Practical Compliance
How Important is Knowing and Verifying the Identity of Commercial Counterparties in Connection with Economic Sanctions?
The definition of beneficial ownership refers to the natural person(s) who ultimately owns or controls an entity (definitions vary in different jurisdictions, but mostly center around 25% or more of equity interests or voting rights).  Why is it relevant to understand who are the ultimate beneficial owners (“UBOs”) of an entity you intend to engage with, especially in the context of sanctions compliance, and how to integrate it in your standard due diligence procedures?

Answer: Due diligence of commercial counterparties is essential when managing sanctions risks. When a prospective counterparty has an opaque ownership structure, conducting due diligence on that entity alone would not be sufficient and will not likely provide any meaningful results.  Instead, one should request from a counterparty a detailed ownership structure of the entity in question and conduct appropriate due diligence on all of its UBOs.  In the context of sanctions, knowing the UBOs of an entity is even more critical.  Under the regulations of the U.S. Office of Foreign Assets Control (“OFAC”), even if an entity is not listed on OFAC’s sanctions list, but is 50% or more owned by entities or persons that are on the list, the same prohibitions apply to dealing with such entity.  Likewise, it is important to know whether one of the UBOs of a counterparty may be a politically exposed person(“PEP”).  PEPs typically present a higher risk for due diligence procedures and may require you to take reasonable measures to establish the source of wealth and source of funds and conduct enhanced ongoing monitoring of the business relationship.  As part of the ongoing management of the relationship, you may ask in your agreement with a higher risk counterparty to report on any beneficial ownership changes and have termination rights, if circumstances warrant.   

*The contents of this message, current at the date of publication, are for reference and general informational purposes only and do not constitute legal advice.  You should contact your attorney to obtain advice with respect to any particular legal matter.  You should not act or refrain from acting on the basis of information in this publication without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.   

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