What is the LMA guidance on sanctioned lenders in syndicated loan transactions?

The Loan Market Association (LMA) has released guidance to address the ever-increasing sanctions risk in syndicated loan transactions. We look at the key takeaways for developing and emerging markets.

On 2 February 2026, the published new guidance (the Guidance) to help market participants manage disruption to syndicated loan transactions where a lender may become the subject of sanctions or is located in a sanctioned territory. The Guidance is available for LMA members to access on the LMA Documentation Hub. Particular disruption risks include:

Export credit agency cover being terminated;
Loans becoming “frozen” or “blocked” property;
Restrictions being imposed on the ability of a sanctioned lender to fund or receive payments; and
Payments between facility agents and sanctioned lenders being prohibited.

Not all transactions are subject to these risks, so it is important to determine whether and how a particular transaction is affected.

A bespoke approach

The Guidance is neither prescriptive nor exhaustive. It recognises that sanctions risks are fact-dependent and calls for tailored, flexible drafting specific to each transaction. Adaptability is key as changes to sanctions regimes can take effect within a matter of hours and as regulatory compliance becomes increasingly complex as transnational payment systems (such as digital currencies) diversify and financial technologies advance.

Sanctions risk is particularly high in developing/emerging market deals because the lenders may be less aligned with international banking standards, the local loan market may offer fewer potential replacements if a lender does fall foul of the sanctions regime and, because of the lower liquidity levels, the loans are priced more highly.

Potential drafting options

The Guidance contemplates extending the LMA defaulting lender regime to sanctioned lenders. This would allow the usual remedies for lender default to apply, such as cancelling undrawn commitments, requiring the lender to transfer its participation or removing the lender’s voting rights.

However, the impact of sanctions may effectively nullify certain of the above remedies even if expressly provided for in the facility; for example, a sanctioned and defaulting lender’s participation may not be transferable as a result of the application of sanctions. Clauses are therefore increasingly drafted to include defaulting lender protections and to allow an affected lender’s commitment to be suspended without derailing the whole loan.

The Guidance also suggests including clauses dealing with matters such as:

Notification of sanctioned lender status to the agent and borrower;
Temporary suspension of payment obligations in respect of sanctioned lenders;
Payments owed to sanctioned lenders to be paid into a frozen or blocked account; and
Waiver of break costs in respect of sanctioned lenders.

Such clauses should be tailored to fit the specific transaction and market dynamics.

Practical considerations and key UK developments

Parties to an emerging markets syndicated loan agreement will need to consider how payment obligations should be dealt with whilst sanctions prevent the borrower from making payments to a sanctioned lender, including where restrictions outlast the facility’s maturity. The ability to withhold payment, pay into frozen accounts or pay the agent to hold funds on an interim basis will depend on the scope of the relevant sanctions regime and should also be considered from the borrower’s accounting perspective.

UK loan market lenders have strengthened sanctions safeguards in response to the Guidance to mitigate legal and operational risks. Many loan agreements now include comprehensive sanctions representations and undertakings requiring borrowers to certify ongoing sanctions compliance, as well as “drawstop” provisions requiring confirmation at each utilisation that funding will not breach sanctions.

Since the Guidance was released, the Office of Financial Sanctions Implementation (OFSI) has updated its enforcement framework, introducing stricter penalties and self-reporting incentives for suspected breaches from 6 February 2026. The UK Government subsequently released a landmark sanctions package on 24 February 2026 targeting major Russian oil export pipelines and illicit finance networks.

Further, on 28 May 2026, the Financial Conduct Authority (FCA) published a warning for firms to ensure they have adequate sanctions systems and controls. An assessment of the existing sanctions systems found that the most frequent causes of reported sanctions breaches included weaknesses in due diligence, alert management and transaction screening. Compliance teams should bear these points in mind when monitoring the UK Sanctions List, which has been the sole authoritative list of designated persons in the UK since 28 January 2026.

The FCA also signed a Memorandum of Understanding with the Office of Trade Sanctions Implementation (OTSI) on 28 May 2026 to coordinate sanctions oversight, including proactive information sharing on suspected breaches. Whilst no new rules have been imposed, flaws in a firm’s sanctions controls can now be identified by both regulators, likely leading to tighter scrutiny and potential joint enforcement action.

These key developments highlight the need for lenders, agents, trade finance providers and other FCA-regulated firms to maintain robust sanctions processes.

Conclusion

The sanctions landscape has evolved rapidly, but funders now have a helpful framework to navigate it. Whilst different countries, businesses and individuals may be subject to sanctions from time to time, the Guidance provides a sensible starting point. Parties do however need to continue to assess sanctions risk, monitor changes to sanctions regimes and ensure their transaction documents contain adequate protections in order to protect against the risks specific to their transaction. Our Banking and Finance team can provide tailored advice on sanctions regimes and financial regulation to suit your specific transaction needs.