A North American private-equity fund structures a joint venture between a US entity and a Canadian operating company. The target market sits in a jurisdiction where one potential local partner has unclear ownership links to a person appearing on a watchlist. The US principals assume OFAC governs the whole deal. The Canadian counsel assumes the domestic regime is less demanding. Both assumptions are wrong – and that gap is where enforcement exposure is born.
Joint-venture sanctions structuring under OFAC requires mapping ownership and control to the 50 percent rule before signing, blocking, or authorising any transaction. The Canadian sanctions regime, administered by Global Affairs Canada under the Special Economic Measures Act and associated regulations, applies a distinct control test and carries its own extraterritorial reach. Where both regimes apply, the stricter prohibition governs. Neither regime permits structural workarounds that defeat the purpose of the control.
This analysis walks through the governing tests, the points of divergence between OFAC and Canada, the practical structuring decisions a compliance team must make before a joint-venture closes, and the risk flags that call for counsel involvement early.
What governs joint-venture sanctions structuring under OFAC?
OFAC derives its authority from the International Emergency Economic Powers Act (IEEPA) and a series of programme-specific executive orders, translated into binding regulations for each sanctions programme. For a joint venture, the operative question is whether the entity itself is a blocked person, whether any counterparty or beneficial owner is a blocked person, and whether the transaction involves property in which a blocked person has an interest.
The SDN List (OFAC's list of Specially Designated Nationals and blocked persons) is the starting point, but it is not the ending point. A target company that does not appear on the SDN List may still be blocked if it is owned 50 percent or more in the aggregate – directly or through layers – by one or more persons who are. This is the 50 percent rule. The rule is mechanical and objective. Intention, commercial rationale, and management arrangements do not displace it.
For a joint-venture structure, the 50 percent rule does three things. It determines whether an investee is itself blocked. It determines whether a co-investor in the same vehicle is blocked. And it reaches through intermediate holding companies in the ownership chain. A joint venture is not protected simply because it was formed lawfully or because neither the US party nor the Canadian party has a direct SDN relationship. If the local partner in the target market is an entity that a blocked person owns at the threshold level, the deal is blocked from the outset.
In our experience, the most common structuring error at the OFAC stage is treating the SDN List as a binary screen rather than the entry point to an ownership and control analysis. A clean SDN hit is easy to detect. An indirect ownership chain that crosses the 50 percent threshold four layers from the ultimate beneficial owner is not.
The position above covers the standard OFAC analysis. Your specific structure – the jurisdiction of incorporation of each entity, the nationality of the ultimate beneficial owners, and the subject matter of the joint venture's business – will change the analysis materially.
For a confidential review of your joint-venture exposure under OFAC or under the applicable country regime, contact Calder & Vance at info@caldervance.com.
How does the Canadian sanctions regime structure the same test?
Canada's sanctions authority rests primarily on the Special Economic Measures Act (SEMA) and, for UN-mandated measures, the United Nations Act. Global Affairs Canada (GAC) administers both. The Export and Import Permits Act creates a parallel export-licensing layer for controlled goods. For a cross-border joint venture with US principals, the relevant Canadian question is whether any party to the venture, or any owner of a party, is a "listed person" under the applicable Canadian regulations – and whether the transaction constitutes dealing in the property of a listed person.
The Canadian test differs from OFAC's in several ways that matter for joint-venture structuring. First, Canada has not codified a 50 percent rule in the same mechanical form as OFAC. The ownership and control analysis under Canadian regulations tends to be more contextual: a person who "owns or controls" a listed person's property is caught, but the control element introduces a qualitative dimension that is absent from OFAC's arithmetic threshold. That means a joint-venture partner that falls below the 50 percent line under OFAC's test may still be caught under the Canadian test if it exercises effective control over the relevant assets.
Second, the scope of prohibited dealings under Canadian regulations is defined instrument by instrument. The prohibitions are not uniform across all Canadian programme regulations. A joint-venture lawyer advising a Canadian entity must read the specific regulatory schedule for the relevant programme, not assume that OFAC's programme-specific prohibitions map onto Canadian law. The coverage is sometimes broader, sometimes narrower, on specific transaction types.
Third, Canadian regulations apply to Canadians and Canadian permanent residents wherever they are located, and to all persons in Canada. A Canadian co-investor in a joint-venture operating outside Canada is still subject to SEMA. A US co-investor operating partly through a Canadian subsidiary is also captured to that extent. In our cross-border practice, this territorial interaction is consistently under-appreciated at the deal-structuring stage.
Where do the two regimes diverge in practice?
The clearest divergence sits in three areas: the ownership threshold, the control test, and the licensing architecture.
