Introduction
Sanctions provisions have become a standard feature of facility agreements in the international lending market. Their purpose is to protect lenders from the regulatory, reputational, and financial consequences of dealing with sanctioned persons or jurisdictions especially under applicable regimes administered by leading authorities such as the U.S. Office of Foreign Assets Control (OFAC), the European Union, the United Kingdom, and the United Nations. These provisions do not simply mirror public law requirements; they also establish contractual risk allocation between the parties, spelling out what must happen if sanctions touch the borrower, the lenders, or the transaction itself. They can trigger mandatory prepayment, cancellation of commitments, or events of default, and in some cases even alter the currency in which repayment must be made. The development of these clauses illustrates how closely international sanctions regimes and private financing arrangements have become intertwined.
A. Sanctions Provisions in Facility Agreements
Modern facility agreements adopt an expansive definition of "Sanctions" to ensure that all relevant regimes are captured. This typically includes the economic sanctions laws, regulations, embargoes, or restrictive measures enacted or enforced by the U.S., the EU, the UK, the UN, and other jurisdictions relevant to the transaction, together with their implementing agencies such as OFAC and His Majesty's Treasury. Alongside this definition sits the concept of a "Sanctions List," which refers to the registers of designated individuals, companies, and entities, such as OFAC's Specially Designated Nationals and Blocked Persons List (SDN List) and the consolidated lists maintained by the EU and HMT. These definitions allow the agreement to remain current, automatically tracking changes in the underlying law and public designations without the need for further amendment.
Two contractual devices then form the backbone of sanctions protection: representations and undertakings.
a) Representations. Borrowers are required to represent that neither they nor any of their group entities that may benefit from the facility are subject to sanctions, nor are they established in sanctioned jurisdictions. This assurance does not stop at name-match designations. It is typically extended to the concept of ownership and control, ensuring that an entity owned fifty percent or more by a sanctioned person, or otherwise controlled by one, is treated as sanctioned even if not explicitly listed. These representations are usually made when the agreement is signed and deemed repeated at each drawdown and rollover date, giving lenders continuing assurance that their funds are not being advanced to restricted parties.
b) Undertakings. Complementing this assurance, borrowers also covenant that they will not use the loan proceeds, directly or indirectly, in a way that would benefit sanctioned persons or cause a breach of applicable sanctions. The drafting is deliberately broad, covering indirect dealings as well as direct ones, to prevent loan proceeds from being routed through complex structures to reach prohibited entities. Many agreements also recognise that activities may be permitted if authorised by a licence or exemption granted by the relevant authority, but the burden is on the borrower to demonstrate the existence and scope of that authorisation. These undertakings therefore impose an ongoing compliance obligation on borrowers, requiring them to monitor their own business, counterparties, and payment flows to ensure that they remain consistent with sanctions law throughout the life of the facility.
B. Results of Sanctions Provisions
The contractual consequences of breaching sanctions clauses are serious and often immediate. A misrepresentation about sanctions status, or a breach of the undertaking, is usually defined as an event of default. This entitles lenders to accelerate repayment of the entire facility and cancel undrawn commitments. In addition, many agreements contain mandatory prepayment provisions requiring repayment of outstanding amounts if the borrower or a member of its group becomes a sanctioned person, or if a sanctions authority blocks or freezes its assets. Unlike other defaults, these breaches often do not allow for cure periods. The reasoning is clear: once sanctions exposure exists, lenders cannot continue their participation without risking civil or criminal liability, reputational harm, or secondary sanctions.
From the lenders' perspective, these provisions protect against three categories of risk.
- First is regulatory risk: continuing to fund or receive payments from a sanctioned counterparty could expose lenders to significant penalties under U.S., EU, or UK law.
- Second is reputational risk: banks that appear to be financing sanctioned persons risk losing correspondent banking relationships and broader market trust.
- Third is credit risk: once a borrower is subject to sanctions, its ability to generate cash flow, access markets, and repay debt may collapse. For these reasons, lenders insist on strong sanctions remedies as a condition of their continued participation.
For borrowers, the results are equally stark. A sanctions breach can lead to the immediate acceleration of a facility at a time when access to liquidity is already impaired. It may also trigger cross-defaults in other financing arrangements, creating a cascade of repayment demands. Even where lenders do not accelerate, they may cancel undrawn commitments, depriving the borrower of funding it was relying on for operations or investment.
The commercial impact can therefore be devastating, which is why borrowers must approach sanctions provisions with care and ensure that their compliance systems are robust enough to prevent inadvertent breaches.
C. Currency of Payment and Sanctions
Another important consequence of sanctions is their effect on the mechanics of repayment. Because U.S. dollar payments generally clear through the U.S. financial system, they automatically create a nexus with U.S. jurisdiction. This means that even non-U.S. borrowers and non-U.S. lenders can fall within OFAC's reach if they attempt to make or receive payments in dollars. To avoid this, some facility agreements require that if sanctions prevent payment in U.S. dollars, repayment must instead be made in an alternative currency, such as euros or sterling.
For lenders, this provides a clear compliance safeguard, ensuring that their rights to repayment remain enforceable even if the U.S. channel is blocked. For borrowers, however, such provisions can pose significant operational challenges. Companies whose revenues are dollar-based may find themselves forced to source alternative currencies at short notice, often at unfavourable rates. They may also face complications with hedging strategies, accounting treatments, and underlying commercial contracts that assume payment in dollars. While this mechanism is increasingly standard in cross-border facilities, it remains one of the more onerous consequences of sanctions clauses from a borrower's perspective.
D. Conclusion
Sanctions provisions in facility agreements demonstrate how international regulatory regimes directly shape private contractual arrangements. By combining representations about a borrower's sanctions status with undertakings governing the use of proceeds, lenders obtain powerful contractual protections against sanctions exposure. The consequences of breach—mandatory prepayment, cancellation of commitments, acceleration without cure periods, and repayment in alternative currencies—illustrate the seriousness with which these provisions are treated. For lenders, they are indispensable compliance safeguards; for borrowers, they represent ongoing obligations that must be actively managed through effective compliance systems and treasury controls. In today's global lending market, sanctions clauses are no longer peripheral boilerplate: they are central to the allocation of legal and commercial risk.
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