A private equity sponsor based in New York signs a term sheet for a target company headquartered in Europe. The target has a subsidiary operating in a third market and several minority shareholders whose ultimate beneficial owners have not been traced. The US-side counsel runs OFAC screening. The UK-side counsel applies OFSI tests. Within forty-eight hours, both teams reach different conclusions about the same counterparty. The deal is not yet dead – but it is complicated.
Sanctions due diligence in M&A under OFAC and OFSI follows materially different legal tests, and those differences determine whether a proposed acquisition can proceed, what conditions attach to closing, and what post-closing liability exposure the acquirer inherits. As of January 2026, the divergences span the ownership threshold, the control test, successor-liability doctrine, and the licensing routes available when a target's ownership structure creates a sanctions problem.
This analysis maps the key divergences between OFAC and OFSI across the full M&A diligence cycle – from pre-signing screening to post-closing remediation – and identifies the points at which the two regimes pull in opposite directions.
Why the ownership test produces different results under OFAC and OFSI
The single most consequential divergence in M&A sanctions diligence is the ownership threshold: OFAC applies a 50 percent aggregate ownership rule; OFSI applies an ownership-or-control test that catches entities at a lower percentage where control is present. Understanding this distinction before signing a purchase agreement is not a formality – it is the analysis that decides whether the target is itself a blocked or designated person.
Under OFAC's 50 percent rule (the rule by which entities owned 50 percent or more in the aggregate by one or more blocked persons are themselves treated as blocked, regardless of whether they are named on the SDN List – OFAC's list of Specially Designated Nationals and blocked persons), the test is mechanical. Two blocked persons each holding twenty-six percent of the same target reach the threshold together. Intention is irrelevant. Management independence does not help. If the arithmetic crosses the line, the entity is blocked as a matter of law.
OFSI's approach is different. The UK rules apply ownership and control (the combined test under which a non-listed entity is caught where a designated person owns it or controls it, with control assessed through a facts-and-circumstances analysis extending to indirect influence over decisions). The control limb means that a minority shareholder who exercises de facto direction over the target's decisions may cause the target to be treated as designated even where formal ownership sits well below fifty percent.
In our cross-border practice, the gap between these two tests regularly produces divergent legal opinions on the same target when US and UK counsel work the same ownership chart. The practical answer is to conduct both analyses simultaneously from the outset, using a single consolidated ownership register rather than running parallel and potentially inconsistent streams.
How the successor-liability question differs between the two regimes
An acquirer in an M&A transaction can inherit the target's pre-closing sanctions exposure. The scope of that inherited risk differs materially between OFAC and OFSI, and the difference affects how the acquirer structures its pre-signing diligence, its representations and warranties, and its post-closing integration plan.
OFAC's enforcement posture allows it to pursue an acquirer for the pre-closing violations of a target, including violations the acquirer did not know about at signing. The regulator's published guidance on voluntary self-disclosure (a VSD – a disclosure to OFAC, made before the regulator identifies an apparent violation, that can mitigate any civil penalty) treats the quality of pre-acquisition diligence and the speed of post-closing disclosure as aggravating or mitigating factors. A thorough diligence process, documented before closing, is therefore not only a transactional protection – it is direct mitigation evidence in any enforcement proceeding that follows.
OFSI's enforcement guidance reflects a comparable logic. The UK regime also recognises the quality of compliance arrangements as a relevant factor in civil penalty determinations. The difference is procedural: OFSI operates a distinct specific licence (a case-by-case authorisation issued by OFSI permitting an otherwise prohibited transaction) process that can, in appropriate cases, permit a transaction to close with conditions. OFAC has an equivalent route through the specific licence application, but the procedural timelines and the conditions OFAC attaches differ in ways that matter to M&A timetables.
We regularly advise acquirers to treat the successor-liability analysis as a discrete work-stream, separate from the transactional screening exercise. The two questions – is the target currently blocked or designated, and has the target historically committed apparent violations – require different methodologies and different forms of documentary review.
The position above covers the standard case. Your facts – the counterparty's ownership chain, the jurisdictions of the relevant shareholders, the goods or services at the heart of the business, and the regime in play – change the analysis materially. For a confidential review of your transaction exposure, contact Calder & Vance at info@caldervance.com.
