A tightening global sanctions and tariff regime, led by the US, is pushing Indian firms to step up background checks before finalising commercial transactions such as mergers and acquisitions, supply contracts, and trade deals.
According to legal experts that Mint spoke with, companies are increasingly hiring law firms and investigative agencies before closing deals to ensure that none of the parties involved, including subsidiaries, parents or suppliers, feature on sanctions lists.
Clients are now required to sign sanctions standard operating procedures (SOPs) before finalising deals, which mandate disclosures such as ultimate beneficiaries, end-use certificates, and verification of licensed vendors.
The purpose of such stringent due diligence is to ensure that companies do not deal with sanctioned entities, thus preventing frozen assets, blocked payments, or stalled deals amid geopolitical tensions.
“With growing awareness, turbulent global environment and growing tariff and sanctions regime, sanction checks are carried out on large and key vendors at a pre-transaction stage. Further, post transactions, clients are asking us to implement third-party diligence programs in the acquired company and also have a real-time sanctions screening process,” said Tarun Bhatia, managing director and APAC co-head at financial risk and advisory firm Kroll.
A sanctions control and ownership test determines whether an entity is “blocked” due to ownership by sanctioned individuals. If a sanctioned person owns 50% or more of an entity, it is considered sanctioned. In certain jurisdictions, sanctions can apply even when ownership is below 50%, said Sara Sundaram, partner at Cyril Amarchand Mangaldas. Sundaram is part of the white-collar crimes and dispute resolution practice at the law firm.
According to Bhatia, a sanctions screening looks at the company, its holding structure, subsidiaries, associate companies, and key management personnel (KMP) among others. He noted that there is often a “misconception that only if you are a subsidiary of a sanctioned company do sanctions apply to you. (But) Association in many forms with sanctioned entities can mean that even you are a sanctioned entity or your transactions are.”
As a result, there is a growing demand for professionals who understand corporate structure and ownership patterns. To be sure, sanctions are not new. The Russia-Ukraine war, the US-Israel-Iran conflict, and other geopolitical tensions have led to expansive sanctions by the US, EU, and the UK targeting leaders, companies and executives, making sanctions screening crucial for businesses to avoid trouble later.
Law firm Khaitan & Co has 8-10 lawyers working on US, EU and UK-related sanctions. They collect information on final beneficiaries, request an end-user certificate, and verify the details of the licensed vendors. The law firm has noted that Indian businesses have many transactions in the US or other countries enforcing sanctions and “need to ringfence themselves”.
“The companies have seen increased disclosures, warranties that they have no dealings with a sanctioned party. There are clauses that now say who will bear the licensing cost if one gets to know that some of the vendors are part of the sanctioned list,” said Manavendra Mishra, partner at Khaitan & Co, who oversees the white collar crime, investigations and sanctions practice.
“Sanctioned entities at times are like a contagion that must not be touched, and we must determine how deep the spread of the risk is. Over the last six months, we have 8-10 clients who want to ensure that none of their contracts involve sanctioned parties,” said Charanya Lakshmikumaran, executive partner in commercial and regulatory disputes practice at Lakshmikumaran & Sridharan (LKS), a law firm.
She pointed out that sectors like chemicals, petrochemicals, energy, electronics, and defence largely get impacted by these sanctions arising from geopolitical strife. Maritime logistics such as vessels, ports, and financial institutions like banks also get impacted for facilitating such transactions.
“India Inc struggles with maintaining purchase orders and procurement contracts with robust terms, so we are establishing systems to improve these processes for our clients. Another major challenge is ascertaining risks in dealing with certain customers and selling in certain countries, as that can also expose Indian businesses to sanctions issues,” Lakshmikumaran said.
According to a senior partner in a Mumbai-based law firm, there are cases where the payment from banks get stopped because a subsidiary’s business links may be under the sanctions list.
Law firms are banking on compliance platforms and global sanctions data bases to delve deeper into these complex cases. Ashwin Krishnan, a partner in the corporate practice of Argus Partners (Solicitors & Advocates), said that law firms like theirs are bringing in specialists who review publicly available sanctions databases, including those maintained by the UN, the European Union (EU), and The Office of Foreign Assets Control (OFAC), the financial intelligence unit of the US Treasury Department. They also use proprietary and specialised risk and compliance platforms to help identify potential risks and exposure.