Can a non-designated distributor expose me to a risk of breaching financial sanctions?

Hypothetical 

Bootxit, a UK manufacturer active in the automotive sector, is approached by Wheelsale, a wholesaler based in Turkey, who claims it would be able to sell a higher volume of Bootxit’s products than Bootxit’s current distributor.  Due diligence carried out by Bootxit confirms that Wheelsale and its shareholders are not designated entities under the UK, EU or US sanctions regimes.  Commercial due diligence also identifies that whilst the company’s market share in Turkey is estimated to be only 5%, the volume of Bootxit’s products that Wheelsale proposes to purchase for sale in Turkey is equivalent to almost 60% of the overall market.  The same employee also learns from one of her contacts for the MENA region that Wheelsale has a longstanding strategic partnership with SyriaWheel a Syrian distributor, and IranWheel, an Iranian distributor. 

Key Considerations

  • A company may be exposed to a risk of breaching EU, UK and US sanctions because of the actions of a distributor, even when that distributor operates in a country which is not subject to those sanctions regimes.
  • Risks may arise if there are connections between the distributor and specially designated persons or sanctioned jurisdictions such as Syria or Iran.
  • Exposure to a breach of sanctions may also arise depending on the markets the distributor will be selling to and the identity of the end customers.
  • When assessing the extent of the due diligence to be performed on a distributor, factors such as the type of market, the industry, and the terms of the proposed distribution agreement should be taken into consideration.
  • A distribution chain may give rise to a number of other compliance risks, e.g. in respect of bribery and corruption, modern slavery, facilitation of tax evasion, or money laundering.

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