What's Happening?
Recent cases from the Office of Foreign Assets Control (OFAC) highlight a critical issue for U.S. companies acquiring foreign businesses: the moment a U.S. entity takes ownership, the acquired foreign business can become subject to U.S. sanctions, even
if its operations remain unchanged. This 'jurisdiction trigger' has led to significant penalties for U.S. acquirers. For instance, J.C. Flowers, an American private equity firm, acquired a majority stake in Romania's First Bank in 2018. Subsequently, First Bank processed euro-denominated payments involving Iranian parties that, while not touching the U.S. financial system, became U.S. sanctions violations due to the bank's new U.S. ownership. Similarly, Key Holding, a Delaware logistics company, acquired a Colombian business in 2021, which then unknowingly violated Cuba sanctions for two years by continuing freight shipments to Cuba. These cases underscore that activities previously permissible for a foreign entity can become illegal under U.S. law post-acquisition.
Why It's Important?
This phenomenon has profound implications for U.S. businesses engaged in mergers and acquisitions (M&A) involving foreign entities, particularly those with operations in regions subject to U.S. sanctions. It significantly increases the due diligence burden on acquirers, requiring them to not only assess existing sanctions violations but also to anticipate how U.S. ownership will alter the legal status of the target's ongoing activities. Failure to adequately address this can result in substantial fines, reputational damage, and complex remediation efforts, as seen in the AppliChem and Stanley Black & Decker cases where foreign subsidiaries continued sanctioned business despite acquirer instructions. This risk extends beyond direct violations to include activities that were previously legal for the foreign entity but become prohibited under U.S. jurisdiction, impacting financial institutions, logistics companies, and manufacturers alike.
What's Next?
U.S. dealmakers and legal teams will need to implement more robust sanctions M&A protocols. This includes treating sanctions as a dedicated diligence workstream, scrutinizing distributor agreements, customer lists, payment flows, and freight records to identify potential 'jurisdiction trigger' risks. Purchase agreements will likely incorporate more specific indemnities covering post-closing investigations and penalties. Crucially, immediate and clear communication to the acquired entity's management about the applicability of U.S. sanctions on day one, along with freezing pending orders, will become standard practice. Post-acquisition, extending the U.S. parent's compliance program, including screening tools, training, and rigorous testing of actual transactions, will be essential. The emphasis will shift from merely stopping existing violations to proactively preventing new ones that arise solely from U.S. ownership, with a focus on continuous monitoring and prompt escalation of any red flags.
Beyond the Headlines
The 'jurisdiction trigger' issue highlights a broader challenge in the globalization of business and the extraterritorial reach of U.S. law. It forces a re-evaluation of corporate responsibility and the extent to which a parent company is accountable for the actions of its foreign subsidiaries, even when those actions were previously legal under local laws. This creates a complex ethical dilemma for foreign businesses that suddenly find their established practices deemed illegal due to a change in ownership. It also raises questions about the fairness and practicality of imposing U.S. legal standards on entities operating entirely outside U.S. borders, simply by virtue of their ownership structure. The long-term implication could be a chilling effect on U.S. investment in certain foreign markets, or a push for more localized and independent corporate structures to avoid U.S. sanctions exposure, potentially fragmenting global supply chains and financial systems.