What does the control test mean for M&A structures involving minority shareholders?
Minority shareholder positions are a persistent source of analytical difficulty in M&A sanctions diligence, and the divergence between the OFAC mechanical threshold and the OFSI control test means that the same minority stake can produce opposite results depending on which regime governs the analysis.
Under OFAC, a minority holding – say, a twenty-percent stake held by a blocked person – does not by itself block the target. The OFAC analysis then shifts to whether the blocked shareholder has indirect or contingent rights that, when combined with other blocked holders, reach the fifty-percent aggregate. That is an aggregation exercise: it requires tracing every beneficial owner, every class of shares, and every option or warrant that could affect the ownership calculation. The depth of the required record review is often underestimated in compressed M&A timetables.
Under OFSI, the same twenty-percent stake could be enough if the holder exercises control. Control under the UK rules is assessed against a list of indicators: the power to appoint or remove a majority of the board; the ability to direct the activities of the entity; the holding of voting rights sufficient to pass or block resolutions; and a general catch-all for influence over decisions that would not otherwise be taken. In a typical private equity structure with detailed shareholder agreements, these indicators deserve close reading.
The EU regime adds a third dimension for any transaction with a European-law element. EU Council regulations on ownership and control follow a similar logic to OFSI but are implemented through national competent authorities, whose interpretations can vary. A transaction structured to satisfy OFSI may still face questions from a continental European authority applying a different administrative interpretation of the same instrument.
Is the minority shareholder position on the target's cap table fully mapped? If beneficial ownership beyond the first layer has not been traced and documented, the diligence record will not withstand regulatory scrutiny.
Licensing routes: when the OFAC and OFSI processes diverge in practice
Where pre-signing diligence identifies a sanctions problem that does not block the transaction entirely – because the applicable threshold is not met, or because a licence route is available – the acquirer must decide whether to apply for a licence before signing, condition closing on licence receipt, or proceed and rely on a post-closing remediation plan. That decision depends heavily on the licensing timeline and the form of relief available under the relevant regime.
OFAC's specific licence application process operates on timelines that the regulator does not formally guarantee. In our experience, applications in complex or novel fact patterns take considerably longer than straightforward cases. Deal timetables that assume a rapid OFAC response tend to create pressure on the wrong side of the transaction. A general licence (a standing authorisation that permits a defined category of transactions without a separate application) may exist that covers part of the transaction, but general licences are regime-specific and require careful analysis to confirm that the transaction's particular characteristics fall within their terms.
OFSI's licensing process similarly operates without a guaranteed turnaround time. OFSI publishes guidance on the grounds for specific licences, which include humanitarian purposes, legal expenses, and transactions that are in the public interest. For M&A transactions, the "prior obligations" and "extraordinary situations" grounds are sometimes relevant, but OFSI's interpretation of those grounds in a transactional context requires careful preparation of the application.
One structural difference matters greatly: OFAC licences bind only the immediate applicant and the named parties; they do not automatically protect downstream counterparties or service providers. A financing bank, a transfer agent, or a clearing institution involved in the same transaction may each need independent comfort. OFSI licences operate similarly. In a complex cross-border M&A transaction involving US-dollar clearing, this means that a single deal may require parallel applications to multiple authorities before any party in the payment chain will act.
Risk flags specific to M&A sanctions diligence
Several patterns in M&A transactions generate heightened sanctions risk, and practitioners conducting diligence should flag each one explicitly in their risk assessment rather than treating them as generic ownership-chart questions.
The first is layered or opaque ownership. A holding structure that places beneficial owners behind multiple intermediary entities in jurisdictions with limited beneficial-ownership registries makes the aggregation analysis uncertain. If the full chain cannot be traced, the diligence record should say so – and the acquirer should consider what representations and warranties it requires from the seller regarding the identity of ultimate beneficial owners.
The second is historical transactions in high-risk jurisdictions. Pre-closing business activity by the target in markets that are subject to comprehensive or sectoral sanctions programmes requires a transaction-by-transaction review. The question is not only whether that activity was lawful at the time but whether it constitutes an apparent violation that OFAC or OFSI could pursue post-closing against the acquirer as successor.
