Economic sanctions: risk and opportunity for private equity


Financier Worldwide Magazine

September 2016 Issue

September 2016 Issue

US economic sanctions present a growing challenge to US private equity (PE) firms. Rapidly changing restrictions, including sanctions regimes for Iran, Cuba and Russia, and for global terrorism and cross-border crime programmes, bring with them the potential for strict liability civil fines and even criminal penalties, for wilful violations.

Sanctions represent a unique challenge for PE firms, primarily because they are driven not by regulation of the industry or protection of investors but by foreign policy and national security crises. As a result, the rules can change rapidly and in unpredictable ways. PE firms can also face liability issues based on the activities of their investment companies overseas. Given the complexity of the various sanctions regimes, compliance by PE firms requires an up-to-date understanding of the sanctions and the government’s views on policy and enforcement.

However, PE firms also can reap benefits from their familiarity with the rules; firms can be the first to take advantage of the easing of sanctions and make investments in newly opened markets. This article attempts to explain the implications of US sanctions for PE firms, and provides examples of both new risks and new opportunities resulting from sanctions.

Background – where do sanctions come from?

US economic sanctions are administered by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC). The president regularly grants OFAC authority to enforce restrictions on investment and other business by invoking the International Emergency Economic Powers Act (IEEPA), which grants the president broad authority to regulate and block transactions subject to US jurisdiction.

OFAC administers two general categories of sanctions programmes. First, OFAC implements broad prohibitions on business in particular territories. These territory-wide restrictions can include broad embargoes, such as those on Cuba, Iran, Sudan, Syria and Crimea, or lesser restrictions, such as the import ban for North Korea and reporting requirements for new investments in Myanmar.

Second, OFAC implements targeted restrictions on engaging in transactions with particular individuals and entities that are designated in connection with certain nefarious activities or a government’s violations of certain norms. Most of these individuals and entities are placed on OFAC’s list of Specially Designated Nationals and Blocked Persons (the SDN list). US persons – meaning US citizens, permanent residents, or individuals present in the US, as well as entities organised in the US – are prohibited from engaging in any transaction in which such SDNs have an interest. Other individuals and entities, though, are subject to lesser restrictions.

Compliance has its costs, including the development of policies and procedures for acquisitions, deal due diligence, and screening for potential partners or even customers. Those costs, however, are dwarfed by the potential penalties. IEEPA provides for strict liability civil fines of $284,582 per transaction or twice the value of the transaction, whichever is greater. The statute also provides for significant criminal penalties for wilful violations – up to 20 years in prison and $1m in fines. In recent years, OFAC has imposed fines ranging into the hundreds of millions of dollars, including on European financial institutions for ‘causing’ violations of the sanctions by routing transactions involving sanctioned countries through US banks.

Recent examples – new risks and new opportunities

PE firms investing in companies overseas, or US companies doing business overseas, face the risk of sanctions violations. However, sanctions can be lifted, creating new opportunities. To give one example of each scenario, the US rapidly imposed sanctions on Russia in 2014, significantly limiting the market for debt and equity securities of certain Russian companies. Conversely, the US lifted many sanctions on Iran in 2016, opening much of the Iranian market to foreign companies owned or controlled by US investors.

New risks – sanctions on Russia

In 2014, the US and Europe imposed several rounds of sanctions on Russia in response to its attempted annexation of Crimea and its support of separatists in eastern Ukraine. The sanctions created several new limitations that could affect the investment activities of PE firms.

First, the Russia sanctions regime introduced a new type of restriction: sectoral sanctions. The sectoral sanctions prohibit US persons from providing new debt or new equity to designated Russian state-owned enterprises. For example, US persons may not deal in new debt with more than 30 days’ maturity or new equity of most Russian state-owned banks. Similar, but not identical, restrictions apply to subsidiaries of Rostec, a massive state conglomerate, and to major Russian energy companies. Other Russian individuals and entities appear on the SDN list, which means that US persons are prohibited from engaging in any transaction involving those individuals and entities. However, those restrictions do not apply only to the names on the SDN list; they also extend to any entity owned 50 percent or more by an SDN or, pursuant to 2014 guidance from OFAC, by an aggregate of designated individuals or entities. Entities throughout Europe and elsewhere are now off-limits to US companies because of the ownership interests of designated Russian oligarchs.

