Checking of counterparties in international projects

Mainstream

Verification of a counterparty in an international project is not just a collection of constituent documents and breaking through the sanctions lists. It is a strategy to prevent legal, financial and reputational disaster.

The question is not whether the company exists formally. The main question is whether it is possible to work safely in three years, taking into account the dynamics of sanctions regulation, export control, corruption risks and opaque ownership structures.

Effective international verification therefore begins with three checkpoints:

Is the ownership structure transparent up to the ultimate beneficiary – an individual?There are no direct or indirect sanctions, export and compliance triggers.Whether the business reputation of the counterparty and its affiliates is confirmed by real facts, not only self-assurances.

If at least one of these points is not worked out, the company risks blocking payments, secondary sanctions, criminal liability of officials and the destruction of the entire project.

When it is necessary to conduct an in-depth check of the counterparty

An enhanced due diligence is required if:

• the counterparty is registered in a high-risk or offshore jurisdiction
• ownership structure includes trusts, nominee directors or shareholders
• Export of dual-use goods or technologies is planned
• Project related to subsanctions industries
• There is a risk of circumventing sanctions through chains of intermediaries
• The contractor insists on non-standard payment routes
• The ultimate beneficiaries are not disclosed or hidden behind a corporate veil
• Requests from banks or compliance units
• The project is being implemented in a region with a high level of corruption.
• Investments, joint ventures or M&A deals are planned
• counterparty: a public official (PEP) or related to such persons

The mistake most companies make

Many companies start with the question:

Is it enough to have a record from the registry and no counterparty on the SDN list?

That's the wrong first question.

The right question is:

What risks will cooperation with this counterparty create for our business today, a year from now and if the sanctions landscape changes?

Sometimes the problem is not in the counterparty itself, but in the person controlling it. Sometimes it is in the middle of the supply chain. Sometimes, in the final use of the product. Sometimes it is in reputational ties that are not visible in formal registers.

Verification of the counterparty in an international project does not require a personal approach, but a sanctions-informed, compliance-oriented and intelligence-analytical strategy.

Step 1. Disclose ownership structure and ultimate beneficiaries

The first step is to determine who is actually behind the contractor.

It is necessary to obtain and analyze:

• corporate structure up to the level of an individual
• Registration certificates and constituent documents
• shareholders (participants) with shares from 5-10%
• information on nominee holders and trust declarations
• Indirect ownership schemes through a chain of companies in different jurisdictions
• Family and business relationships of the ultimate beneficiaries
• Communication with Politically Important Persons (PEP) and Government Authorities

If the counterparty refuses to disclose the ultimate beneficiary, this should be treated as a red flag of the highest category. Without a transparent ownership structure, a full-fledged check on either sanctions or compliance criteria is impossible.

Step 2. Conduct multi-level sanction screening

The check on the sanctions lists should not be one-time, but multi-level and cross-jurisdictional.

Mandatory minimum:

• OFAC SDN List and Sectoral Sanctions (SSI)
• sanctions lists of the EU, the UK, the UN
• National lists of countries involved in the project
• Lists of export control bodies (BIS Entity List, Military End-User List, etc.)
• automatic screening of all related persons (directors, shareholders, beneficiaries, key employees)
• Checking for compliance with the ownership/control criteria (50 percent rule and share aggregation)

It is important not just to verify the names, but to analyze indirect links, common addresses, directors and historical intersections with the sanctioned structures.

Step 3. Assessing the risks of export controls and end-use

If the project involves cross-border supply of goods, technology or software, check:

• whether the goods are subject to export control (EAR, ITAR, national lists)
• Whether an export or re-export license is required
• Is there a risk of unauthorized end-use, including military use?
• What are the actual and claimed end users
• Are there any persons from the export control restrictive lists?
• Are there restrictions on technology transfer and know-how?

Liability for export control violations may occur even in the absence of a direct violation of sanctions. Therefore, the verification of the counterparty for export risks is an independent and mandatory stage.

Step 4. Analyze business reputation and media background

Formal absence from the sanctions lists does not guarantee a clean reputation.

It is necessary to examine:

• International and Local Media
• bases of arbitration and litigation disputes
• Information on investigations and regulatory actions
• reputational risks associated with corruption, money laundering, human rights violations
• history of interaction with government customers
• Participation in projects that may be considered unethical or illegal

Reputation due diligence is particularly critical for public companies, financial institutions and projects with high regulatory burden. Even indirect association with toxic persons or projects can lead to bank failures and loss of business partners.

Step 5. Checking financial stability and reliability

A partner with an opaque financial structure carries risks not only of compliance, but also commercial.

