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Ukraine as a Matter OFAC: Sanctions, What’s Off Limits Means More Due Diligence

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Date: Apr 07, 2022 @ 05:00 AM
Filed Under: Risk Management

All of the terrible events currently taking place in the country of Ukraine are unfortunately very well known, and we are all feeling at least some of the secondary effects of the war that ripple through our own economy.

But you may not be thinking of the more direct impact that the economic sanctions imposed by governments around the world, including of course the U.S. government, may have on your equipment finance business. No doubt you have been conducting OFAC checks as part of your routine transaction due diligence, but are you aware of the very recent and ever shifting changes to the multiple lists that are maintained by OFAC, and of the impact of doing business with the parties identified on those lists?

As you may know, the U.S. Office of Foreign Assets Control publishes a list of “Specially Designated Nationals and Blocked Persons” (called the SDN List) that shows all of the specific persons and entities that the U.S. government has declared to be off limits for doing business with U.S. companies; and, as you most likely also know, there are statutory penalties for dealing with these SDNs.

However, there are also a multitude of additional lists of persons and entities identified by OFAC as those with whom you are forbidden to do business, and these may appear on a number of “Non-SDN Lists” that include individuals and entities which have been sanctioned for their presumed involvement with the Russian Federation’s activities in Ukraine.

“Remember, too, that it is not just the entities shown directly on these many lists whose business you don’t want to do, but also the individual or corporate owners of these entities.”

The Non-SDN Lists fall into a number of special categories based upon how they are identified under presidential executive orders or other forms of policy or economic sanctions, and there are a lot of specific EOs and laws that require listing by OFAC. A few examples of these are the Foreign Sanction Evaders List, the Non-SDN Menu-Based Sanctions List, and (perhaps most important for leasing and finance companies) the Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions List, also called the CAPTA List, each list being driven by specific governmental orders or laws by which listees are identified.

The CAPTA List may be especially important because it shows those foreign financial institutions “for which opening or maintaining of a correspondent account or a payable-through account is prohibited or subject to one or more restrictions or strict conditions,” as stated by OFAC, and because the issue of pass-through accounts is no longer just an anti-money laundering issue but a matter of banks trying to avoid international economic sanctions on financial institutions.

As the scope of U.S. (and other countries’) sanctions continues to expand, all of these lists will be subject to increasingly rapid changes and updates, and it behooves everyone involved with equipment leasing and finance due diligence to be aware of the lists, how they are used, and how important it is to refer to them in assessing deals and parties involved in them.

Remember, too, that it is not just the entities shown directly on these many lists whose business you don’t want to do, but also the individual or corporate owners of these entities. You must inquire about and know who is behind the businesses you’re working with, especially with regard to pass-through and pay-through structures, since OFAC also considers doing business with material owners of listed companies a prohibited activity. Just consider the increasingly international scope of the financial institutions being sanctioned and the potential correspondent and ownership (and sub-ownership) tentacles they may seek to employ to avoid the authorities.

Fortunately, the Treasury Department makes a great deal of information readily available on this topic; and those who are responsible for vetting lessees, third-party funders and other participants in deals should be familiar with the details.

General information about the OFAC sanctions program and requirements can be found at: https://home.treasury.gov/policy-issues/office-of-foreign-assets-control-sanctions-programs-and-information

Information on the SDN List is at: https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked-persons-list-sdn-human-readable-lists

Information on the Non-SDN Lists is available at: https://home.treasury.gov/policy-issues/financial-sanctions/consolidated-sanctions-list-non-sdn-lists

Perhaps most importantly, an online (and relatively easy to use) tool for actually searching the lists can be found at https://sanctionssearch.ofac.treas.gov, although unless you want to search through hundreds of listings you should have an idea of which lists are most likely to apply in your situation. For example, you’ll find lists based on specific executive orders that have been promulgated since the start of the Ukrainian invasion (identified as “Ukraine” in the search window)—you may want to start with those.

These lists are ever-changing (as is the war in Ukraine), so regular reviews and consistent checking of the pertinent lists on every deal are essential to keeping up with important OFAC rules and requirements.



Paul Bent
Senior Managing Director, Legal Services & Business Assessment | The Alta Group
Paul Bent is leader of The Alta Group’s legal services and business assessment services for equipment leasing and finance companies and transactions. A licensed attorney with extensive equipment finance experience, he is a frequent industry speaker and writer. Bent can be reached at pbent@thealtagroup.com or (562) 491-5000.
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