On ownership threshold: OFAC applies its 50 percent rule uniformly and mechanically across its programmes (subject to programme-specific guidance). Canada does not publish a fixed numerical equivalent. A 49 percent stake may not trigger the OFAC rule but may still constitute "control" under a Canadian contextual reading if the 49 percent holder also holds contractual rights that govern key decisions of the joint-venture vehicle. In structuring terms, a joint-venture agreement that grants veto rights, nomination rights to the management board, or drag-along rights to a party with a sub-50 percent economic stake can create a control conclusion under Canadian law that does not arise under OFAC's mechanical threshold.
On the control test: OFAC's guidance on entities owned by blocked persons focuses on ownership percentage. Where the percentage is below 50 percent, OFAC's standard analysis may not block the entity, though deal-specific facts (earmarking of assets for the benefit of a blocked person, trust arrangements, nominee ownership) can lead to a different conclusion. Under the Canadian regime, control in fact – rather than control by majority ownership – is a recognised basis for designation exposure. A compliance programme that passes OFAC's test but has not mapped the control structure under Canadian law is incomplete.
On licensing: OFAC offers a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) and a general licence (a standing authorisation that permits a defined category of transactions without a separate application). The Canadian licensing mechanism under SEMA operates through ministerial permits. The substantive criteria, the timeline, and the permitted scope of those permits differ from OFAC's licensing standards. A joint venture that obtains an OFAC specific licence for a transaction touching a programme is not thereby authorised to proceed under Canadian law. Dual licensing may be required.
If a transaction has already been flagged by OFAC or by GAC, or a filing has been refused, an early review can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com.
How does the extraterritorial reach of each regime affect joint-venture design?
OFAC's extraterritorial reach is among the broadest of any sanctions regime. US persons – including US citizens, US permanent residents, US-incorporated entities, and their foreign branches – are subject to OFAC regardless of where the transaction occurs. US dollar clearing through a US correspondent bank can also draw a transaction into OFAC jurisdiction even where neither party is a US person. For a joint-venture with a US principal, this means that OFAC analysis cannot be confined to the US parent alone. The structure of the joint-venture vehicle, the currency of financial flows, the jurisdiction of incorporation of intermediate holding companies, and the routing of payments all carry OFAC implications.
Canada's extraterritorial reach is real but different in character. SEMA's person-based reach to Canadians and permanent residents worldwide is comparable in philosophy to the US person test. However, Canada does not operate a secondary-sanctions programme of the same breadth as the United States. The concept of secondary sanctions – exposure of non-US persons to OFAC penalties solely on the basis of dealings with a sanctioned party, without a US nexus – does not have a Canadian equivalent. A Canadian joint-venture participant that has no US nexus is not subject to OFAC's secondary-sanctions exposure on that ground alone.
That distinction matters for deal architecture. A joint-venture structured so that the US party holds its interest through a foreign subsidiary, with no US person at the transaction level and no US dollar involvement, may reduce OFAC primary-sanctions exposure. It does not eliminate it if there is a US-person interest anywhere in the chain. And it does not affect the Canadian party's obligations under SEMA. In our experience, the temptation to use structural layering to reduce OFAC exposure – without a proper legal opinion on whether the US-person connection has genuinely been severed – creates more risk than it removes.
The EU and UK regimes add a further dimension for joint ventures with a European participant. OFSI's ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person) incorporates a control limb that aligns more closely with Canada's approach than with OFAC's mechanical rule. A structure designed around OFAC's 50 percent threshold should be tested against OFSI's control test before closing if any UK person or UK-governed asset is in the structure. For a full analysis of the OFAC and OFSI comparison, see our analysis at Joint-venture sanctions structuring: OFAC and OFSI compared.
What are the principal risk flags in a cross-border joint venture?
The risk flags in joint-venture sanctions structuring are consistent across the regimes, even where the legal tests differ. The following are the situations that most frequently require specialist counsel involvement before a joint venture closes.
Layered ownership chains. A target with three or more layers of beneficial ownership, where the identity and status of the ultimate beneficial owners is unclear, requires a structured ownership tracing exercise. Screening tools that match only the entity name at the first layer are not sufficient. The exercise must reach through to natural persons and identify any who are listed or owned by listed persons.
Jurisdiction of incorporation mismatches. A joint-venture vehicle incorporated in a jurisdiction that is itself the subject of a programme – or incorporated in a third country with opaque corporate registries – warrants enhanced due diligence on the beneficial-ownership chain. The fact of incorporation in a third country does not isolate the vehicle from OFAC or Canadian jurisdiction if US persons or Canadians hold interests in it.
Contractual rights that substitute for majority ownership. A co-investor with a 30 or 40 percent economic stake that holds veto rights on key decisions, the right to appoint the majority of the board, or first-refusal rights over the remaining equity may be treated as exercising control under the Canadian test and under an OFSI or EU analysis, even if the 50 percent threshold is not crossed. These rights should be mapped before the joint-venture agreement is finalised.