Finally, firms should be aware of the embargo on Crimea. These sanctions generally prohibit the export or import of any goods, technology or services to or from Crimea from the US or by a US person. Screening the provision of goods or services to Crimea can be particularly challenging given the porous border between Russia and Crimea.

Collectively, these restrictions can create unique hazards of doing business in Russia. Given that they have only been in place since 2014, the restrictions can often take companies by surprise, especially companies without an up-to-date compliance programme.

New opportunities – Iran sanctions

On 16 January 2016, pursuant to the Joint Comprehensive Plan of Action for Iran’s nuclear programme between Iran and the ‘P5+1’ governments, the US eased sanctions stemming from Iran’s nuclear programme. This created significant new business opportunities in a market that had been isolated by sanctions for several years.

While US persons remain generally prohibited from doing business in Iran, OFAC has issued ‘General License H’, which generally authorises foreign entities owned or controlled by a US person to engage in business in Iran. In 2012, those foreign subsidiaries of US persons had been put under the same limitations as their US parents and prohibited from engaging in any business with Iran that was not exempt or licensed by OFAC. However, because of the new general licence, foreign US-owned entities may now engage in business in Iran, despite their US parentage.

In addition, the US PE firm, or any other US person, may establish or alter policies and procedures to allow that foreign investment company to engage in business in Iran. This authorisation allows the US PE firm to outline the parameters of its investment company’s activities in Iran or with the Iranian government and other entities in Iran.

Foreign subsidiaries, including investment companies, must, however, comply with the restrictions in General License H. For example, the licence does not authorise foreign subsidiaries of US persons to engage in any transactions involving anyone on the SDN list, any entity in which those SDNs have a 50 percent or greater interest, or any military, paramilitary, intelligence or law enforcement entity of the government of Iran. These limitations can be managed through careful due diligence, but do require caution and a keen sense of the Iranian market. For example, several Iranian airlines remain on the SDN list, while others have been removed. Moreover, Iran’s Revolutionary Guard Corps, which has broad private sector interests, remains on the SDN list and off-limits.

Managing risk – practical approaches to sanctions compliance

US PE firms should be keenly aware of the need for compliance with US sanctions laws and the potential consequences of a violation. However, the risks can be mitigated through close management of investment companies’ compliance programmes and practices.

PE firms should conduct careful due diligence on investment opportunities at the earliest stages of a transaction to ensure that the target has no relationship with SDNs or business in a sanctioned country that could potentially expose the PE firm to a violation.

A PE firm also should ensure that its foreign-owned investment companies have the appropriate compliance programmes in place to avoid a violation in the future. OFAC expects a ‘risk-based approach’ to compliance, and companies therefore should assess the rigor of their compliance programmes against these unique risks, including those related to operating in high-risk regions or in high-risk markets such as the financial sector.

Prudent steps usually will include establishing a written compliance policy and procedures, screening potential partners and customers against the SDN list and other US and European sanctions lists, escalating high-risk transactions to the compliance department for review, and fire-walling US persons, including US banks, from transactions that may involve a US-sanctioned country or an SDN.

With careful planning, and assistance from legal and other experts, PE firms can minimise their risks under US sanctions while also maximising their opportunities in a rapidly changing landscape.


David Mortlock and Steven Gartner are partners at Willkie Farr & Gallagher LLP. Mr Mortlock can be contacted on +1 (202) 303 1136 or by email: Mr Gartner can be contacted on +1 (212) 728 8222 or by email:

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