A US-headquartered private equity fund discovers mid-portfolio review that a minority co-investor in a joint venture has been designated by OFAC. The question lands on the general counsel's desk: can the fund simply sell its own interest and walk away, or does the designation freeze the entire structure? The answer is not the same under OFAC as it is under BIS and the EAR – and treating the two regimes as interchangeable is one of the most operationally costly mistakes we see in cross-border divestitures.
Divesting a sanctioned interest under OFAC requires identifying whether the target entity is itself blocked – by designation or by the 50 percent rule (OFAC's rule treating entities owned 50 percent or more in the aggregate by one or more blocked persons as themselves blocked) – and then either obtaining a specific licence or executing a wind-down authorised under a general licence before any transfer of value occurs. BIS and the EAR impose a separate and independent control: export-controlled technology, software, or technical data tied to the divestiture transaction must be licenced or qualify for a licence exception regardless of whether OFAC has cleared the deal. Both regimes must be satisfied concurrently; satisfying one does not discharge the other.
This analysis maps the two regimes side by side – governing authority, trigger conditions, procedural requirements, cross-border interactions, and the practical risk flags that most commonly derail a divestiture when OFAC and BIS obligations collide.
What governs each regime and who administers it?
OFAC administers US economic sanctions under IEEPA and related statutory authority. When a person or entity is added to the SDN List (OFAC's list of Specially Designated Nationals and blocked persons), US persons – and, under certain programmes, non-US persons – are prohibited from engaging in virtually all transactions with that SDN, including transferring, purchasing, or receiving an interest in a blocked entity. The prohibition is immediate upon designation; there is no grace period to complete a transaction already in progress unless a general licence expressly authorises it or OFAC grants a specific licence.
BIS administers US export controls through the Export Administration Regulations (EAR). The EAR controls the export, re-export, and in-country transfer of items – goods, software, and technology – that are listed on the Commerce Control List (CCL) or that are subject to EAR jurisdiction by other operation of the rules. The EAR also maintains the Entity List: a list of foreign parties against whom a licence requirement applies for all items subject to the EAR, regardless of the item's classification or the destination's normal licence requirements. A designation on the Entity List does not block a person under OFAC's rules; it imposes an additional, independent export-control barrier.
The practical consequence is immediate: a divestiture transaction that involves the transfer of export-controlled technology – whether through an assignment of IP licences, a data-room process, technical disclosures during due diligence, or the migration of controlled software to a buyer – sits simultaneously within the EAR's jurisdiction and, if a blocked person is involved, within OFAC's jurisdiction. The two agencies do not coordinate their approvals. Practitioners must sequence applications and manage timelines across both regulators.
How does the OFAC analysis proceed when a sanctioned interest is involved?
The first analytical step under OFAC is to determine whether the entity in which an interest is held is itself blocked. Three distinct situations arise, each carrying a different procedural consequence.
The first situation is direct designation: the target company itself appears on the SDN List. All of its property and interests in property are frozen. A transfer of ownership requires either a specific licence (a case-by-case OFAC authorisation to conduct an otherwise prohibited transaction) or a valid general-licence provision permitting divestiture wind-downs. Absent such authority, even a sale at fair market value to an unrelated buyer is prohibited if any step of the transaction touches the blocked entity's interest.
The second situation is indirect blocking through the 50 percent rule. Where a designated person owns 50 percent or more of a company in the aggregate – whether directly or through a layered ownership chain – that company is treated as blocked even if it does not appear on the SDN List by name. In our experience, this is the position that most frequently catches cross-border investors by surprise. A fund may own forty percent of a joint-venture entity whose other investors include a recently designated party holding fifty-five percent. The fund's own interest is now held in a blocked entity. Disposing of it requires OFAC authorisation even though the fund itself has no designation and the joint-venture vehicle is not itself listed.
The third situation – and the one that generates the greatest analytical uncertainty – is minority exposure below the 50 percent threshold. Here the entity is not blocked by OFAC's rule, but the designated co-investor's interest means that some part of the divestiture proceeds will flow to or benefit a blocked person. That flow is itself a prohibited transaction unless authorised. The divestiture structure must ensure that the SDN's interest is either separately escrowed pending authorisation, transferred through a licensed mechanism, or quarantined from the US-person seller's proceeds entirely.
Have you mapped the full ownership chain – not just the direct holding – before reaching a conclusion about whether the entity is blocked?
