Forming a joint venture with an OFAC sanctioned entity can be tricky business. There are a lot of legal implications and risks to consider. But it may also present unique opportunities that are worth exploring if done carefully and legally. First, let's cover the basics. OFAC stands for the Office of Foreign Assets Control, which is part of the US Department of Treasury. They administer and enforce economic and trade sanctions based on US foreign policy and national security goals against foreign countries, entities, and individuals. If an entity is sanctioned by OFAC, that means they have been placed on the Specially Designated Nationals (SDN) list. US persons and companies are generally prohibited from dealing with SDNs. The sanctions aim to isolate SDNs financially and economically. Some of the major sanctions programs administered by OFAC include those against Russia, Iran, North Korea, Syria, and Venezuela. Recent Russia-related sanctions have placed major Russian banks, energy companies, government officials, and oligarchs on the SDN list.

Legal Risks and Implications

In most cases, US persons, companies, and entities are prohibited from entering into joint ventures with OFAC sanctioned entities. There are legal exceptions and authorizations that allow certain transactions, but the default is no business dealings. Violating OFAC sanctions can lead to significant civil and criminal penalties. Civil penalties can be up to $311,562 per violation, or twice the value of the underlying transaction. Criminal violations may result in up to $1 million in fines and up to 30 years in prison. In addition to direct penalties, an OFAC violation can lead to serious reputational damage, loss of access to US markets and financial system, and follow-on regulatory actions. However, in some cases, a US company may apply for and receive a specific license from OFAC to engage in transactions with a sanctioned entity. This requires a compelling case that the activity is in the foreign policy or national security interests of the US.

Assessing the Risks

Before considering a joint venture with an SDN, it's essential to carefully assess the risks involved:

• Determine the full ownership structure of the SDN entity to avoid hidden risks
• Assess whether the entity is subject to any less restrictive sectoral sanctions
• Evaluate whether licenses would authorize the joint venture activity
• Weigh the likelihood of receiving an OFAC license if required
• Consider whether alternative partners could fulfill the commercial goals
• Analyze the risk-based sanctions compliance program of the SDN
• Review all applicable sanctions laws including state and local regulations

It's also critical to evaluate risks to the SDN entity. Entering a deal with a US partner may subject it to secondary sanctions, complicate operations, or limit growth. This could reduce the value of the partnership.

Navigating OFAC Licenses

If the risks assessment concludes that a license is required, applying for one can be a long and uncertain process. Some tips include:

• Hire experienced sanctions counsel to increase the chances of approval
• Be transparent and cooperate fully with OFAC
• Emphasize how the JV aligns with US policy goals
• Offer OFAC oversight of the venture as a condition
• Start the licensing process early to allow sufficient time
• Be prepared for detailed info requests from OFAC
• Consider applying for a broader umbrella license upfront

Licenses typically restrict transactions to specified parties, time periods, and categories of goods or services. Ongoing compliance is essential.

Creative Deal Structures

If licensing is unavailable or denied, some creative deal structures may still allow indirect participation:

• Enter a JV with the SDN's non-sanctioned subsidiary or affiliate
• Utilize offshore holding companies to participate in ventures
• Lend the SDN funds rather than take an equity stake
• Enter a JV with the SDN's foreign partners instead
• Contract production/services from the SDN as a vendor

However, all structures must still comply strictly with OFAC rules. Overly complex deals may raise enforcement risks.

Managing Compliance

If a joint venture with an SDN is undertaken, robust compliance processes are essential. Steps may include:

• Conduct risk-based due diligence on all parties and transactions
• Implement a customized sanctions compliance policy
• Train staff regularly on sanctions requirements
• Screen all transactions against OFAC lists
• Conduct periodic audits and assessments
• Appoint an internal sanctions compliance officer
• Impose contractual sanctions provisions with partners
• Report periodically to OFAC if required

Maintaining an open dialogue with OFAC and transparency is also critical.

Evaluating the Benefits

Despite the risks, joint ventures with SDNs may offer unique advantages in some cases:

• Access to blocked markets and restricted industries
• Relationships with companies otherwise off limits
• Knowledge transfer from partners with valuable expertise
• Entry point for future opportunities if sanctions are lifted
• Access to raw materials, technologies, or infrastructure
• Foothold in a strategic emerging market
• Leveraging a partner's local workforce and expertise
• Cost savings from a partner able to operate in the sanctioned country

Some companies may determine these potential benefits are compelling enough to explore structured joint venture deals that comply with sanctions rules. This is especially true for ventures with long investment horizons or in rapidly evolving regions. However, any activities would need to be completely transparent and authorized by OFAC. Otherwise, the legal and reputational risks almost certainly outweigh any benefits. To mitigate risks when dealing with OFAC sanctioned entities, companies should implement robust compliance programs that include:

• Conducting thorough due diligence on all counterparties to ensure no hidden SDN ownership or control
• Screening all transactions against the latest OFAC SDN lists
• Implementing risk-based know your customer (KYC) processes
• Training employees regularly on OFAC regulations
• Appointing an internal OFAC sanctions compliance officer
• Seeking specific OFAC licenses when required for dealings
• Auditing and testing compliance controls periodically
• Imposing contractual OFAC compliance provisions in partner agreements

Maintaining complete transparency with OFAC and implementing safeguards beyond minimum requirements is also advisable. The costs and effort of compliance must be weighed against the unique benefits and risks of each potential joint venture. Companies should also be aware that OFAC guidance and enforcement priorities can change quickly. A venture authorized today may be prohibited or scrutinized much more closely in the future.