Product Description:

Acquisition Leveraged Finance provides debt products (predominantly senior loans, but could also include subordinated debt) to facilitate the purchase of a company through a financial sponsor.

A bank can act as an “arranger/participant,” lending to a business through a holding company (or subsidiaries of a holding company) in an event-driven deal, typically an acquisition.

An acquisition-leveraged finance deal generally consists of 3 stages.

1. Acquisition of the business (the simultaneous transfer of equity and debt into a holding company).

2. Syndication.

3. Repayment of the loan.

Example:

ABC Ltd. is being purchased for £100 million.

• XYZ Private Equity invests £45 million.

• Management invests £5 million.

• The bank provides £30 million in senior debt.

• Mezzanine financing of £20 million is provided.

XYZ Private Equity retains ownership of the company via a holding company.

Inherent Risk Rating: High (85.1%)

Risk Indicators:

• 3rd Parties in High Risk Jurisdictions: Involves 3rd parties of a client (in the supply chain) in jurisdictions with higher money laundering or corruption risks.
• 3rd Party or Unverified Parties Receipts:

  Product can be used to receive funds from a 3rd party or without verifying the sender’s identity, which can enable anonymous transactions and increasing laundering risks.

• 3rd Party Payments: Can be used to make payments or transfer value to a 3rd party.
• Cash Placement: Involves the purchase of a product using cash, currency, or currency equivalents, or the transfer of cash, currency, or currency equivalents into a firm.
• Concealed Source of Payment: Source of payment is not available.
• Correspondent Banking Product: Transactions can be conducted on behalf of a respondent's customers.
• Direct Deposit: Allows for funds or value to be transferred electronically directly into the client's bank account.
• Easily Transferable: Product ownership can be moved or allocated from one firm or person to another easily.
• Finance of Embargoed Goods: Can be used to finance goods subject to trade embargoes or financial sanctions.
• Foreign Exchange Payments to Suppliers: Facilitate foreign exchange payments in different currencies to suppliers.
• Frequent Payments: Frequent payments can be made outside of normal regular contractual terms.
• Handling of Currency or Currency Equivalent: Includes the handling of currency (i.e. money used in a particular country) and/or currency equivalents.
• High Sanctions Risk Jurisdictions: Involves transfers through multiple jurisdictions that are 'friendly' to countries subject to sanctions or that do not enforce United Nations sanctions.
• High Value Payments: Allows acceptance of very high-value or unlimited-value payments.
• High Volume, Low Value:

  Frequent or high volume payments made in a short time that are low value. Could indicate smurfing activity or structuring of payments to avoid hitting payment filters or AML reporting thresholds.

• Involves Vessels Using Flags of Convenience: The product involves the shipment of goods using a vessel with flags of convenience registered in a different country.
• Linked to Iran and DPRK: Can be used to finance activity-based prohibitions in Iran/DPRK.
• Multiple Simultaneous Transactions: Allows for multiple transactions to be made simultaneously.
• No Jurisdictional Restrictions on Transactions: Related transactions are not bound by jurisdictional restrictions or currency controls.
• Opaque Flow of Funds: Difficult to identify the fund flows and includes transactions which are not transparent.
• Payments from Medium- or Higher Risk Jurisdictions: Allows payments to be processed from firms in medium- or higher-risk jurisdictions.
• Payment to Person or Firm or Country or Wallet Designated Sanctions:

  Can be used to make direct or indirect payments to a designated or sanctioned target or country or virtual asset wallet address.

• Requires Export License: The product being financed requires an export license.
• Supplier Forex Payments:

  Facilitates foreign exchange payments from suppliers.

• Unknown Source of Funds:

  Facilitates significant deposits or placement of funds into the firm.

  Facilitates the funding of a wallet or purchase of virtual assets with funds of unknown origin.

• Use of Intermediary or Agent Acting on Behalf of: Involves an intermediary, agent, or representative who performs services on behalf of the firm or is authorized to represent the firm through other 3rd parties.

Possible mitigation controls:

• Compliance approval is required for 3rd party payment and monitoring.
• The product is not easily transferable, and payment flows are restricted due to book entry (recorded electronically) and Delivery vs. Payment (DVP), a settlement system that stipulates cash payment must be made prior to or simultaneously with the delivery of the security to a specified party.
• Legally binding agreements relevant to the service include an early termination clause for high-risk clients or sanctions breaches.
• Holds no investment value and pays out only upon the occurrence of a specific, verifiable event as determined by the product provider.
• Monitoring of inducements or gifts, and entertainment.
• A product or service requires entering into a legally binding agreement or contract (which can be standard or tailored) with the relevant counterparty (i.e., ISDA, Repo Agreements).
• Restricted capacity to make 3rd party payments.
• The fee arrangement is not tied to performance.
• Entering into a transaction before completing CDD (Customer Due Diligence) or EDD (Enhanced Due Diligence), as appropriate, is not allowed.
• Daily sanctions and adverse press screening, in addition to the risk review cycle.
• Require that originator and beneficiary information be included in the payment.
• Screens financial transactions to identify potential matches against international economic and financial sanctions.