Due to costly settlements secured by U.S. regulatory agencies, banks, insurers, and corporations are increasingly inserting rigorous OFAC sanctions compliance language into their credit agreements, insurance policies, debt-offering underwriting agreements, and corporate acquisition agreements.
A current trend by banks, insurers, and acquisition-minded corporations is to insert rigorous Office of Foreign Assets Control (OFAC) economic sanctions compliance provisions into credit agreements, insurance policies, debt-offering underwriting agreements, and acquisition agreements. This trend is no doubt driven in part by the recent surge in huge settlements obtained by U.S. regulatory agencies arising out of enforcement actions for economic sanctions violations committed by major banks as well as other companies.
Many contracting parties would like to believe that the mere inclusion of OFAC economic compliance language in one or more contractual provisions enables a contracting party to insulate itself from OFAC liability and pass off responsibility for OFAC sanctions compliance to the contract counterparty. These efforts fall flat, however, and do not eliminate underlying OFAC risk for those seeking this goal. At most, OFAC sanction compliance language provides contracting parties with a private contractual remedy from contract counterparties for monetary damages associated with OFAC sanctions violations.
To the extent that contracting parties and contract counterparties are each “U.S. persons,” as defined by OFAC, they will each have separate and individual liability and responsibility to the U.S. government for OFAC sanctions compliance, which cannot be defeated by private contract language of any kind. This means that to truly insulate themselves from OFAC liability, all U.S. persons must conduct their own OFAC sanctions screenings and ensure that they are not dealing with an OFAC-sanctioned party or an OFAC-sanctioned country.
OFAC sanctions compliance provisions vary in purpose and scope, as evidenced by sample clauses below, each of which is presented for illustrative purposes only.
Provisions Intended to Identify the OFAC Sanctions Status of the Contract Counterparty
None of the Borrower, any of its Subsidiaries or, to the knowledge of the Borrower, any director, officer, or employee of the Borrower or any of its Subsidiaries is a Person who
Provisions Intended to Identify the OFAC Sanctions Status Compliance for the Ownership and/or Control of the Contract Counterparty
None of the Borrower, any of its Subsidiaries or, to the knowledge of the Borrower, any director, officer, or employee of the Borrower or any of its Subsidiaries is a Person who
Provisions Intended to Identify the OFAC Sanctions Compliance Status of Both the Contracting Party and the Contract Counterparty
To the extent applicable, each Party is in compliance with the Trading with the Enemy Act, as amended, and each of the foreign assets control regulations of the U.S. Department of Treasury (31 C.F.R., Subtitle B, Chapter V, as amended) and any other enabling legislation or executive order relating thereto, except to the extent that such noncompliance would not reasonably be expected to have a Material Adverse Effect.
Provisions Intended to Obtain Assurance That No OFAC Investigations Are in Process
None of the Borrower, any of its Subsidiaries or, to the knowledge of the Borrower, any director, officer, or employee of the Borrower or any of its Subsidiaries is a Person who
Provisions Intended to Obtain Assurance That an Investment Available for Purchase Was Not Funded by a Sanctioned Party or with Funding from a Sanctioned Country
The monies used to fund Seller’s acquisition and funding of the Interests were not derived from, invested for the benefit of, or related in any way to
Provisions Intended to Obtain Assurance That Loan Proceeds Will Not Be Used for the Benefit of a Sanctioned Party or a Sanctioned Country
The Borrower will not, directly or indirectly, use the proceeds of the Loan or lend, contribute, or otherwise make available such proceeds to any Subsidiary, other Affiliate of the Borrower, joint venture partner, or other Person
(Note that the language in the second bulleted item, taken holistically, may impose on a borrower economic sanctions compliance obligations and contractual liability far wider than applicable law and regulation may impose—depending on the nature of the borrower’s corporate organization, place and type of business, and other factors. Accordingly, we recommend to many borrowers that these types of sections’ respective expansive scopes be narrowed or otherwise be made congruent to—and not beyond—the jurisdictional limit and scope of U.S. sanctions requirements for U.S. borrowers.)
Provisions in Underwriting Agreements Intended to Obtain Assurance That Proceeds from Debt Offerings Will Not Be Used for the Benefit of a Sanctioned Party or a Sanctioned Country
Neither the Company nor any of its subsidiaries, directors, officers or employees, nor, to the knowledge of the Company, any agent, or affiliate or other person associated with or acting on behalf of the Company or any of its subsidiaries is
For the past 5 years, the Company and its subsidiaries have not knowingly engaged in and are not now knowingly engaged in any dealings or transactions with any person that at the time of the dealing or transaction is or was the subject or the target of Sanctions or with any Sanctioned Country.
Additional Considerations
Although the above types of sample OFAC sanctions compliance provisions are currently quite commonplace, the contract parties that insert this type of language into their agreements should note that although such provisions may impose restraints on a contract counterparty, they do not absolutely immunize the contract parties from all OFAC liability in cases where the contract counterparty violates the relevant OFAC sanctions compliance language.
OFAC and other U.S. regulatory agencies are not bound by the terms of such agreements between private parties. Based on the specific facts and circumstances of a particular transaction, OFAC can seek to impose strict liability on a contracting party for certain violations committed by the contract counterparty, despite language in the agreement in which the contract counterparty covenanted that it would comply with all OFAC prohibitions.