March 21, 2019
Cross-Border: OFAC Actions Highlight Sanctions Risk
This Fried Frank memo says that two recent enforcement actions against foreign subsidiaries of US companies highlight the importance of pre-acquisition sanctions due diligence in cross-border transactions. Here’s the intro:
In the last two weeks, OFAC issued two enforcement actions for activities conducted by foreign subsidiaries that violated U.S. sanctions laws. On February 14, 2019, OFAC announced a $5.5 million civil penalty against AppliChem GmbH, a German company, for deliberately and surreptitiously continuing business with Cuba after being acquired by a U.S. company. On February 7, 2019, OFAC announced a settlement with Kollmorgen Corporation, a U.S. company, because its Turkish subsidiary continued conducting business in and with Iran after it was acquired by Kollmorgen.
These settlements highlight the importance of U.S. companies conducting enhanced sanctions due diligence on foreign targets during the M&A process, and implementing sanctions compliance policies at the new foreign subsidiaries. It is equally important to monitor the foreign subsidiaries’ compliance with U.S. sanctions laws and internal policies. Failure by foreign subsidiaries to comply with OFAC regulations could result in significant penalties for both the parent and subsidiaries.
U.S. persons are prohibited from conducting or facilitating business in or with sanctioned countries, and foreign subs of U.S. companies are directly subject to compliance obligations with respect to U.S. sanctions against Cuba and Iran. Accordingly, buyers should conduct thorough due diligence to find any history of dealings with sanctioned entities or countries. The memo also recommends implementation of U.S. sanctions compliance policies at the newly-acquired sub, particularly if there’s a history of conducting business with sanctioned parties.
– John Jenkins