Key elements of verification:

• Financial reporting and its compliance with the scope of activities
• signs of fictitious operations and one-day companies
• History of banking relationships and denial of service
• assets proportionate to the liabilities
• Analysis of cash flows and suspicious transactions
• Lack of signs of bankruptcy and insolvency

Financial analysis should not replace sanctions compliance, but without it it is impossible to understand whether the counterparty will be able to fulfill obligations in a long-term international project.

Step 6. Identify corruption risks and signs of unethical business conduct

International projects, especially in high-risk jurisdictions, require an assessment of the corruption component.

The verification shall include:

• presence of a counterparty in the databases on corruption investigations
• Communication with public officials
• Participation in tenders with signs of conflict of interest
• use of agents and intermediaries with opaque remuneration
• Analysis of gifts, representation costs and sponsorship
• Compliance with the FCPA, UK Bribery Act, and national anti-corruption legislation

Corruption risk is not only a legal liability, but also a direct path to reputation degradation, cross-jurisdictional investigations and blocking the entire project.

Step 7. Check the supply chain and related counterparties

In international projects, risk is often hidden not in the direct counterparty, but in the second or third level of the supply chain.

It is necessary to carry out:

• mapping the entire value chain
• Verification of key subcontractors, suppliers and agents
• analysis of final destinations of goods
• Screening of companies involved in logistics and financing
• Identification of schemes aimed at circumventing sanctions and export restrictions

Without supply chain analysis, direct counterparty verification remains incomplete and creates the illusion of security.

Step 8. Assessing jurisdictional and regulatory risks

The counterparty’s risk is inextricably linked to the jurisdiction of its registration, banking and operating activities.

Rate:

• The country is on the list of high-risk jurisdictions of the FATF
• Sanctions regime against the country of registration or nationality of the beneficiaries
• Applicability of blocking and sectoral sanctions
• Restrictions on foreign exchange transactions and capital movements
• the ability of the counterparty to ensure the stability of settlements in the long term

Jurisdictional analysis helps to anticipate future limitations that can paralyze the project even if the counterparty is perfectly clean at the time of signing the contract.

Step 9. Document the verification process

The results of the check should not be just a conclusion “clean / unclean”, but a full-fledged compliance dossier.

The file should contain:

• description of the verification methodology
• sources of information and dates of verification
• Results of Sanctions Screening and Export Control
• diagram
• Red Flag Analysis and Decisions
• recommendations and, where appropriate, a risk mitigation plan
• Confirmation of approval by the authorized body (compliance, management)

Documented inspection protects not only against risks, but also against possible claims of regulators in the future. The company must be able to prove that it acted in good faith and professionally.

Step 10. Incorporate verification into a contract and monitoring structure

The inspection does not end with the signing of the contract.

An international contract should include:

• Sanctions and export assurances and guarantees
• obligation to immediately notify of a change in ownership structure
• the right to unilaterally withdraw from a treaty when sanctions are imposed
• Prohibition clauses on re-export and non-authorised end-use
• Regular (quarterly/annual) re-screening of counterparty and related persons
• Compliance audit

Constant monitoring transforms counterparty verification from a static report into a living risk management system.

Formal verification vs. International due diligence

How to strengthen your position before starting a project

The best counterparty check doesn’t start with finding red flags, but with building a system where red flags can’t go unnoticed.

Prior to the start of the international project, it is necessary to:

• Develop a compliance check policy for counterparties
• implement automated sanction screening systems
• Determine the criteria for high-risk counterparties
• Obliging contractors to provide full information about beneficiaries
• include sanctions and export clauses in treaty templates
• training project teams in the basics of sanctions compliance
• External consultants to check complex structures

A project without built-in compliance is a project in which risks manage the company, not the company’s risks.

Common mistakes in checking counterparty in international projects

1. Restricted to sanctions lists, export controls, corruption and reputation remain unembraced.
2. Trusting assurances without verification – a statement of absence of sanctioned beneficiaries does not replace one’s own investigation.
3. Not to disclose the ultimate beneficiary – the counterparty’s failure or inability to show the real owner should be a stop factor.
4. Ignoring the supply chain – the main risk is often the third-tier subcontractor.
5. Check only at the start – the sanctions lists and ownership structures change, monitoring should be continuous.
6. Not documenting the process – in proceedings with the regulator, an unconfirmed inspection equals its absence.
7. Relying on local databases does not reflect sanctions from other jurisdictions or international red flags.
8. Saving on professional due diligence – the cost of error is many times higher than the cost of correct verification.

