OFAC and German Foreign Trade Regulations: Underwriters Attempt to Square the Circle

*Skadden's 2014 Insights - Financial Regulation

Stephan Hutter

When negotiating underwriting and purchase agreements for securities offerings by German issuers, legal advisers face conflicting requirements under U.S. economic sanctions laws administered by the Office of Foreign Assets Control (OFAC) and the anti-boycott statutes under German and EU law. It can be quite challenging to bridge these seemingly incompatible legal regimes, and underwriters and their counsel need to consider the nuances of each jurisdiction to better navigate and comply with the laws impacting international securities offerings.

OFAC Obligations

U.S. and non-U.S. banks offering securities of a German foreign private issuer (FPI) are seeking higher levels of comfort that the issuer is complying with OFAC regulations, whether the transaction takes place in the U.S. through a private placement or registered offering, or is executed in another country outside the U.S. under the Regulation S safe harbor of the Securities Act of 1933. Because of the heightened expectations that banks comply with OFAC, this comfort level applies even if the FPI is not directly subject to U.S. sanctions laws.

Banks have to consider two types of OFAC obligations:

  • Direct. Underwriting banks may not conduct business with a person who is a target of OFAC sanctions or controlled by a person who is subject to OFAC-sanctions. Banks also cannot support an FPI´s business with persons who are sanctioned by OFAC (e.g., providing services or advice regarding such business or allowing proceeds from an offering to be used to fund such business). For U.S. banks, this is a matter of complying with U.S. law; non-U.S. banks often view this as a necessary compliance policy choice (see “‘Know Your Customer’: OFAC Raises Due Diligence Expectations of Non-US Banks”).
  • Indirect. Underwriting banks should avoid situations that are subject to OFAC regulations. This includes (i) engaging in offering-related activity involving a U.S. jurisdiction (which may be as little as settling U.S. dollars or using a U.S.-based server to clear the transaction), (ii) causing violations of, conspiring to violate, or aiding and abetting violations of OFAC regulations, (iii) engaging in transactions involving the extraterritorial exercise of a U.S. jurisdiction (such as the re-export of controlled goods, where jurisdiction is deemed to attach to the goods themselves) and (iv) engaging in activity to which jurisdiction applies per se (such as nuclear proliferation or terrorist financing).

German Anti-Boycott Laws

Section 4a of the German Foreign Trade Ordinance prohibits a German FPI from declaring its intention to comply with a foreign sanction regime that is not recognized by German, EU or international law. A Section 4a violation may result in a voided contract, civil monetary penalties of up to €500,000, and, in some cases, imprisonment and criminal fines.

While the language of Section 4a is broad in scope, it has been interpreted in various circular orders (Runderlasse) and letters (Rundschreiben) issued by the German Federal Ministry of Economics and Technology. As a result, the following actions generally are considered to be prohibited under German anti-boycott provisions:

  • A statement of compliance with the boycott laws of a third country.
  • “Blacklist” clauses, which include a statement that:


    • the FPI or its affiliates or directors are not listed as a person on the OFAC list of special designated nationals; and
    • the FPI is neither directly nor indirectly associated with nor does business with states, regions, persons or organizations listed on the OFAC list, nor those that have been sanctioned in connection with OFAC programs.
  • Even though a declaration with regard to the compliance with all laws of a foreign country generally is permissible, it is prohibited if given in close connection with other statements that point to the participation in a foreign boycott against a third country. For example, a declaration is prohibited if (i) the boycott laws of third countries name the specific target countries of applicable boycotts, (ii) it provides declarations that all laws regarding the boycott of a specific third country will be complied with or (iii) it generally provides that all boycott laws will be complied with.

Permissible actions include (i) factual statements about the past and (ii) declarations regarding boycotts that are recognized by Germany, the EU or the UN.

Reconciling the Two Regimes: Representation and Covenant Language

As a result, a German law-compliant OFAC representation and covenant in an underwriting or purchase agreement for an international securities offering by a German FPI typically will state that (with respect to the past) neither the company nor any of its subsidiaries has taken any action resulting in a violation of any laws or regulations administered by OFAC and the Office of Export Enforcement of the U.S. Department of Commerce, or any equivalent sanctions or measures imposed by the U.S., Germany, the EU, the UN or any other relevant sanctions authority.

With respect to the use of the proceeds from an offering, the company typically will confirm that it will only use such proceeds, or lend, contribute or otherwise make available such proceeds for the purposes as disclosed in the applicable disclosure document (e.g., prospectus).

If there is no disclosure document available or if no specific use of an offering’s proceeds has been defined, the company typically will be asked not to use the proceeds from an offering in a manner that would cause a breach by the underwriters of any law applicable to them.

Since statements with respect to future behavior are particularly problematic under applicable German law, a company typically will only represent that it (and its subsidiary) will comply with the sanctions and measures imposed by Germany, the EU, the UN and the applicable federal laws of the U.S. to the extent such compliance is not prohibited by applicable law.

OFAC-Related Business Due Diligence

Banks customarily conduct specific OFAC-related due diligence to address the OFAC representation in an underwriting or purchase agreement for an international securities offering by a German FPI. OFAC-related questions in a business due diligence questionnaire may be posed with respect to the past and also extend to the present, as any answer to such a question will be deemed a mere statement as to facts or information. However, as discussed above, under German law, statements in response to due diligence questions with respect to future compliance with the boycott laws of a third country generally are prohibited.


We expect that capital markets (and bank financing) transactions involving German companies will continue to be affected by some conflict between OFAC (and the underlying U.S. foreign policy) and German foreign trade laws and practice. Underwriters in German transactions will need to draw a fine line between the respective U.S., European and German practices, and focus on clear contractual language and enhanced due diligence.

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.


* This article appeared in the firm's sixth annual edition of Insights on January 16, 2014.