A US private equity firm is acquiring a Canadian manufacturing target. The deal team has run the buyer and seller through standard screening. Nothing flags. But three weeks before signing, a counterparty review surfaces a minority shareholder in one of the target's subsidiaries – a name that appears on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons). The acquisition price does not change. The timeline does not slip. Yet the legal exposure has just shifted materially – and the question is whether US or Canadian sanctions law, or both, now govern the position.
As of January 2026, sanctions due diligence in M&A under OFAC and the Canadian regime administered by Global Affairs Canada operate from different legal foundations, apply different ownership tests, and produce different default obligations on the acquirer. Understanding where they converge and where they diverge is not a theoretical exercise. It decides how the deal is structured, what representations appear in the purchase agreement, and whether a licence is required before closing.
This analysis maps the two regimes criterion by criterion – legal basis, ownership and control tests, acquirer liability, licence requirements, and post-closing obligations – and draws out the practical implications for cross-border M&A teams handling transactions with a US or Canadian nexus.
How the two regimes are constituted: legal authority and administration
OFAC administers US economic sanctions under IEEPA and related statutes. Its authority is broad, jurisdictional reach is extraterritorial, and its primary enforcement tools are civil monetary penalties and, in criminal referrals, coordination with the Department of Justice. The SDN List and the various programme-specific blocked-party lists are maintained by OFAC and updated continuously. Any US person – and, through secondary-sanctions risk, many non-US persons – must comply.
Canada's sanctions regime operates under the Special Economic Measures Act ("SEMA"), the Justice for Victims of Corrupt Foreign Officials Act, and associated regulations issued by the Governor in Council. Global Affairs Canada ("GAC") is the competent authority for licensing and policy guidance. The Royal Canadian Mounted Police and Public Prosecution Service of Canada hold enforcement powers. Canada maintains its own consolidated list of designated persons; that list does not mirror the SDN List, though the two overlap significantly in their coverage of major programmes.
The immediate structural difference matters for an M&A team. An acquirer cannot assume that clearance under one regime confers clearance under the other. A counterparty not named on the Canadian consolidated list may still appear on the SDN List, and vice versa. In our experience, deal teams that run a single consolidated-list check – without specifying which regime they are satisfying – routinely underestimate their exposure on exactly this point.
A transaction with a US-incorporated acquirer, a Canadian target, and proceeds routed through a US correspondent bank is potentially subject to both regimes simultaneously. The stricter prohibition governs. That cross-border reality is the baseline for the analysis that follows.
Ownership and control: where the tests diverge most sharply
The ownership test under OFAC is mechanical: the 50 percent rule (OFAC's rule treating entities owned 50 percent or more in the aggregate by blocked persons as themselves blocked) applies regardless of control, governance, or the intent of the ownership structure. If blocked persons collectively hold 50 percent or more of an entity, that entity is treated as blocked even if it is not itself named on the SDN List. Aggregation across multiple blocked persons applies; two listed shareholders at 28 percent each reach the threshold together.
Canada's SEMA-based regime uses a different formulation. The regulations prohibit dealings with designated persons and entities that are owned or controlled by them. The "controlled" limb is significant. Canadian courts and GAC guidance interpret control to include de facto control – the ability to direct or substantially influence the management of an entity – not only formal majority ownership. A 35 percent stake held by a designated person accompanied by board appointment rights and veto provisions on material decisions may constitute control for Canadian purposes even where it would not trigger OFAC's 50 percent threshold.
The implication for diligence is direct. Under OFAC, a shareholding below 50 percent held by a single SDN that does not aggregate with another SDN does not automatically block the target entity. Under the Canadian regime, that same minority stake, if accompanied by control mechanisms, may place the target in scope. An M&A team that screens only for the OFAC threshold and applies that result to the Canadian leg of the transaction will miss this divergence.
Does your deal structure account for both tests? If the ownership chain has been mapped only to the OFAC 50 percent line, the Canadian control analysis may remain incomplete.
Intermediate holding structures add complexity on both sides. OFAC's aggregation rule runs through every layer; a blocked person owning 60 percent of a holding company that owns 40 percent of the target produces a 24 percent indirect blocked interest in the target, which does not breach the threshold. But if the holding company is itself blocked (because the 60 percent interest exceeds the threshold at that level), then all assets held through it are blocked too. The chain must be traced in full.
Acquirer liability: what the transaction itself triggers
Under OFAC, a US person who acquires an interest in a blocked entity – or who facilitates such an acquisition – commits a strict-liability violation. Intent is not a defence to civil liability, though it is relevant to penalty calculation. The acquirer does not need to know that the target is blocked; the fact of the acquisition is sufficient. This strict-liability standard places the entire burden of pre-closing diligence on the deal team. A missed SDN hit discovered post-closing does not generate a defence; it generates an apparent violation requiring a response.
Canada's SEMA-based enforcement is not strict liability in the same formal sense, but the effective position for a Canadian acquirer is close to it. The Act prohibits dealings with designated persons. Knowingly facilitating a dealing is also an offence. In practice, the "knowingly" element in the facilitation limb means that a well-documented, good-faith diligence process carries more legal weight in Canada than under OFAC's civil regime. That said, GAC's enforcement posture has tightened, and the absence of diligence records is treated as an aggravating factor in any review.
