OFAC Compliance in Loan Agreement Clauses

Transcription

1 OFAC Compliance in Loan Agreement Clauses Presented by William B. Hoffman Counsel May 20, 2010 Davis Polk & Wardwell LLP IIB: International Banking Anti-Money Laundering Seminar NYC

2 Goal of U.S. Economic Sanctions Deny any benefit from the U.S. economy or markets to Sanctions Targets in order to alter their behavior No transfers or dealings in property in which Sanctions Targets have any interest, present, future, contingent, conditional Property includes Funds Securities Services Goods Contracts of any nature 1

3 Main Prohibitions of Concern to Banks Exportation of Services by U.S. Person to Target Country or Government Any benefit received by persons in Target Country or by its government Facilitation of Non-U.S. Persons Transactions by U.S. Person Approval, guarantee, financing, or other facilitation Transaction could not be entered by U.S. Person or from United States Includes changing policies to allow non-u.s. Person to act in place of U.S. Person normally responsible for approval of such transactions 2

4 Guidance Needed for Third-Country Lending OFAC s Hot Line is excellent at providing answers on pending transactions involving Sanctions Targets No published OFAC guidance on U.S. banks most frequent USD lending activities with third countries: Foreign borrower is not a Sanctions Target and is not located in a Target Country, but has some business activity in or with Target Countries No OFAC Statements of Licensing Policy in territorial sanctions regulations regarding what OFAC will review or license when you deal with third-country borrowers Case-by-case review and licensing of the transactions would overwhelm OFAC 3

5 Evaluate Risk of Formal OFAC Review Pro: Direct advice and input on your transaction Confidentiality highly likely to be maintained (unless you release) May provide insight useful in future transactions in specific sanctions program Con: May be restricted to facts at point of consultation May be bad news of which only your bank has notice in your industry Knowledge of OFAC position may restrict your participation in future transactions that your (unencumbered) competitors may grab 4

6 Caveats on Transactional Guidance from OFAC OFAC website caution regarding reliance on OFAC precedents: 5

7 Mitigating Sanctions Risk in Third-Country Lending Due diligence on: Foreign borrower and its affiliates (include SDN List check) Planned use of proceeds (allocated? general business purposes?) Borrower s and its affiliates OFAC-sensitive business locations and counterparties (de minimis? Check legal and franchise risk) Borrower s willingness to restrict use of proceeds to non-sensitive countries and uses If due diligence provides comfort that loan will not go to Target Countries or Sanctions Targets, negotiate appropriate OFAC compliance clause 6

8 Credit Agreement Compact OFAC Clause for a Note Purchase Agreement Will your foreign borrower and your head office reviewer (if required) understand this OFAC compliance clause? Neither the receipt of the Loan by the Company hereunder nor its use of the proceeds thereof, nor the execution, delivery and performance of this Agreement will violate, or cause anyone participating therein to violate, any of the sanctions programs administered by the United States Treasury Department s Office of Foreign Assets Control, including without limitation the regulations published in 31 CFR, Subtitle B, Chapter V, as amended, or any legislation or executive order authorizing or relating to such sanctions programs. If so, it may provide a simple way to reduce the outcome of your due diligence to writing. Covers both prongs of OFAC risk. 7

9 Loan Agreement Representation Sanctions Status If borrower not familiar with U.S. sanctions, consider more transparency: (a) Borrower represents that neither Borrower nor any of its subsidiaries (collectively, the Company ) nor, to the knowledge of the Company, any director, officer, employee, agent, affiliate or representative of the Company, is an individual or entity ( Person ) that is, or is owned or controlled by, a Person that is: (i) the subject of any sanctions administered or enforced by the U.S. Department of Treasury s Office of Foreign Assets Control ( OFAC ) [, the United Nations Security Council ( UNSC ), the European Union ( EU ), Her Majesty s Treasury ( HMT ), or other relevant sanctions authority] (collectively, Sanctions ), nor (ii) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Burma/Myanmar, Cuba, Iran, North Korea, Sudan and Syria). 8

10 Loan Agreement (cont.) Representation & Covenant Use of Proceeds (b) The Company represents and covenants that it will not, directly or indirectly, use the proceeds of the Loan, or lend, contribute or otherwise make available such proceeds to any subsidiary, joint venture partner, or other Person: (i) to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is the subject of Sanctions; or (ii) in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as underwriter, advisor, investor or otherwise). 9

11 Questions? Lunch? William B. Hoffman Counsel Davis Polk & Wardwell LLP Washington, DC