A Canadian bank with US correspondent relationships discovers that a corporate account holder has appeared on an updated OFAC screening alert. The account holds funds transferred from a US counterparty two weeks earlier. The compliance team faces an immediate question: does the obligation to freeze originate in US law, Canadian law, or both – and what must the bank actually do next?
Frozen-account management under OFAC and under the Canadian sanctions regime share a common objective – immobilising assets connected to designated persons – but they differ materially on who must act, how quickly, what records must be kept, and when funds can be released. As of mid-2026, both regimes are active and diverging in their enforcement postures. A cross-border business holding accounts in both jurisdictions cannot treat either regime as a proxy for the other.
This analysis maps the two regimes criterion by criterion: legal authority, the freeze obligation, the ownership and control test, the licensing and unblock route, reporting and record-keeping, and enforcement posture. It closes with practical guidance on managing exposure across both.
What legal authority underpins each freeze obligation?
The freeze obligation under OFAC derives from executive orders issued under IEEPA and, in older programmes, under TWEA; the Canadian freeze obligation derives from the Special Economic Measures Act ("SEMA") and the United Nations Act ("UNA"), implemented through programme-specific regulations issued by the Governor in Council and administered by Global Affairs Canada ("GAC").
The structural difference is significant in practice. OFAC operates as a programme-based system: each sanctions programme has its own regulations, its own list of Specially Designated Nationals (OFAC's list of blocked persons and entities, the "SDN List"), and its own general and specific licensing infrastructure. GAC administers a single consolidated list of designated persons under SEMA and a separate list under the UNA, but the underlying statutory powers are distinct and can produce different results for the same counterparty.
A company appearing on the OFAC SDN List is not automatically designated under the Canadian regime. Conversely, a person designated by Canada under SEMA may not appear on the SDN List at all. We regularly advise clients who assume these lists are equivalent and find, mid-transaction, that the assumption is wrong. The lists overlap substantially in practice – particularly following coordinated designations with G7 partners – but they are legally independent instruments. Relying on one as a substitute for screening against the other is a compliance error.
How does the freeze obligation differ in scope and mechanics?
Under OFAC, a US person – and any person transacting within or through the US financial system – must immediately block all property and property interests of an SDN that come into their possession or control; the obligation attaches to the property, not the account as a formal construct.
The concept of "blocked property" under OFAC is broad. It includes funds held in accounts, securities, contractual rights, and any interest – direct or indirect – a designated person holds in those assets. The moment a US person identifies blocked property in their custody, the obligation to freeze arises. There is no grace period, and the question of when knowledge crystallises is legally material.
Canadian law operates differently. Under SEMA-based regulations, the obligation is to freeze property held by, or on behalf of, a listed person. The precise formulation varies by programme-specific regulation. GAC guidance indicates that the obligation extends to property that a designated person owns or controls, but the Canadian test has historically been applied with somewhat more attention to formal title and less attention to the economic-interest chain than OFAC's approach. That distinction matters when a fund holds an interest in a structure that a designated person does not directly own on paper.
In our cross-border practice, institutions operating under both regimes frequently encounter accounts where the OFAC obligation to block is clear but the Canadian designation status of the same person is under review or not yet mirrored. In those situations, both analyses must run in parallel, not sequentially.
Where do the ownership and control tests diverge?
The OFAC ownership test is mechanical: an entity owned 50 percent or more in the aggregate by one or more SDNs is itself treated as blocked, regardless of whether that entity is separately listed.
This is the 50 percent rule – OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked even without a separate designation. Aggregation operates across multiple SDNs: two listed persons each holding 27 percent of the same target together exceed the threshold. Screening tools that do not aggregate ownership across multiple listed persons will miss this outcome.
The Canadian regime applies an ownership and control test – the test for whether a non-listed entity is captured through a listed person's interest in it – but the statutory language and GAC guidance do not replicate the mechanical 50 percent bright line in the same way. Canadian regulations typically refer to property that a designated person "owns or controls," which introduces a qualitative element. A structure where a designated person holds 49 percent but exercises effective control through a shareholders' agreement may be caught under the Canadian test in circumstances where, mechanically, the OFAC 50 percent threshold is not breached.
The practical implication: neither test reliably captures all exposures that the other would catch. A robust cross-border ownership analysis must apply both tests independently to the same ownership chain. Where the two produce different results, the stricter prohibition governs the conduct of persons subject to that regime – and a person subject to both regimes must comply with the stricter of the two applicable obligations. That is a cardinal principle of multi-regime compliance that we address in every cross-border diligence instruction.
