A US-headquartered business and a European partner are finalising the shareholder agreement for a joint-venture holding company. The legal team has screened both corporate parents. Both are clean. But has anyone looked at the silent minority investor sitting at 23 percent of the European partner? Has anyone tested whether the JV board structure gives that investor a veto right that, under OFSI or EU rules, would trigger a control finding even though the ownership threshold is not met? These are the questions that close deals – or unwind them after signing.
Joint-venture sanctions structuring under OFAC and OFSI turns on two distinct legal tests. OFAC applies a mechanical 50 percent rule (the rule that treats any entity owned in the aggregate at 50 percent or more by one or more blocked persons as itself blocked, regardless of operational control). OFSI and the EU add a separate ownership and control test (a broader standard that can capture an entity through a listed person's ability to exercise decisive influence, even below the ownership threshold). Structuring a JV to satisfy one regime while ignoring the other is one of the most persistent and expensive errors in cross-border transactions work.
This analysis sets out where the two regimes diverge on JV sanctions structuring, what each test actually requires, where the risk concentrations sit in a typical JV architecture, and what a cross-border business needs to do before the shareholder agreement is signed.
What governs joint-venture sanctions structuring under OFAC?
OFAC's authority rests on the International Emergency Economic Powers Act (IEEPA) and, for the oldest programmes, the Trading with the Enemy Act (TWEA). The operative instrument varies by programme, but the ownership threshold is consistent across OFAC's primary sanctions regimes: 50 percent or more aggregate beneficial ownership by one or more persons on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) renders the owned entity blocked as a matter of law, even if that entity is not itself listed.
For a joint venture, this means the analysis starts with the ownership table and works upward and downward through every tier. If a listed person directly owns 50 percent or more of a JV holdco, the holdco is blocked. If two listed persons each hold 26 percent of the same vehicle, their combined 52 percent blocks it. But the rule is strictly quantitative at the 50 percent line. A listed person holding 49.9 percent does not trigger the rule on ownership grounds alone – though that position may still raise a risk of facilitation and should be assessed separately.
Aggregation across multiple listed persons is the most frequently missed dimension. In our experience, compliance teams screen each shareholder individually and confirm that no single investor crosses the threshold. They do not aggregate across all listed persons in the cap table simultaneously. That gap is where OFAC's rule bites hardest on complex JV structures.
The 50 percent rule also applies on a look-through basis through intermediate holding companies. A listed person owning 80 percent of an intermediary that itself owns 70 percent of the JV vehicle has an effective interest of 56 percent in the JV. The JV is blocked even if the listed person's name appears nowhere in the JV's direct shareholder register.
How does OFSI's ownership and control test differ?
OFSI administers UK financial-sanctions law under the Sanctions and Anti-Money Laundering Act (SAMLA) and the relevant thematic sanctions regulations. The UK ownership threshold mirrors OFAC's 50 percent figure in the ownership strand – but OFSI's test does not stop at ownership. It adds a parallel control limb that has no equivalent under OFAC's primary-sanctions rules.
Under the UK control test, an entity can be caught where a listed person is able to direct or influence the entity's activities in a material way. That standard encompasses board appointment rights, veto powers over material decisions, and contractual rights under a shareholders' agreement that give a minority investor effective operational control. A 30 percent shareholder with a contractual veto over all capital expenditure above a defined threshold may be exercising control for OFSI purposes, even though the 50 percent ownership threshold is not crossed.
The EU position under the relevant Council regulations is substantially similar to OFSI's approach: it combines an ownership prong with a control prong that turns on the ability to exercise decisive influence. Both the EU and the UK require an entity-by-entity factual assessment rather than a purely arithmetic calculation.
What does this divergence mean for a JV structure? It means a transaction that passes the OFAC numerical screen may still be caught by OFSI or the EU if a sanctioned minority investor holds structural rights that amount to control. The shareholder agreement itself – the governance provisions, the consent rights, the deadlock mechanisms, the reserved matters – becomes a sanctions document, not merely a commercial one.
The position above covers the standard analysis. Your specific facts – the sector, the counterparty's jurisdictions of incorporation, the governing law of the JV documents, and which regime's sanctions apply to which party – change the analysis materially.
Where do the structural risk concentrations sit in a typical JV?
