[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
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.