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An international target’s compliance with U.S. sanctions regulations is often one of the more challenging due diligence issues confronting potential buyers. But this Schulte Roth memo says that Treasury’s Office of Foreign Asset Control expects buyers to conduct appropriate pre- and post-closing due diligence on this issue.  Here’s an excerpt:

In May 2019, OFAC for the first time published guidance outlining the key components of a sanctions compliance program, entitled “A Framework for OFAC Compliance Commitments” (“Framework”). While not mandatory, OFAC “strongly encourages” U.S. firms and foreign firms subject to U.S. jurisdiction to employ a risk-based sanctions compliance program in accordance with the parameters set forth in the Framework.

The Framework specifically addresses M&A, noting that in recent years, M&A “appears to have presented numerous challenges with respect to OFAC sanctions.” The Framework recommends that a company’s sanctions compliance functions be incorporated into the M&A process and when integrating the combined entities post-acquisition.

More specifically, the Framework advises that, whether a firm is involved in an M&A deal as a participant or as an adviser, it should “engage in appropriate due diligence” to ensure that sanctions related issues “are identified, escalated to the relevant senior levels, addressed prior to the conclusion of any transaction, and incorporated into the organization’s risk assessment process.”

Post-acquisition sanctions compliance efforts are also important. “After an M&A transaction is completed,” the Framework states, “the organization’s Audit and Testing function will be critical to identifying any additional sanctions-related issues.”

The memo reviews OFAC’s 2019 enforcement activities, and offers tips on mitigating the risk of non-compliance during the pre-acquisition due diligence process and during post-acquisition integration of the acquired business.

– John Jenkins