Most JV sanctions exposure does not sit in the obvious place – a listed party at the top of the ownership chain. It concentrates at three other structural points that a standard pre-signing screen will miss.
The first is indirect minority ownership beneath the threshold. A listed person holding 45 percent of an upstream parent that holds 100 percent of the JV vehicle produces a 45 percent effective interest in the JV. That does not trigger the 50 percent rule on its own. But if the same listed person also holds a direct 6 percent stake in the JV for historical reasons, the aggregate position is 51 percent and the JV is blocked. The risk is invisible unless the screener maps every route of ownership simultaneously.
The second concentration point is the governance architecture. Under OFSI and EU rules, consent rights in a shareholders' agreement can constitute control over the JV even where the direct and indirect ownership of listed persons is below 50 percent across all routes. Reserved matters, unanimous-consent provisions, and appointment rights that give a minority investor the ability to prevent the JV from operating materially in any direction are the practical triggers. We regularly advise clients at the term-sheet stage to redesign governance provisions precisely to address this risk – not because the commercial position is wrong, but because the legal drafting converts a permissible structure into a prohibited one.
The third concentration point is the point-in-time problem. The JV may be clean on day one. But a subsequent share transfer, the listing of an existing investor, or the exercise of a convertible instrument or option that lifts a minority stake above 50 percent can block the JV in mid-operation, with no warning. JV agreements should include a specific sanctions clause that addresses what happens to governance rights, profit distributions, and loan repayments if any party becomes a listed person during the JV's life.
Does OFAC's secondary-sanctions risk layer matter for a non-US JV?
It does – and it is the dimension most frequently underweighted by European parties who believe that because they are not US persons, OFAC's primary regime does not apply to them. That view is partly right and mostly incomplete.
OFAC's secondary sanctions (measures targeting non-US persons who transact with SDN-listed persons or with blocked property, even without a US nexus) operate in selected programmes. A European JV that, through its shareholder structure, receives or disburses funds in which a blocked person has a property interest may expose its non-US corporate partners to the risk of a secondary-sanctions designation in their own right. The threshold for secondary-sanctions exposure varies by programme and is programme-specific, but the mechanism operates outside the primary US-person nexus test.
For a cross-border JV with any US nexus – US dollar settlements, a US-based LP investor, a US-incorporated co-venturer, or goods and technology of US origin transiting through the JV – OFAC's primary regime applies directly to the US-person participants and will constrain the structure accordingly. A JV governance or profit-distribution mechanism that requires a US-person participant to route funds in a way that benefits a blocked person cannot be operated lawfully by that participant, regardless of what the governing-law clause says.
In our cross-border practice, the most difficult JV structures are those where one partner is subject to OFAC primary sanctions, another is subject only to OFSI, and a third operates under EU law exclusively. Each partner must satisfy its own applicable regime, and the stricter prohibition governs the transaction as a practical matter. That means designing the JV to the highest applicable standard from the outset, rather than trying to patch the structure after the shareholders' agreement is executed.
What is the licensing position under each regime?
A licence – a case-by-case authorisation from the relevant authority to conduct an otherwise prohibited transaction – is available under both OFAC and OFSI, and under the EU's national competent authorities, but the criteria and timelines differ in ways that are material to JV planning.
OFAC issues specific licences (individual authorisations for a named applicant and transaction) and general licences (standing authorisations permitting a defined category of transactions without a separate application). A general licence will sometimes permit the completion of pre-existing contractual arrangements or the wind-down of a JV interest following a listing. The operative general licence, if any, must be identified from the programme-specific regulations applicable to the blocked person's designation, not from a general assumption that a wind-down permission exists. Specific licences for complex JV structures typically require a detailed statement of the transaction, the parties, the sanctions nexus, and the foreign policy or national security considerations that support the application.
OFSI's licensing regime operates under SAMLA and the relevant thematic regulations. OFSI publishes licensing grounds covering categories including prior obligations and ordinary living expenses; for commercial JV structures the relevant ground is typically a specific licence based on a prior-contractual obligation or a broader purpose licence. OFSI requires the applicant to demonstrate that the licensed activity serves a permitted purpose and that all funds flowing through the licence are accounted for. Record-keeping obligations attach to any transaction conducted under an OFSI licence.