The third is the target's own compliance programme. An acquirer that inherits a target with no sanctions screening policy, no training records, and no documented ownership-tracing methodology inherits a higher-risk compliance posture. OFAC and OFSI both treat the existence and quality of a compliance programme as a factor in penalty determinations. Post-closing remediation of a programme gap is possible, but it takes time, and the exposure during the remediation window is real.
The fourth is secondary-sanctions risk. A target with non-US counterparties, non-US bank accounts, and non-US revenue streams may not itself be an OFAC target – but if it maintains business relationships with parties subject to US secondary-sanctions programmes, the acquirer should assess whether those relationships create exposure for US-connected entities after closing. Secondary sanctions reach beyond the direct prohibitions of OFAC's primary programmes and can affect a transaction even where the target and its counterparties are not themselves on any list.
If a deal has already been flagged, or a regulatory query has arrived post-signing, an early legal review preserves options that close down as time passes. For advice on a specific transaction, contact Calder & Vance at info@caldervance.com.
The myth that a clean screening report is sufficient diligence
A persistent misconception in M&A transactions is that running the target's name and known key persons through a screening database and receiving no hits constitutes adequate sanctions diligence. It does not. Neither OFAC nor OFSI treats a negative screening result as a safe harbour.
Screening tools identify matches against published lists. They do not identify entities that are blocked by operation of the 50 percent rule but not themselves listed. They do not trace the ownership chain below the first layer unless they are specifically configured to do so. They do not identify apparent violations committed by the target in the past. They do not assess secondary-sanctions risk arising from the target's counterparty relationships. And they do not flag control relationships of the kind that OFSI and the EU test for.
The standard that OFAC and OFSI each use in assessing the quality of an acquirer's diligence is not "did they run a screen." It is "did they take reasonable steps to understand who they were dealing with and what the target had been doing." That standard requires documentary review of the ownership chain, review of the target's historical compliance records, and a legal analysis of the applicable tests under each relevant regime.
We have acted for acquirers who discovered, during post-closing integration, that a target had pre-closing exposure that a more thorough pre-signing diligence exercise would have identified. The cost of remediation in that posture – both regulatory and commercial – exceeds the cost of conducting the diligence properly before signing. That observation is not a guarantee of any particular outcome; it is a reflection of the mechanics of successor liability.
How the EU and UN layers interact with OFAC and OFSI in a cross-border M&A deal
A transaction that engages OFAC and OFSI simultaneously will typically also engage EU Council regulations if any party, counterparty, or financial intermediary has a European nexus. The UN Security Council's Consolidated List (the authoritative multilateral list of individuals and entities subject to UN Security Council measures adopted under Chapter VII of the UN Charter) underpins all the major regimes – but the domestic implementing rules add further layers that are not always harmonised.
The EU's ownership and control standard for determining whether a non-listed entity falls within the prohibitions of a Council regulation closely mirrors the OFSI approach, but EU Council regulations are directly applicable across all member states and do not require domestic transposition. That means a deal with any EU-incorporated party, any EU-regulated financial institution, or any payment flow through an EU financial system must be assessed under the applicable Council regulation as well as under OFAC and OFSI.
Where the regimes converge, this adds process overhead but not analytical conflict. Where they diverge – particularly on the control test, on licensing grounds, and on the treatment of affiliated entities – an acquirer can face a situation where one regime permits the transaction and another prohibits it. In those cases, the stricter prohibition governs. A transaction that OFAC would licence but that an EU regulation absolutely prohibits cannot proceed on the strength of the OFAC licence alone.
Canada, Australia, and Switzerland each maintain autonomous sanctions regimes that may reach the same transaction from a different angle. A target with Canadian or Australian operations, or with Swiss banking relationships, requires a check against those regimes' designation lists and a review of their ownership-and-control tests, which differ in detail from both OFAC's and OFSI's approaches.
Related practices
- Correspondent banking and de-risking under OFAC – managing sanctions exposure in cross-border financial relationships
- OFSI vs EU: sanctions due diligence in M&A – a comparative analysis of UK and EU diligence standards
- OFSI vs EU sanctions diligence: further analysis – extended treatment of EU Council regulation ownership tests