Where does BIS / EAR diverge from OFAC on a divestiture transaction?
BIS and the EAR approach a divestiture through a fundamentally different conceptual lens. OFAC's concern is with who owns or benefits from property. BIS's concern is with what items – technology, software, source code, technical data – flow through or in connection with the transaction.
A divestiture that is fully authorised under OFAC may nonetheless require a BIS licence if the transaction involves the release, transfer, or export of items subject to the EAR. Consider a sale of equity in an operating subsidiary that holds US-origin controlled technology. The due-diligence process alone – sharing technical specifications, product roadmaps, or controlled source code with a foreign buyer's team – may constitute a deemed export or re-export requiring prior BIS authorisation. The deal may close under an OFAC licence; BIS could still issue a stop-transfer or enforcement action if the EAR licence was not obtained.
The Entity List adds a second layer of independent BIS restriction. If the intended buyer appears on the Entity List, all items subject to the EAR require a licence for export or transfer to that party – and BIS applies a policy of denial for most Entity List transactions. A buyer's Entity List status is therefore a divestiture-blocking condition under the EAR quite independently of whether OFAC sanctions apply to it. In our cross-border practice, we regularly advise clients who have secured OFAC approval for a divestiture only to encounter a separate BIS barrier they had not anticipated.
There is also a temporal divergence. OFAC licensing timelines and BIS licensing timelines are set by different internal processes and different policy priorities. A divestiture plan that assumes both approvals will arrive in parallel – or that one agency's clearance signals the other's – will frequently fail to account for the independent sequencing required.
The position above covers the standard analysis. Your facts – the nature of the controlled technology, the buyer's jurisdictional profile, the ownership structure at each holding level, and the specific programmes in play – change the analysis materially. For an assessment of your exposure, contact Calder & Vance at info@caldervance.com.
What is the cross-border dimension – does either regime reach non-US parties?
Both OFAC and BIS exercise extraterritorial reach, though through different mechanisms and to different degrees.
OFAC's primary reach runs to US persons wherever located and to transactions that transit the US financial system or involve US-origin property. Under certain country-based programmes, however, OFAC has published rules that can expose non-US persons to secondary-sanctions risk: a foreign financial institution that facilitates a significant transaction for a designated person may itself face correspondent-banking restrictions or designation under the applicable country programme. That risk is not confined to transactions with a direct US nexus. A European or Asian fund considering a divestiture of an interest tied to a designated person should assess whether any step of the transaction could trigger a secondary-sanctions exposure before it proceeds.
BIS's extraterritorial reach operates through the de minimis rule and the foreign-direct-product rule. Where a foreign-made item incorporates more than a defined threshold of US-controlled content, it may remain subject to EAR jurisdiction regardless of where it was manufactured. The foreign-direct-product rule can extend EAR controls to items produced abroad using US-origin technology or equipment. For a divestiture of an operating technology business, these rules mean that items held by a non-US subsidiary may still be subject to EAR licence requirements when they are transferred to a buyer, even if the transfer occurs entirely outside US territory.
The divergence between OFAC's ownership-focused extraterritorial reach and BIS's item-focused extraterritorial reach creates a specific planning risk for cross-border divestitures: a transaction structured to avoid OFAC's US-person nexus may nonetheless carry EAR jurisdiction over the items being transferred. Non-US counsel and local counsel in the relevant jurisdiction can map the country-level controls that apply alongside the US regimes, but the US analysis must be completed independently and first.
UK and EU dimensions compound the picture. OFSI's ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person) applies a control element that OFAC's 50 percent rule does not: a non-listed entity may be treated as owned or controlled by a designated person under OFSI and EU rules even where direct ownership falls below 50 percent, if that person exercises board control, veto rights, or effective management authority. Where the divestiture involves a UK or EU entity, or where UK or EU persons are involved in the transaction chain, the OFSI and EU Council regulation analysis must run concurrently with the OFAC analysis. A divestiture authorised under OFAC is not automatically permissible under EU or UK law.
If a transaction has already been flagged under one regime, or a filing has been refused, an early review of the cross-regime position can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential review.
How do the licensing procedures compare in practice?