Programme-specific asset restrictions. Certain OFAC programmes impose restrictions not only on transactions with listed persons but on dealings in specific categories of goods, services, or technology in the target market. A joint venture whose business involves the supply of those goods or services may require a separate programme-specific analysis in addition to the counterparty screen.
Currency and payment routing. A joint venture with non-US parties that routes payments through US dollar accounts, US correspondent banks, or US-incorporated payment platforms creates a US nexus that may draw the transaction into OFAC jurisdiction even in the absence of a direct US-person investor. Payment architecture is a sanctions structuring question, not only a treasury question.
Post-closing ownership changes. A joint venture that is clean at closing can become non-compliant if a co-investor's beneficial owner is later designated. Ongoing compliance obligations – periodic rescreening, change-of-control notifications, and representations from co-investors – should be built into the joint-venture agreement. The failure to do so is a common post-closing risk in deals with a medium-to-long investment horizon.
In a recent matter, a mid-market manufacturer forming a joint venture in a third market asked us to review the ownership chain of its proposed local partner. The initial screen appeared clean. A second-layer ownership trace identified a beneficial owner with a fractional stake in a listed entity. That stake, when aggregated with a second listed person's holding in the same entity, crossed the 50 percent threshold under OFAC's rule. We advised on the structure of a revised transaction that removed the offending indirect interest at the seller level before closing. The matter illustrates why a first-layer screen is not sufficient.
Is joint-venture sanctions compliance harder under Canada than OFAC?
Neither regime is uniformly stricter. The answer depends on the specific fact pattern.
On ownership thresholds, OFAC is in one sense more demanding because the 50 percent rule is automatic and requires no showing of actual control. A purely passive financial stake that crosses the threshold is enough. Under the Canadian regime, a sub-threshold stake may be caught if it confers effective control – which makes Canada potentially more demanding in deals with complex governance arrangements.
On secondary-sanctions exposure, OFAC is considerably broader. A non-US, non-Canadian party to a joint venture faces secondary-sanctions risk under OFAC programmes that include such measures. Canada does not impose equivalent secondary-sanctions exposure on third-country parties.
On licensing, OFAC's specific-licence process is well-established and follows published guidance. The Canadian ministerial permit process is less frequently used in the cross-border joint-venture context and carries more procedural uncertainty at the margins. Timeline assumptions drawn from OFAC experience should not be applied to Canadian permit applications without verification.
The AUDIENCE_MYTH worth correcting here is the assumption that a joint-venture receiving a clean OFAC opinion needs no further Canadian analysis. A clean OFAC opinion addresses US-law exposure. It does not address whether Canadian parties to the same venture comply with SEMA, whether the venture's activities require a Canadian export permit, or whether the control structure raises issues under Canadian regulations that the OFAC test did not surface. We regularly advise joint-venture teams where the US-law work was thorough and the Canadian position was assumed to be less demanding – and found to be more demanding on a specific structuring point.
For a direct comparison of the OFAC and OFSI ownership and control tests in the joint-venture context, see our related analysis at Joint-venture sanctions structuring: OFAC and OFSI – further analysis.
Decision points: when does a joint-venture require a sanctions opinion?
A sanctions opinion is advisable – and in some cases necessary – in the following situations. These are not exhaustive.
A joint venture with a counterparty incorporated in or operating in a jurisdiction subject to a comprehensive OFAC programme requires a full programme-specific analysis before any US person signs or funds. A standard counterparty screen is not sufficient. The analysis must cover the programme's scope, any applicable general licences, and whether the business of the venture falls within prohibited services or goods categories.
A joint venture where the beneficial-ownership chain includes a person from a jurisdiction with a programme applying ownership-based blocking requires an ownership tracing exercise to the ultimate natural-person level. Where the chain cannot be fully traced, the risk assessment must account for the possibility that an unknown beneficial owner may be listed.
A joint venture where the governance documents give a minority co-investor effective control over key decisions requires a legal opinion on whether that governance structure creates a control conclusion under the Canadian, UK, or EU sanctions regime applicable to any party in the structure.
A joint venture requiring ongoing dealings with a jurisdiction subject to a sectoral programme – for example, dealings in specified sectors such as energy, finance, or defence technology – requires programme-specific analysis on whether the nature of the joint venture's business is caught, and whether any licence or authorisation is required.
Finally, a joint venture where one party has already received a subpoena, inquiry letter, or informal question from OFAC or GAC requires counsel involvement before any further steps are taken. The window in which voluntary engagement produces the best outcome is often short.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions structuring advice for financial institutions managing US-nexus counterparty risk.
- Joint-venture sanctions structuring: OFAC and OFSI compared – ownership and control test comparison for cross-border ventures with UK participants.