Under the EU regime, each member state's national competent authority issues licences under the framework of the relevant Council Regulation. The criteria are broadly aligned across member states, but implementation speed and the level of documentation requested vary. A JV structure that spans multiple EU jurisdictions may require coordinated licence applications in more than one member state, which adds timeline risk to any transaction under time pressure.
If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time. Licensing windows and wind-down permissions carry deadlines; once a blocked person is formally listed, the legal position crystallises and the range of available remedies contracts.
How does the diligence process need to be designed for a cross-border JV?
Standard transaction diligence – a screening run against the SDN List and the OFSI Consolidated List – is the floor, not the ceiling. A well-designed diligence process for a cross-border JV has at least five layers that go beyond a name-match screen.
The first layer is the ownership chain, run to ultimate beneficial owner level across all direct and indirect routes, with a specific check for aggregated listed-person ownership. This requires the corporate structure chart and the register of members, not merely a name and country.
The second layer is the governance review: the shareholder agreement, any side letters, any option or convertible instruments, and any management services agreement that might give a listed person contractual influence over the JV's affairs.
The third layer is the transaction-nexus analysis: does the JV have US-person participants, US-origin technology, a US-dollar settlement mechanism, or a US-incorporated fund as an investor? Any of these creates a primary-sanctions exposure for the US-person component and may affect the structure available to all parties.
The fourth layer is the programme identification: which regime's sanctions programme is in play? The ownership and control tests, the licensing grounds, the reporting obligations, and the secondary-sanctions risk all vary between programmes within OFAC's own remit, not merely between OFAC and OFSI.
The fifth layer is the forward-looking risk assessment: what happens to the JV if a current shareholder is listed after closing? What are the exit mechanics and what sanctions covenants are in the shareholders' agreement? We have acted for clients on the buy side and the sell side of JV structures that required re-engineering after a co-venturer was added to the SDN List mid-project. Drafting the contingency provisions at the outset is substantially less costly than negotiating an emergency restructuring under time pressure.
A common myth among treasury and structuring teams is that once a JV is incorporated in a jurisdiction not subject to the primary sanctions regime in question, the structure sits outside the regime's reach. This is incorrect. The reach of OFAC primary sanctions follows US persons, US nexus, and US-origin property; it does not stop at the border of the JV's jurisdiction of incorporation. The reach of OFSI follows UK persons and UK nexus. A Cayman-incorporated JV holdco with a UK-bank LP and a US-technology-licensing subsidiary is simultaneously within OFAC's primary reach (US-person participant and US-origin technology) and OFSI's reach (UK-person financial institution).
When does a cross-border JV require specialist counsel?
Not every JV with a complex cap table requires a full sanctions-structuring review. But several indicators signal that a general-corporate or M&A team cannot manage the risk without specialist input.
The first is any direct or indirect ownership interest held by a person incorporated or based in a jurisdiction subject to a comprehensive sanctions programme under OFAC or a comparable regime. Comprehensive programmes carry the broadest blocking coverage, the most restrictive licensing criteria, and the most limited general-licence availability.
The second is any ownership or governance interest – direct, indirect, or contractual – held by a person who appears on or is closely related to a person appearing on the SDN List, the OFSI Consolidated List, or the UN Consolidated List. Ownership analysis at proximity to a listed person requires detailed and documented legal advice, not a compliance-team spot-check.
The third is a JV structure that will involve US-dollar clearing, US-person co-venturers, or goods, software, or technology of US origin. The EAR (the Export Administration Regulations administered by the Bureau of Industry and Security) may apply in parallel with OFAC's financial-sanctions rules, adding an export-classification and licence-determination layer to the transaction.
The fourth is any intended transfer of a JV interest post-closing, including drag-along and tag-along mechanisms, that could result in a blocked person acquiring an ownership stake that crosses the 50 percent threshold. Pre-agreed transfer restrictions and consent rights need to be drafted with the sanctions tests in mind, not added as boilerplate after the commercial terms are fixed.
In a recent matter, a technology-sector business was finalising a minority-investment JV in a third market. Screening identified one upstream investor – itself holding a minority stake in a co-venturer – whose aggregate position, when combined with a convertible instrument held by an affiliated entity, would cross the OFAC ownership threshold upon conversion. We mapped the full ownership chain, identified the triggering event, and advised on a restructuring of the conversion mechanics that kept the aggregate position below the threshold at all times. The matter was resolved before signing, preserving both the transaction and the client's OFAC compliance record.
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