In our previous blog,“Sanctions - what’s changed?”, we explored how sanctions are an increasingly complicated risk area, and that breaching sanctions can be expensive both financially and reputationally. And for most businesses, sanctions risk is usually viewed through the lens of its existing third party relationships and distribution channels.
But in a world where deals have hit record levels in the UK and worldwide, how many organisations are actually considering the sanctions risks associated with mergers, acquisitions and joint venture arrangements?
Are you really considering all relevant sanctions risks as part of your due diligence processes?
Due diligence is key to ensuring that you’re not doing business with a sanctioned person or company. As part of a merger, acquisition or joint venture, due diligence can become even more important - you don’t want to find yourself liable for breaches that occurred prior to your involvement with the target entity.
Due diligence activities are also your way of determining whether the people and processes that are going to become YOUR people and processes are sufficient and appropriate for the risk you’ll be managing. These due diligence activities help you to identify early what remediative actions you'll need to put in place post acquisition, addressing the current gaps in process that could otherwise expose you to additional risks.
What are the key things to consider as part of your due diligence activities?
As with all due diligence activities, you should first understand the risk profile of the target as well as your own risk appetite.
When undertaking this work, some key questions to consider include:
- Which sanctions regimes are relevant for your business?
- Is the target or people associated with the target sanctioned?
- Has the target made any high risk payments (e.g. to third parties)?
- Does the jurisdictional profile of the target's business pose a heightened sanctions risk?
- Does the target consider sanctions risks as part of their compliance procedures?
In some cases, this high level understanding of the target entity may mean you decide not to undertake further checks. However, where the risk profile is higher than your risk appetite, its incumbent on you, as the buyer, to ensure that any activities undertaken provide you with comfort over not only the target’s current approach, but also their historic activities. This could include a review of the target policies and procedures, sanctions screening of the target’s third parties and enhanced due diligence when required. This will provide you with a better understanding of any current sanctions breaches within the target, as well as the risk of breaches occurring in the future.
A key challenge when undertaking a sanctions review on a target is likely to include the ability to access relevant data, such as complete customer lists; and the ability to talk to individuals who are involved in the process, if they are not aware of the potential acquisition or merger.
Including sanctions in your due diligence checks is not only a defensive risk mitigation tactic but can also be a way of embracing new opportunities with more confidence. By having the right data to stay ahead of changing sanctions regimes, you could gain a competitive advantage in the future.
Sanctions should be included, proactively, in your approach to due diligence. Please reach out to me or the team if you’d like to find out more about how you can embed this into your business.
