Article Corporate Counsel

Risks and Rewards for Borrowers in Negotiating Economic Sanctions Provisions in Credit Agreements

Discussion of some key economic sanctions representations, covenants and compliance provisions that arise in credit agreements, and why it is important to sufficiently consider and negotiate these terms.

Companies seeking financing should be mindful of provisions in credit agreements related to economic sanctions, such as those prohibiting doing business in countries subject to U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) sanctions or with sanctioned parties, including those identified on the List of Specially Designated Nationals and Blocked Persons (SDN List). What at first glance can seem like boilerplate can have meaningful differences borrowers should not neglect to carefully review.

Below we discuss some of the key economic sanctions representations, covenants and compliance provisions that arise in credit agreements, and why it is important to sufficiently consider and negotiate these terms.


Though lenders understandably seek to protect themselves against violations of economic sanctions resulting from a borrower’s use of funds in sanctioned activity, borrowers should evaluate whether provisions that seek to satisfy that purpose might more broadly interfere with permissible business.

Sanctioned Countries

Credit agreements often include representations that the borrower has not engaged in dealings in “sanctioned countries.” Companies might assume that term only concerns markets such as North Korea where they have never done business. However, often the term is defined broadly to include all countries subject to some form of OFAC sanctions. As drafted, borrowers engaging in dealings in Russia, Ukraine, or certain other countries subject to limited sanctions may not be able to make this representation, even though such business may be lawful. Revisions to clarify the scope of what constitutes a “sanctioned country” can still meet the lenders’ purpose but help borrowers gain comfort in making this representation.

Sanctioned Persons

Similarly, agreements often include representations that the borrower has not engaged in dealings with “sanctioned persons.” Some companies may think that just means “terrorists,” with whom they would never do business. However, the definition can often be broadly drafted to encompass parties that are only partially restricted, with whom it may still be lawful to engage (e.g., Sberbank, Huawei). Borrowers may need to qualify the representations or definitions related to doing business with “sanctioned persons” before agreeing to them.


Even if a credit agreement does not contain representations about compliance with sanctions historically, it will likely include covenants on conduct going forward. Borrowers should carefully consider the terms of these provisions and whether they may trigger obligations that are difficult to manage or could otherwise risk an unintended event of default.

Use of Funds

Borrowers should evaluate sanctions covenants regarding the direct and indirect “use of funds” and consider whether they are limited to use of the lender’s funds or also extend to other funds generally. For this purpose, borrowers may also want to revise the definitions of sanctioned countries and persons or otherwise qualify the covenants to allow for continued dealings that the sanctions authorize. This can help assure the lender that the borrower will not cause the lender to violate sanctions, while not requiring termination of potentially important business.


Complications can also arise if sanctions covenants apply to the borrower’s “affiliates.” Borrowers may have affiliates located outside the U.S. that may not be subject to U.S. sanctions requirements. For example, those operating in the EU can be subject to “blocking” statutes that actually prohibit them from agreeing to comply with certain U.S. sanctions.

When the borrower’s owner is a private equity sponsor, it is also critical to consider whether the definition of “affiliates” could capture all portfolio companies that the sponsor owns. Both borrowers and lenders may not want to risk a breach for actions of a loosely affiliated portfolio company who will have no access to the lender’s funds. Without careful review, broad covenants can have unwanted collateral consequences.


Credit agreements raise important compliance considerations to think through and plan for in considering both the borrower’s ability to certify to conditions in the provisions, as well as their readiness to meet the obligations associated with securing the financing.

Policies and Procedures

Credit agreements often require borrowers to represent that they have policies and procedures reasonably designed to ensure compliance with economic sanctions. Specialists can help review company policies, including codes of conduct and employee handbooks, to see if the borrower can make such a representation based on what it has in existence. Borrowers should exercise caution in agreeing to such a representation without first undertaking a close review.

Compliance Program

If a borrower does not have existing sanctions compliance policies and procedures, lenders often ask for a covenant that the borrower will implement them within a set number of days. Borrowers will want to ensure that the timeframe is sufficient to develop an appropriate compliance program. For example, if there is a requirement for sanctioned party “screening” or KYC, it is important to understand that prohibitions on doing business with parties on the SDN List also extend to parties they majority-own, even if not specifically identified. This can necessitate that due diligence procedures include checking beneficial ownership.

To be effective, a compliance program should be tailored to a company’s particular international risk exposure. That will be different for a company making sales only within the U.S. and one that makes half its sales outside the U.S., including in higher-risk jurisdictions or via agents or distributors. Specialists can assist with making this assessment based on the borrower’s business activities, business model, and business profile. Without appropriate tailoring, a borrower may find itself unprepared to administer what it has committed to or taking on requirements that go beyond what is needed under the circumstances.


Careful vetting of economic sanctions representations, covenants and compliance provisions can help strike the right balance and make the credit agreement more workable.


Mario Mancuso and Sanjay Mullick are partners, and Carolyn Schroll is an associate at Kirkland & Ellis in the firm’s International Trade & International Security group, which provides strategic and legal advice to companies, investment funds and financial institutions operating or investing across international borders.