One practical implication: for a US acquirer of a Canadian target, OFAC's strict liability governs its own exposure regardless of what the Canadian law provides. A Canadian acquirer purchasing a US target company is exposed to OFAC through the target's US-person status post-acquisition. Both scenarios call for diligence that satisfies OFAC's standard, even when the deal is primarily characterised as a Canadian transaction.
In a recent matter, a Canadian private equity sponsor was acquiring a logistics business with US warehouse operations. We assessed the full ownership chain of the target under both OFAC and SEMA, identified a minority shareholder that appeared on the SDN List, and advised on the restructuring required to remove the blocked interest prior to closing. The matter resolved without a licence application because the counterparty negotiated a buy-out of the blocked shareholder's interest before the long-stop date.
The position above covers the standard case. Your facts – the counterparty's ownership chain, the jurisdictions through which value flows, the governing law of the acquisition agreement, and the regime in play – change the analysis materially.
For an assessment of your cross-border M&A exposure under OFAC and the Canadian regime, contact Calder & Vance at info@caldervance.com.
Licence requirements and deal-specific authorisations
Where a prohibited nexus exists, the question becomes whether a licence is available and whether the timeline is workable. OFAC issues both general licences (standing authorisations that permit a defined category of transactions without a separate application) and specific licences (case-by-case authorisations). For an M&A transaction involving a blocked party, a specific licence is almost always required; general licences rarely cover acquisitions of interests in SDN-linked entities. OFAC does not publish a fixed processing timeline for specific licences, and in our experience, complex transactional applications can take several months.
Canada's licensing equivalent under SEMA is a permit issued by GAC. The permit process is analogous to OFAC's specific-licence regime: the applicant must demonstrate that the transaction serves a legitimate purpose and that the permit is consistent with the policy objectives of the relevant regulations. GAC does not publish binding processing timelines, though simpler applications have been turned around in a shorter period than OFAC's more complex matters in our cross-border practice.
A cross-border transaction caught by both regimes may require two separate authorisations, from two separate authorities, potentially on different timelines. M&A purchase agreements should reflect this reality in their conditions precedent and long-stop provisions. Failure to account for the licensing timeline at heads-of-terms stage has caused significant disruption on deals in our practice – particularly where the blocked nexus is discovered late in due diligence.
One further consideration: even where a licence covers the acquisition itself, it will typically impose conditions on the acquirer's post-closing conduct. OFAC licences for transactions involving SDN-linked entities frequently require ongoing reporting, restrictions on the blocked person's access to value, and divestment of the blocked interest within a specified period. GAC permits carry analogous conditions. Deal documentation must incorporate these conditions, and the compliance programme must be designed to operationalise them from day one.
Post-closing obligations and ongoing compliance
Closing is not the end of the sanctions diligence cycle in a cross-border M&A transaction. Both OFAC and the Canadian regime impose ongoing obligations that survive completion and attach to the combined entity.
Under OFAC, the acquirer inherits the target's compliance posture. If the target held assets that were, or should have been, blocked before closing – and was not licensed to hold them – those assets are blocked in the acquirer's hands from day one. The acquirer has a reporting obligation to OFAC for any blocked property it holds, and failure to report is itself a violation. Deadlines for reporting are set by the applicable programme regulations; the period is typically short and should be verified against current OFAC guidance before reliance.
Canada's SEMA-based obligations similarly attach to the acquirer. A Canadian entity that discovers, post-closing, that it holds property of a designated person must disclose that fact to GAC and, where required, to the RCMP. The disclosure obligation is triggered by knowledge of the holding; it is not deferred until a regulatory review. In our experience, acquirers who inherit designated-person property and delay disclosure pending a legal review materially worsen their enforcement position.
The record-keeping obligations of the two regimes also merit attention. OFAC's guidance refers to a five-year record retention standard for transactions covered by its regulations. GAC's requirements under SEMA are comparable in duration, though the specific requirements should be verified against the current regulations before reliance. Both sets of records may be sought in any subsequent enforcement review or due-diligence enquiry by a future purchaser.
What does an effective post-closing compliance programme look like for a deal with exposure under both regimes? At minimum: a designated compliance function with responsibility for both OFAC and SEMA obligations, a rescreening protocol for the combined entity's counterparty base, and a clear escalation path for any hits identified in the first 90 days.
Risk flags specific to cross-border M&A between the two regimes
Five patterns recur in cross-border M&A between US and Canadian parties, each representing a distinct risk concentration.
First: de-risking (a financial institution exiting a relationship to avoid sanctions exposure) by the transaction bank. Where a US correspondent bank is involved in the financing or settlement of the acquisition, OFAC's strict liability attaches to the bank as well as the acquirer. Banks have exited financing arrangements at advanced stages when diligence identified an SDN-linked interest in the target. This risk should be assessed and disclosed to the financing bank early in the process, not at commitment.
