Overview
International sanctions have transformed from a relatively stable regulatory backdrop into a source of acute business volatility. The speed at which designations occur, the extraterritorial reach of major sanctions regimes, and the severity of consequences for violations have made sanctions compliance a board-level concern. Contracts must now address not just current sanctions exposure but anticipate how rapidly evolving geopolitical tensions might affect commercial relationships.
Sanctions volatility provisions go beyond traditional compliance representations. They establish frameworks for responding to mid-contract designation of counterparties or their beneficial owners, changes in sanctions that affect performance, and the operational challenges of maintaining compliance when regulations shift faster than business relationships can adapt. The goal is preserving commercial relationships where possible while creating clear, pre-agreed protocols for situations requiring modification or termination.
The regulatory change notice mechanics increasingly appearing in international contracts reflect a broader recognition that compliance obligations are not static. Parties need mechanisms for communicating regulatory changes, adjusting performance obligations, and allocating the costs of compliance. Without such mechanisms, one party may bear disproportionate compliance burdens or find themselves unable to perform without explanation of why changed circumstances justify relief.
Key Considerations
Multi-Jurisdictional Scope
Addressing compliance across multiple sanctions regimes (US, EU, UK, UN, India) and understanding their extraterritorial application and potential conflicts.
Screening Obligations
Establishing who screens whom, against which lists, how frequently, and what the consequences of a positive hit are for the commercial relationship.
Mid-Contract Designation
Defining procedures and consequences when a counterparty or its beneficial owners are designated during contract performance.
Compliance Representations
Structuring representations that are meaningful without creating strict liability for matters beyond the representing party's knowledge or control.
Regulatory Change Response
Creating mechanisms for notifying regulatory changes, assessing impact, and adjusting performance or price accordingly.
Wind-Down Rights
Including provisions for orderly wind-down of relationships that become untenable due to sanctions, with clear timelines and financial consequences.
Applying the TCL Framework
Technical
- Implementing sanctions screening tools and processes
- Mapping supply chains for potential sanctions exposure
- Understanding payment routing and correspondent banking implications
- Assessing technology transfer restrictions and deemed export rules
- Building compliance documentation and audit trails
Commercial
- Pricing in compliance costs and risk premiums
- Allocating sanctions risk between parties appropriately
- Structuring payment terms that enable compliance
- Building flexibility for supply chain adjustments
- Negotiating appropriate indemnities and insurance requirements
Legal
- Drafting representations that balance certainty with practicality
- Structuring termination rights that comply with wind-down requirements
- Addressing conflicts between different sanctions regimes
- Including appropriate dispute resolution for sanctions-related disputes
- Ensuring contractual provisions don't themselves create sanctions exposure
"Sanctions law moves faster than commercial relationships. The contracts that survive sanctions volatility are those designed with change in mind—not trying to predict specific designations, but building frameworks for responding to whatever changes occur. Compliance must be a living process, not a one-time check."
Common Pitfalls
Single-Regime Focus
Addressing only US sanctions without considering EU, UK, UN, and domestic Indian regulations that may also apply.
Static Compliance
Treating sanctions compliance as a one-time check rather than ongoing obligation requiring continuous monitoring.
Overreach in Representations
Requiring representations about matters (like counterparty beneficial ownership) that the representing party cannot reasonably verify.
Termination Without Wind-Down
Including immediate termination rights that may themselves violate requirements for orderly wind-down of sanctioned relationships.
Ignoring Secondary Sanctions
Failing to address secondary sanctions risk—the risk of being sanctioned for doing business with entities that have their own sanctions exposure.
Sanctions Framework
India maintains its own sanctions regime through PMLA and UAPA, listing organizations and individuals with whom dealings are prohibited. However, Indian businesses with international exposure must also navigate US sanctions (administered by OFAC), EU sanctions, UK sanctions, and UN Security Council sanctions. US sanctions have significant extraterritorial reach, affecting non-US persons who deal with SDN-listed parties or in specified sectors. Secondary sanctions create additional exposure—being sanctioned for facilitating sanctions evasion by others. The rapidly evolving nature of these regimes, particularly regarding Russia-related sanctions, requires continuous monitoring and adaptive compliance programs.
Practical Guidance
- Conduct comprehensive sanctions risk assessment covering all relevant regimes before entering international relationships.
- Implement continuous screening against updated sanctions lists, not just at onboarding.
- Include specific procedures for handling positive screening hits, including escalation and decision-making protocols.
- Draft compliance representations that are specific about what has been verified and by what method.
- Build regulatory change provisions that trigger review rather than automatic termination.
- Maintain detailed documentation of compliance efforts for regulatory defense purposes.
Frequently Asked Questions
Related Practice Areas
Need Assistance with Sanctions Compliance?
Our team brings deep expertise in contracting for volatility matters.