compliance throughout any M&A process. The framework encourages the engagement of a due diligence process to ensure that sanction-related issues are identified, escalated to the relevant authorities, and addressed before the closing of any transaction. Following closing, the framework also suggests additional post-closing risk assessments. These additional risk assessment processes need to be included in the due diligence process.

South African perspective

While the OFAC machine continues to churn on, it is important to understand that not all is doom and gloom. The fundamental point to understand is that an OFAC listing of a South African entity or individual has no impact or force under South African law. The entering into M&A transactions by South African entities with foreign entities that are listed on OFAC is not itself illegal under South African law.

Given that non-US persons or entities are free to transact with OFAC-listed entities, the risks can be mitigated in various ways to ensure that a transaction reaches completion.

Risk Mitigation in the M&A Process

It is important for the purchaser to conduct thorough due diligence, which includes an OFAC risk assessment analysis of a target company (the Target). The purchaser should also be well informed of the business of the Target and the regions where the Target conducts its operations and trade, as OFAC has imposed sanctions on various countries, government agencies and companies. A further measure to mitigate OFAC risks is to perform a deep dive into the existing ownership of the Target, as well as screening the Target’s shareholders and directors against the OFAC database. Provided that the Listed Entity will not be able to hold USD-denominated accounts, transactions will need to be in South African Rands or an alternative currency.

A prudent approach to contractual representations would include specific warranties and indemnities to negate the effect of potentially acquiring an OFAC-listed company. While this may not completely mitigate OFAC risks, it does signify that the purchaser has made an effort to conduct the appropriate due diligence and act in good faith.

As an additional measure, the parties may agree that the proceeds from the M&A transaction involving a Listed Entity can be ring-fenced and placed in escrow pending the Listed Entity’s removal from the SDN List. A further way to mitigate the risk is to request the US Department of Treasury to grant a specific license to proceed with the distribution of proceeds from the M&A transaction with a Listed Entity.

Conclusion

While an OFAC listing does pose a challenge to an M&A transaction, there are many ways to safeguard and mitigate the risks that are associated with it. However, due to the regulations and complexity of OFAC, removal from the SDN List and certain transactions with Listed Entities can be complex. This article does not purport to exhaustively address these issues. A very limited number of predominantly Washington-based attorneys, acting under general approval by the US Treasury, are best placed to assist clients on OFAC.

Brandon Irsigler is a Partner, Noushaad Omarjee a Senior Associate and Davin Olen a Legal Professional Assistant | Dentons South Africa.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

DealMakers is SA’s M&A publication.
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