What is the licensing and unblock route under each regime?
Under OFAC, a person holding blocked property may apply for a specific licence – a case-by-case authorisation to conduct an otherwise prohibited transaction, including returning or releasing blocked funds – or may rely on an applicable general licence (a standing authorisation permitting a defined category of transactions without a separate application).
OFAC's licensing infrastructure is well-developed. The agency maintains a body of general licences under each programme that can authorise, among other things, the maintenance of blocked accounts, the payment of legal fees, or the completion of pre-existing contractual obligations. Where no general licence applies, a specific licence application sets out the transaction, the parties, the legal basis for relief, and the humanitarian or commercial justification. OFAC reviews applications on the facts presented; review timelines are not fixed by statute, though they are generally measured in months for complex matters.
Canada's equivalent mechanism operates through GAC. SEMA-based regulations provide for permit issuance by the Minister of Foreign Affairs. A permit authorises an otherwise prohibited dealing with a designated person's property. The Canadian permit process has historically been used less intensively than the OFAC licensing pipeline, and published guidance on the evidentiary standard for permits is less granular than OFAC's. In our experience, applicants in the Canadian system benefit from setting out their case with a level of factual specificity comparable to an OFAC specific-licence application, even where GAC's published standards do not explicitly require it.
An important divergence: OFAC offers a route to unblocking – the release of blocked property to its owner – where the agency determines that the blocking was erroneous or where a delisting removes the basis for the block. GAC similarly has authority to revoke a permit and to amend the designated persons list. The mechanics and timelines differ, and – critically – an OFAC unblocking does not release Canadian-frozen property, and a Canadian delisting does not of itself authorise a US person to deal with property that remains blocked under OFAC. Both must be resolved independently.
The position above covers the standard case. Your facts – the counterparty, the holding structure, the regime in play, and whether both a US correspondent and a Canadian institution are involved – change the analysis materially.
For an assessment of your licensing options under OFAC or GAC, or for guidance on managing a frozen account across both regimes, contact Calder & Vance at info@caldervance.com.
What are the reporting and record-keeping obligations?
Under OFAC, a US financial institution that blocks a transaction or rejects a funds transfer must report the action to OFAC; the report is due within a defined statutory window after the block or rejection. OFAC also requires an annual report of all blocked property held as of 30 June each year. Records of blocked property and of any transactions involving blocked property must be retained for five years from the date of the transaction.
These are not aspirational standards. Failure to report a blocked transaction – even where the underlying block was correctly applied – constitutes a separate violation. In our practice, we see institutions that correctly freeze an account but fail to file the required report, and then discover during an examination or investigation that the reporting failure creates its own exposure.
Canada's SEMA-based regulations impose a disclosure obligation: a person who has reason to believe they are holding the property of a designated person must disclose that fact to the Royal Canadian Mounted Police ("RCMP") and to GAC. The Canadian disclosure obligation is triggered by a lower epistemic standard than the OFAC reporting rule – "reason to believe" rather than confirmed knowledge – which means the obligation can arise before a definitive ownership determination is complete.
Record-keeping requirements under the Canadian regime vary by sector and by the applicable programme regulations. Financial institutions regulated under Canadian anti-money-laundering rules will typically maintain records consistent with those obligations, but the SEMA-specific record-keeping standard should be confirmed against the applicable programme regulation rather than assumed to mirror the AML framework.
One cross-regime tension bears emphasis. A Canadian institution with a US correspondent relationship may simultaneously be subject to OFAC reporting requirements (if it processes US-dollar transactions through the US financial system) and Canadian disclosure obligations. The timelines and addressees differ. Both sets of obligations must be discharged; discharging one does not satisfy the other.
Which regime is stricter on frozen-account management?
Neither regime is categorically stricter across every dimension; the two differ in their areas of intensity, and the practical answer depends on the specific obligation being assessed.
OFAC is stricter in two important respects. First, the extraterritorial reach of OFAC – its authority over non-US persons who process US-dollar transactions or engage with US financial institutions – means that a Canadian bank handling US-dollar transfers can be subject to OFAC obligations even with respect to accounts that have no other US nexus. Second, the OFAC penalty regime for financial institutions is well-documented as producing significant civil penalties, and the agency's enforcement record includes institutions from outside the United States.
