[co-author: Jeffrey Meyer]
SPACs and Sanctions Compliance
Economic sanctions have been increasingly used by countries and international organizations as a tool of foreign policy and national security. This increase in the use of sanctions, particularly by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) can create compliance burdens for individuals and companies that are contemplating engaging in a SPAC transaction. Firms that do not comply with OFAC sanctions can face serious consequences, including civil penalties and criminal prosecution. In addition, non-compliance with OFAC sanctions can raise reputational concerns for U.S. and non-U.S. companies.
U.S. SPAC sponsors should consider conducting sanctions-related due diligence on foreign investors and potential target companies to ensure that the individuals or entities are not sanctioned themselves and do not have ties to sanctioned jurisdictions or their governments. With respect to the SPAC process, this diligence should be conducted in three phases: (1) pre-IPO sanctions diligence, (2) de-SPAC diligence on the target company and key related parties, and, if needed, (3) post-closing sanctions compliance integration and audits.
Pre-IPO Sanctions Diligence
U.S. SPACs that are considering bringing foreign persons onboard as investors should consider conducting pre-IPO sanctions diligence to determine whether those investors are blocked persons or could be acting on behalf of blocked persons or other sanctions targets or whether the foreign investor causes other sanctions concerns. Such diligence can include screening names of the entities and customers against OFAC's Specially Designated Nationals and Blocked Persons (SDN) List as well as deeper dives into the business of the foreign companies to ensure that sanctions risks are minimized.
De-SPAC Diligence on Target Company
- Prior to the de-SPAC transaction. U.S. SPACs should conduct sanctions diligence on potential target companies and key executives and directors to assess whether the target has dealings with sanctioned entities, governments, or jurisdictions. This review may be necessitated by disclosure requirements and should include an analysis of the company’s affiliates, subsidiaries, and counterparties located abroad to ensure that they do not conduct business activities with sanctioned countries. In addition, this review should include an analysis of potential risks related to affiliate or subsidiary geographic locations, customers and/or suppliers, and products and services offered.
- Remediation. If sanctions risks are identified during the de-SPAC diligence process, the U.S. persons involved should undertake investigations, disclosure, and remediation efforts, which often include conducting a review of a company’s OFAC compliance program. The U.S. sponsor should ensure that the company has the following five sanctions compliance program fundamentals in place:
- Management commitment. Having senior management sign off on compliance policies and procedures assures accountability and ensures a commitment to a culture of compliance.
- Risk assessment. Conducting a risk assessment is a crucial part of an OFAC compliance program. Performing a periodic review of an entire company, including its affiliates, customers, suppliers, products, services, and geographic touchpoints ensures that an organization understands its inherent sanctions risk.
- Internal controls. Once a company understands its inherent sanctions risk profile, it should implement appropriate internal controls to identify, interdict, escalate, and report sanctions issues. These internal controls often include sanctions screening software and written policies and procedures to ensure that sanctions compliance risk is addressed and that the policies are updated regularly.
- Independent audit. Companies should also conduct an independent audit to test the effectiveness of the sanctions program. This audit may include testing the effectiveness of sanctions screening software, examining gaps in written policies and procedures, and monitoring actual compliance practices.
- Training. Training is a key element of an effective compliance program because it ensures that front-line personnel and senior management have awareness of sanctions compliance obligations. Training should be regular and adapted to address a company’s changing risk profile.
- Contractual protections. U.S. SPACs should also consider using contractual provisions to build added protection against sanctions liability when signing agreements with other investors or the target company. For individual investors, these sanctions protections typically include an affirmation that the investor is not itself sanctioned and is not involved with sanctioned entities. Similarly, for the target company, these sanctions protections typically include a statement affirming that the target company has policies and procedures in place to ensure sanctions compliance, that the company has no operations with or involving sanctioned entities, and that neither the company nor its officers are sanctioned.
Post-Closing Sanctions Compliance Audits
Following a de-SPAC transaction, management of the post-closing company should continue to monitor affiliates and subsidiaries for compliance with sanctions administered by OFAC, particularly if previous diligence uncovered sanctions-related issues. OFAC has highlighted the importance of conducting risk assessments and sanctions-related due diligence in mergers and acquisitions, particularly in scenarios involving non-U.S. companies or corporations. This diligence is especially important because OFAC has previously imposed heavy penalties against companies that have failed to engage in proper post-transaction sanctions due diligence and integration in the merger and acquisitions context, including situations where target companies devised complex schemes to hide continuing dealings with sanctions targets.
OFAC has imposed penalties on U.S. parent companies because their foreign subsidiaries continued to engage in business with or for the benefit of sanctioned countries such as Iran and Cuba. Although the U.S. parent companies identified potential sanctions issues during pre-acquisition diligence, they mistakenly relied on assurances that the foreign target companies would stop doing business with sanctioned countries post-closing. Despite these assurances, the foreign subsidiaries continued to engage in business with sanctioned countries after being acquired by the U.S. parent companies and even took steps to obfuscate their dealings from the U.S. parent companies, leading to the sanctions violations.
These enforcement actions highlight the importance of conducting periodic post-closing sanctions-related due diligence on subsidiaries of the target company. This diligence may include an audit of affiliates, subsidiaries, or counterparties that are known to transact with sanctioned countries or persons, or that pose higher sanctions risk. In addition, this analysis may include examining a company’s geographic location, customers, products and services, or policies, procedures, and practices.
Sanctions Diligence Helps Avoid Unforeseen Issues
All SPAC sponsors thinking about engaging in a de-SPAC transaction may benefit from conducting sanctions-related due diligence. As the use of sanctions increases, so too does the importance of having an effective sanctions compliance program. Companies that do not comply with sanctions expose themselves to potential civil liability and reputational concerns. Moreover, because of the set timeframe within which SPACs must acquire a company, engaging in sanctions-related diligence as early as possible may prove beneficial. Whether an organization is a SPAC sponsor considering bringing a foreign investor onboard during the IPO process or an established SPAC considering a target company for acquisition, engaging a trusted third-party advisor on sanctions issues can help avoid problematic companies or ensure sanctions issues are addressed head-on.