OFAC licensing for a divestiture typically proceeds through one of two routes. If a general licence (a standing authorisation that permits a defined category of transactions without a separate application) covers the specific divestiture – for example, a wind-down or divestiture general licence under the applicable programme – the transaction may proceed within the terms of that licence without a separate application. Compliance with the general licence's conditions is mandatory, and those conditions frequently include time limits, reporting requirements, and restrictions on who may receive the proceeds. Where no general licence applies, a specific-licence application is required. OFAC processes specific-licence applications on a no-stated-deadline basis; processing times vary by programme and complexity and are not publicly fixed. In our experience, applications for divestiture-specific licences in complex ownership structures can take considerably longer than a standard trade-finance application.
BIS licensing for a divestiture involving Entity List parties is subject to a stated policy of denial for most item categories, meaning that approval is the exception rather than the rule. For controlled-technology divestitures not involving Entity List parties, the classification of the items determines the applicable licence requirements and the availability of licence exceptions. A divestiture plan that assumes a BIS licence will be granted on the same schedule as an OFAC licence is likely to fail.
One practical point that is frequently underweighted: both OFAC and BIS expect applicants to submit complete, accurate, and well-supported applications. An incomplete submission does not pause the regulatory clock – it restarts it. In our cross-border practice we have acted for clients whose initial applications were returned for supplementary information, adding months to a time-sensitive divestiture. Front-loading the factual and legal analysis before submission is the single most effective way to control the timeline.
What are the most common risk flags in a sanctioned-interest divestiture?
Five patterns recur in our practice and account for the majority of divestiture delays and enforcement referrals.
The first is failure to trace the ownership chain to its ultimate beneficial owners before signing. A divestiture agreement signed before the ownership analysis is complete creates legal exposure the moment it is executed, because a prohibited transaction may have occurred at the point of contract formation, not merely at closing. The analysis must be completed – and documented – before binding obligations are assumed.
The second is treating the OFAC analysis as sufficient for BIS purposes. The two regimes are independent, have different jurisdictional triggers, and are administered by different agencies with different processing timelines. A divestiture of an interest in a technology company almost invariably requires a BIS analysis alongside the OFAC analysis.
The third is underestimating the scope of the general licence's conditions. A general licence that permits a divestiture wind-down typically imposes time limits – often a defined number of days from the date of designation or from the date the general licence takes effect – and restricts the categories of authorised transaction to those expressly enumerated. Exceeding those limits or proceeding with a transaction type not covered by the licence can convert a compliant wind-down into an apparent violation.
The fourth is failing to address the proceeds. Even where the divestiture of the seller's own interest is authorised, proceeds attributable to a blocked person's interest in the same vehicle cannot simply be paid out. They must be held in a blocked account pending further authorisation. Failure to quarantine those proceeds is a distinct violation, separate from any question about the divestiture itself.
The fifth – and perhaps the most underappreciated in cross-border matters – is ignoring the secondary-sanctions dimension. A non-US seller who routes proceeds through a US correspondent bank, uses a US-managed escrow, or relies on a US-domiciled intermediary may inadvertently pull the transaction within OFAC's jurisdiction even if neither the seller nor the buyer is a US person. Is your transaction structure tested against the full scope of OFAC's jurisdictional reach?
A common misconception: if the target is not on the SDN List, no OFAC issue arises
We regularly encounter the view that OFAC's rules apply only to SDN-Listed entities and that a non-listed target is, therefore, a clean counterparty. This is incorrect. The 50 percent rule means that a company can be fully blocked for OFAC purposes without appearing anywhere on the SDN List. That entity's omission from the list reflects only that OFAC has not published its name as a convenience to the market – it does not indicate that the entity is permitted.
In a recent matter, a financial services firm proceeded with a portfolio restructuring on the basis that its counterparty was not listed. Post-execution review identified that a designated person held a majority interest through two intermediate holding companies. We were engaged to assess the apparent violation, advise on voluntary self-disclosure, and prepare the enforcement defence. The matter was resolved, but the cost – in time, management resource, and legal fees – dwarfed what a pre-transaction ownership-chain analysis would have required. The lesson is consistent: screen the ownership chain, not just the named parties.
Related practices
- Correspondent Banking and De-Risking under OFAC – sanctions risk management for financial institutions in cross-border correspondent relationships
- Divesting a Sanctioned Interest: OFAC vs BIS / EAR – Further Analysis – extended analysis of procedural and structural options in complex divestitures
- Divesting a Sanctioned Interest: OFAC vs EU Regime Compared – criterion-by-criterion comparison of US and EU obligations on divestiture