Checklist: 15 Questions Before Starting Work with the Contractor

Before joining the international project, answer 15 questions:

1. Who is the ultimate beneficiary of the contractor – an individual?
2. Is the full ownership structure, including trusts and denominations, disclosed?
3. Are there any direct or indirect overlaps with the sanctions lists?
4. Is the contractor subject to ownership/control rules?
5. Is it on the list of export controls (Entity List, etc.)?
6. Will an export license be required for the proposed transaction?
7. What is your business reputation and is there a negative media background?
8. Is there a connection to PEP or government agencies?
9. Are the financial statements transparent and are there any signs of fictitiousness?
10. Are there risks associated with the jurisdiction of the counterparty and its banks?
11. Is the entire supply chain and end-use verified?
12. Are there any corruption or regulatory investigations?
13. Are there sanctions and export protection clauses in the treaty?
14. Is the check documented in the compliance dossier?
15. Is regular monitoring of the counterparty and related persons set for the future?

What a strong counterparty verification strategy looks like

A strong strategy includes five interrelated levels:

1. Legal & Structural Clarity Full disclosure of the legal structure, identification of the ultimate beneficiary, analysis of jurisdictional risks.

2. Sanctions & Export Control Screening Continuous multi-level screening for all applicable sanctions and export regimes, including indirect linkage and circumvention risk analysis.

3. Reputational & Business Intelligence Media analysis, judicial and arbitration bases, compliance history, relations with undesirable persons and projects.

4. On-site & Human Intelligence (if necessary) Management interviews, field checks, operational verification – especially for high-risk transactions and joint ventures.

5. Contractual Protection & Ongoing Monitoring: Sanctions clauses, right of withdrawal, export restrictions and automated monitoring for the duration of the project.

Without the fifth level, the first four are no longer relevant a few months after the contract is signed.

FAQ

The assurances of the counterparty have legal force, but do not replace independent verification. In case of detection of violation, assurances give the right to termination and damages, but do not protect against regulatory investigations and reputational losses.

What to do if the contractor refuses to disclose the ultimate beneficiary?Refusal to disclose the real owner in an international project is a critical red flag. In most cases, such a contractor should be abandoned. If the project is strategically important, structuring through bank guarantees and escrow is acceptable, but the risk remains high.

Do I have to check subcontractors and the entire supply chain? Responsibility is not absolved by delegation. An unverified subcontractor may create the same liability as a breach of his own.

Sanctions screening is recommended in real time or at minimum intervals (monthly), and a full due diligence review is recommended annually and with each significant change in ownership structure, geography of activities or regulatory landscape.

What are the most important sanctions lists?It all depends on the project. Minimum set: OFAC SDN, EU Consolidated List, UK Sanctions List, and lists of countries where parties are registered and where enforcement will take place. For export, BIS Entity List and Military End-User List. There is no universal list, and a cross-jurisdictional approach is mandatory.

Under OFAC and EU rules, if a sanctioned person owns 50% or more of a company directly or indirectly (with aggregation), such a company is also considered blocked, even if not listed. Without an analysis of ownership structure, this risk is easily missed.

Can the check of the counterparty protect against secondary sanctions?Verification is a necessary, but insufficient condition. It demonstrates integrity and minimizes risk. However, in a high-risk area (for example, working with persons already under sanctions or in the sanctioned sectors), one inspection is not enough, it is necessary to build the entire architecture of the transaction taking into account sanctions restrictions.

Related services

• Sanctions, export controls and international compliance
• International trade, distribution and cross-border transactions
• Corporate and Regulatory Investigations, Business Integrity
• International regulatory risks and strategic advice
• Commercial contracts
• International Arbitration and Cross-Border Disputes

Related material

• Sanctions clauses in international treaties: How to formulate without errors Secondary sanctions: How to minimize risk to business Export control of dual-use goods: Practical guidance The ultimate beneficiary: How to Discover and Verify in Complex Jurisdictions
• How to Build a Compliance System for International Projects
• Asset tracing and due diligence: asset search and counterparty verification
• How to protect an international transaction from corruption risks Red flags when checking a foreign counterparty: full-length

Conclusion

Verification of the counterparty in an international project is not a compliance formality, but the foundation on which the security of the entire business is built.

A strong verification strategy is based on full transparency of ownership structure, multi-level sanction and export screening, in-depth analysis of business reputation and continuous monitoring throughout the life of the project.

In the face of unprecedented sanctions and extraterritorial application of export controls, the winner is not the one who makes the deal faster. The winner is the one who knows exactly who he works with, what risks he takes and how he will sleep peacefully three years after the project launches.