INTERNATIONAL TRADE LAW
Sanctions Compliance Risk in M&A Transactions
In a merger or acquisition, sanctions compliance is a deal-level risk because the buyer can inherit the target’s liability for violations that happened before closing — a doctrine called successor liability. Buying a company means buying its history, and if that history includes dealings with sanctioned countries, entities, or individuals, the Office of Foreign Assets Control (OFAC) can pursue the acquirer for the target’s past conduct. The same exposure runs through export-controls violations enforced by the Bureau of Industry and Security (BIS). That is why sanctions and export-compliance due diligence belongs near the top of any transaction checklist, not in the fine print.
Why Sanctions Risk Follows the Deal: Successor Liability
OFAC and the other trade-enforcement agencies have repeatedly applied the principle of successor liability — holding an acquiring company responsible for the misconduct of the business it bought, even when the violative activity occurred entirely before the deal closed. In an asset deal the analysis differs from a stock deal, but a buyer should never assume that a change in ownership wipes the slate clean.
The result is a structural mismatch: the seller had the knowledge of what the target did, but the buyer ends up holding the liability. Due diligence is how a buyer closes that gap before it becomes its own problem.
What OFAC Expects: The 2019 Compliance Framework
OFAC’s expectations are not a mystery. In May 2019, OFAC published “A Framework for OFAC Compliance Commitments,” which sets out the five components it considers essential to a risk-based sanctions compliance program. The Framework also flags M&A specifically: a failure to conduct sanctions due diligence in an acquisition is one of the root causes of violations OFAC identifies.
| Component | What it means in practice |
|---|---|
| Management commitment | Senior leadership and the board back the program with authority and resources |
| Risk assessment | The company identifies where its sanctions exposure actually lives |
| Internal controls | Written policies, screening, and recordkeeping that prevent prohibited dealings |
| Testing and auditing | Independent checks confirm the controls work — and catch the ones that don’t |
| Training | The people doing the work understand the rules and the red flags |
For a buyer, this framework does double duty: it is the standard the target should already meet, and it is the standard the combined company must meet after closing.
Sanctions Due Diligence Before You Sign
Effective pre-signing diligence focuses on where sanctions and export-control problems hide:
- Ownership and control. Screen the target, its owners, directors, and key counterparties against the SDN List and other restricted-party lists — and apply OFAC’s 50% rule, under which entities owned 50% or more by blocked persons are themselves blocked.
- Geographic and sector exposure. Map the target’s customers, suppliers, and revenue by country, paying special attention to comprehensively sanctioned jurisdictions and high-risk sectors.
- Export-controls footprint. Identify controlled products, technology, and any prior licensing history with BIS.
- History of contacts. Review past transactions, intermediaries, and any voluntary self-disclosures or enforcement contacts.
Protecting the Deal: Reps, Warranties, and Disclosure
Strong sanctions representations and warranties from the seller matter — but they do not eliminate successor liability. They shift some risk contractually and document the buyer’s diligence efforts, yet OFAC can still pursue the acquirer regardless of what the purchase agreement says between the parties. If diligence surfaces a past violation, a voluntary self-disclosure to OFAC — often coordinated around the closing — can substantially reduce penalty exposure. That is a decision to make with counsel, deliberately, not after a problem surfaces post-closing.
Frequently Asked Questions
Can a buyer really be liable for the seller’s past sanctions violations?
Yes. OFAC and other trade agencies apply successor liability, holding acquirers responsible for a target’s pre-closing violations. The specifics depend on the deal structure, which is one reason early diligence matters.
Do strong contract representations protect the buyer?
They help but do not eliminate the risk. Seller reps and warranties allocate risk between the parties and evidence the buyer’s diligence, but they do not bind OFAC or prevent the government from pursuing the acquirer.
What is OFAC’s 50% rule?
Any entity owned 50% or more — directly or indirectly, individually or in the aggregate — by one or more blocked persons is itself considered blocked, even if it does not appear on the SDN List by name. It is a critical screen in M&A diligence.
When should sanctions diligence start?
As early as possible — ideally before signing, so that any findings can shape the price, the deal structure, the conditions to closing, and any decision to self-disclose.
Reidel Law Firm advises buyers and sellers on the sanctions and export-controls side of strategic transactions — restricted-party screening, diligence, and self-disclosure strategy. Our flat-fee import/export compliance memo gives you a written legal read on a target’s trade-compliance exposure before you commit. Learn more about our international trade law practice.