Second: indirect SDN exposure through minority stakes held in target subsidiaries. Acquirers screen the target entity and its direct shareholders but frequently underscreen the subsidiaries, particularly where those subsidiaries are held at the second or third level. OFAC's 50 percent rule runs through the full ownership chain; a blocked minority interest at the subsidiary level can restrict the acquirer's ability to cause that subsidiary to make payments, enter contracts, or repatriate dividends.
Third: divergence on the control test between Canadian and OFAC analysis. As noted above, Canada's control test can capture arrangements that fall below OFAC's 50 percent threshold. A deal cleared for OFAC purposes on the basis of a below-threshold blocked interest may still require a GAC permit if that interest carries effective control rights.
Fourth: secondary-sanctions risk for the Canadian acquirer. Canada is not subject to US secondary sanctions in the same manner as a US person. However, a Canadian company with US-dollar revenues, US customers, or US financial institution relationships faces practical exposure if it completes a transaction that OFAC would characterise as prohibited. In our cross-border practice, we regularly advise Canadian acquirers to run a secondary-sanctions assessment alongside the direct OFAC and SEMA analysis, particularly for transactions in sectors with significant US nexus.
Fifth: warranty and indemnity coverage. Standard W&I insurance policies contain sanctions exclusions. An undisclosed SDN-linked interest discovered post-closing is unlikely to be covered. The diligence process must be sufficiently robust to satisfy W&I underwriters; where an insurer requires a clean sanctions representation, the deal team must be able to demonstrate the scope and methodology of the diligence undertaken.
If a transaction has already been flagged – by a bank, an insurer, or a counterparty – or if a filing has been refused, an early review can preserve options that narrow with time. Contact us at info@caldervance.com.
Practical diligence methodology: running both regimes in parallel
The most effective approach to sanctions due diligence in M&A with OFAC and Canadian exposure runs the two analyses in parallel rather than sequentially. Sequential analysis – satisfying OFAC first, then applying the result to the Canadian leg – misses the control divergence discussed above and produces a gap in the record.
A parallel methodology proceeds in three phases.
Phase one is ownership mapping. The full ownership chain of the target and each material subsidiary is traced to the ultimate beneficial owners. This includes indirect holdings, nominee arrangements, and trust structures. The threshold for materiality should be set lower than either regime's formal test: mapping only to 50 percent misses interests that may be relevant under Canada's control test.
Phase two is list screening. Each identified entity and individual is screened against both the SDN List and the Canadian consolidated list, as well as the UN Security Council Consolidated List and any other regime-specific lists relevant to the transaction's sector and geography. Automated screening tools are a starting point, not a finishing point. Fuzzy-match review, transliteration variants, and entity-relationship analysis require human judgment.
Phase three is legal analysis. Where a potential hit is identified, the analysis must determine: (a) whether the entity or individual is in fact listed or captured by the ownership/control test under each regime; (b) whether a prohibition is triggered by the proposed transaction; (c) whether a licence or permit is available and on what terms; and (d) what representations and warranties in the purchase agreement are affected. This analysis should be completed and memorialised before signing, not deferred to closing.
The diligence record itself has independent value. A well-documented parallel analysis, demonstrating that the acquirer identified the issue, assessed both regimes, and took appropriate steps, is the foundation of any voluntary self-disclosure or enforcement defence if a problem later emerges. OFAC weighs VSD (voluntary self-disclosure to a regulator) as a mitigating factor; so does GAC. An acquirer that can show a systematic pre-closing process is in a materially stronger position than one that cannot.
Divergence summary and the myth of single-regime clearance
A common assumption among deal teams approaching a US-Canada cross-border acquisition is that OFAC clearance is the harder test and that clearing OFAC therefore clears Canada. This assumption is wrong, and it fails on two specific points.
First, Canada's control test can catch a minority-stake designated-person interest that OFAC's 50 percent threshold does not reach. An ownership structure that produces no OFAC prohibition may still require a GAC permit under SEMA.
Second, Canada's consolidated list does not mirror the SDN List. Individuals and entities designated under Canadian autonomous programmes may not appear on the SDN List at all. A screen that runs only against OFAC's lists satisfies OFAC; it does not satisfy SEMA.
The reverse asymmetry also exists. A US acquirer whose deal team focuses on the Canadian list and finds nothing is not thereby protected under OFAC if the SDN List contains a relevant entry. Each regime must be assessed on its own terms.
In our experience, the most effective cross-border M&A diligence does not ask "which regime is stricter?" It asks "what does each regime require, and can we satisfy both?" Those are different questions, and the second is the right one. Compliance counsel experienced in both OFAC and SEMA practice is necessary to answer it. Applying one regime's methodology to the other produces incomplete coverage and, in an enforcement context, an incomplete record.
Related practices
- Correspondent banking and de-risking under OFAC – assessing sanctions exposure in financial institution relationships and transaction flows
- OFAC vs OFSI: M&A sanctions diligence compared – UK and US regime divergence in cross-border acquisition diligence
- OFAC vs OFSI: further diligence analysis – extended coverage of ownership test and licence requirement divergence