The Canadian regime is, in certain respects, broader in its ownership and control formulation, as noted above. A person who "controls" a designated person's property without holding 50 percent ownership may be caught under SEMA where OFAC's mechanical test would not reach the same result. The Canadian disclosure obligation, triggered at the lower "reason to believe" standard, can also require earlier action than OFAC's reporting rule.
The correct analytical posture for a cross-border business subject to both regimes is not to identify the stricter one and comply only with that. The obligations are cumulative. Where they diverge, both must be met. Where they produce conflicting obligations – a situation that can arise in relation to third-country designations where one regime has listed a person and the other has not – advice on the interaction is essential before any step is taken.
If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time. Contact us at info@caldervance.com for a confidential review.
What are the principal risk flags for cross-border institutions?
The first risk flag is list-substitution: using the OFAC SDN List as the sole screening resource and treating the absence of an OFAC designation as clearance under the Canadian regime, or vice versa. The lists overlap but they are not identical, and the divergence has widened as programmes have developed at different speeds.
The second is aggregation failure. A corporate account holder may be owned by multiple shareholders, none of whom individually clears the 50 percent threshold, but whose combined holding – or whose combined influence over the entity – is caught under one or both regime tests. Screening a legal entity without mapping its ownership chain to the second or third tier is not adequate screening.
The third risk flag is dual-trigger reporting. An institution subject to both OFAC and SEMA obligations on the same frozen account may have staggered reporting deadlines running to different regulators. Missing either deadline creates independent exposure. The internal workflow must track both clocks from the moment the freeze decision is made.
The fourth is the unblock error. When OFAC issues a specific licence permitting a release, a US person may release funds to the extent the licence authorises. But that licence does not bind GAC. An institution that releases Canadian-frozen funds on the strength of an OFAC licence alone – without confirming the Canadian position – risks a violation of the Canadian regime. We have seen this error in matters involving accounts held by institutions with both US correspondent relationships and Canadian regulatory obligations.
The fifth risk flag is the interaction between the sanctions freeze and domestic insolvency or creditor-protection proceedings. When a frozen account is the subject of a third-party claim in insolvency, both regimes impose constraints on how the property may be treated, and the interaction of sanctions law with creditor-protection regimes requires specific advice. This is a specialised intersection that should not be handled through standard insolvency templates without sanctions input.
How does a cross-border business manage a frozen account across both regimes?
Effective cross-border frozen-account management requires a structured sequence, not a simultaneous scramble across two regulatory systems.
The first step is identification and legal characterisation: confirm which regime's list triggered the freeze, whether the other regime has a concurrent or independent basis for the freeze, and whether the ownership or control analysis produces any additional exposures not already identified by the initial screening hit.
The second step is concurrent notification: preserve both OFAC and Canadian reporting and disclosure obligations by mapping the applicable deadlines and addressees from the moment the freeze decision is documented. Internal escalation and external counsel engagement should occur at this stage, not after the first deadline has passed.
The third step is the licence or permit assessment: determine whether a general licence under the applicable OFAC programme authorises any interim steps – such as maintenance of the account, payment of legal fees, or preservation of perishable assets – and whether a corresponding Canadian permit is required for any action that the OFAC licence might authorise on the US side.
The fourth step is the unblock or delisting assessment: where the designated person disputes the designation or the basis for the freeze, the delisting and the licence or unblock routes must be considered in parallel across both regimes. An OFAC-specific licence does not substitute for a GAC permit, and a successful OFAC de-listing does not automatically produce a Canadian de-listing. Both processes must be managed.
In a recent matter, a financial institution holding accounts under both US and Canadian regulatory jurisdiction identified a corporate account holder whose indirect shareholder appeared on both the OFAC SDN List and the Canadian SEMA list. We were instructed to assess the freeze obligations, structure the reporting to both regulators within the applicable windows, and advise on the availability of a general licence for the payment of legitimate legal fees out of the blocked account. The institution avoided a secondary reporting violation that had initially been overlooked in the first response to the screening alert.
Related practices
- Frozen-account management under BIS and the EAR – licensing, holds, and release procedures under US export-control authority
- OFAC vs Canada: Frozen-account management compared (Part II) – extended analysis of secondary-sanctions exposure and financial-institution obligations
- OFAC vs OFSI: Frozen-account management compared – criterion-by-criterion comparison of the US and UK freeze regimes