Due Diligence and Analysis of Particular Parties

A common step of the compliance services we provide is to conduct due diligence and analysis of particular parties overseas for companies so they know whether they are allowed to transact with those persons. Due diligence for transactions with particular parties includes several nuanced steps, which should be done by an OFAC compliance lawyer or pursuant to robust internal sanctions compliance policies.

Searching the Sanctions List

The economic sanctions regulations in the United States are administered by the Office of Foreign Assets Control (OFAC) in the Department of the Treasury. On the Department of the Treasury’s website, there is a consolidated sanctions list which can be searched. However, one should know how to use the sanctions list and make sure that the minimum name score or fuzzy logic score is adjusted appropriately to catch the types of names of the entities.

When conducting due diligence, the individual must understand the type of checklist that OFAC requires. To give a general idea of the type of compliance screening that takes place, when a name is searched on the sanctions list the results will not necessarily reflect an exact match of the party name the individual may be looking for. This is because there may not be an exact match to the party name you entered in the beginning.

It is important to check the details of each and all of the parties that appear on the search results and compare that information against the information you have about the party you are researching to understand whether there is a valid match. This is a very important step to take regardless of the size and volume of transactions that you may be considering doing with the company.

The 50 Percent Rule

Other aspects of compliance analysis and due diligence require getting general information about a company. When we provide these services to clients, they can include collecting information about the parties found online or collecting information on the corporate registration and investors of entities that are overseas.

This is important because of the 50 Percent Rule. The 50 Percent Rule holds that an entity that is owned or controlled by someone on the specially designated persons and blocked person’s list or SDN list is also subject to the same prohibitions as someone who is on the sanctions list. This means that a United States business person is not just prohibited from doing business with bad actor A, but also from doing business with subsidiary X which is owned by 51 percent by bad actor A. It is the same sanctions violation to do business with either of those two.

The Risk of Future SDN Ownership

However, the 50 percent rule is even more nuanced than this. For instance, if company Y is owned by bad actor A in the amount of 40 percent, they do not meet the 50 percent threshold. With that said, depending on the way the market works in that particular region, it may be only a short amount of time before bad actor A is able to get the additional ownership to have the 50 percent ownership of the company.

Analysis of Control and Influence

More importantly, even if they only own 40 percent of company y, bad actor A may have a large influence on the board directors or the management of the company and deemed by OFAC to control the company.

As influence does not deal with numbers, OFAC’s analysis of control and influence is done by on a case-by-case basis. So, it is important for companies to also perform their due diligence on a case-by-case basis in order to ensure there are no bad actors involved in subsidiary X or company Y, and if there are, to what extent they are owned or controlled by those bad actors.

Role of Third Party Actors

Other parts of due diligence include understanding the roles of third parties and the middleman in transactions. It is never enough to simply conduct your due diligence on the end user of an export. Rather due diligence needs to be conducted on all actors involved in the transaction which may include individuals who are handling the shipping, freight forwarders, intermediary financial institutions, beneficiary financial institutions, and the originating financial institutions.

It may also be important to know the contractors and subcontractors used by these different parties, especially when dealing with large transactions or in markets where there is a very high-risk profile. You must adjust your due diligence standards appropriately.