What risks do sanctions pose for borrowers and lenders?

Following the Loan Market Association’s annual conference on 9 September 2014, Rae Lindsay, partner at Clifford Chance, explains what lawyers should watch out for when drafting sanctions provisions in loan documentation.

You mentioned at the conference that lenders are becoming more demanding in relation to due diligence and documentation in terms of sanctions. What sort of requests are you seeing lenders make?

Lenders have to get as comfortable as possible that:

  • they are not dealing with entities that are sanctions targets
  • the funds they lend won't be used for purposes that could potentially result in the lenders themselves committing a sanctions infringement

They also have to deal with the fact that sanctions can change in scope during the life of a facility. This means asking questions to borrowers about their business relationships and also seeking more information about the uses to which loans will be put.

Given the pace of developments, sanctions issues can emerge before the deal is signed that didn't exist at the time original terms were negotiated. Many lenders are also concerned about reputational issues as well as legal compliance. It has become a particularly challenging feature in the Ukraine/Russia context, where loan activity has specifically been targeted, both by the US and the EU.

Is there a standard definition of 'sanctions' in loan documentation?

No, although most definitions aim to cover similar ground. The definitions are not always limited to sanctions imposed by the jurisdictions with which the lenders and borrowers have the most direct connections.

As you said, representations and warranties relating to sanctions are often widely drafted and open to interpretational vagueness. What risks does this pose for both borrowers and lenders?

Interpretational vagueness in any contract means uncertainty over the circumstances in which the terms will or will not apply. Generally speaking, broadly-drafted provisions are likely to work in lenders' favour. But breadth should not necessarily equate with vagueness, which could give rise to difficulties in enforcement.

What can borrowers do to protect themselves from widely-drafted sanctions provisions in loan documentation?

Make sure you have a good lawyer who understands sanctions regulations and who can push back, on a reasoned basis, against wording that is unnecessarily wide in the context of a particular borrower and loan. Borrowers should be wary of providing unqualified assurances relating not only to themselves but also to affiliates, unless they can be confident of the facts backing up the assurances.

Is there anything else that lawyers drafting loan documentation should be mindful of in drafting sanctions provisions in loan documentation?

Templates are an excellent starting point, but always craft the provisions to the specific transaction and parties, while bearing in mind that sanctions regulations may evolve in unexpected ways during the life of the facility.

Be wary also that, in some cases, template language from a few years ago may no longer reflect all of the legal concerns that arise today. Provisions should be sufficiently broad to cover any reasonably foreseeable shifts in events.

In relation to sanctions against Ukraine, you mentioned there have been differences between the approach of the US and the approach of the EU. Can you explain a bit more about that?

There will rarely be exact alignment between US and EU sanctions, unless they are comprehensive sanctions (increasingly rare) and/or based solely on UN Security Council Resolution requirements (which assume similar action by UN members).

Sanctions regulations in the US and EU have different legislative bases that determine their approach. The two tend also to use differing terminology with potentially differing interpretational outcomes. In the case of Ukraine, there have been broadly comparable objectives but politics has determined the precise action taken and its timing. There remains a mismatch both in terms of:

  1. specifically named sanctions targets, and
  2. exact activities targeted by sector-specific sanctions aimed at the energy sectors and access to capital markets

Do you think the US and the EU will continue to take different approaches to sanctions?

Even where policy is broadly aligned, it seems inevitable there will continue to be differences in approach. For financial institutions and others in the front line of compliance, greater clarity on scope and interpretation would no doubt be welcome on both sides of the Atlantic and reduce the challenges of seeking to apply a number of differing standards that may apply.

Rae Lindsay is a partner at Clifford Chance specialising in international law, litigation, economic sanctions and the emerging area of business and human rights. She is co-head of the firm's public international law practice.

Interviewed by Jon Robins

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Filed Under: Sanctions

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