A private-equity fund announces a platform acquisition in a target market. The sellers are eager, the deal timeline is tight, and the compliance team is working from a standard AML questionnaire. Three weeks before signing, a sanctions analyst flags an indirect shareholder in the ownership chain. The shareholder sits on a regime list. The fund's counsel is now managing a potential strict-liability exposure on the US side, a parallel ownership-and-control question on the UK side, and a deal that may need to be restructured or abandoned. This situation is not unusual. In our cross-border practice, it is one of the most common points at which acquirers discover that their diligence was built for the wrong regime.
Sanctions due diligence in M&A under OFAC and OFSI follows different legal tests, different ownership thresholds, and different consequences for getting the analysis wrong. Under OFAC, the 50 percent rule (OFAC's rule treating entities owned 50 percent or more in the aggregate by blocked persons as themselves blocked) is mechanical and strict-liability. Under OFSI, the ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person) extends further than a binary threshold and turns on factual control as well as ownership. A deal that clears one regime may still be prohibited under the other.
This analysis sets out how each regime structures its diligence test, where the standards diverge in ways that affect deal design, what the common failure points are, and when a cross-border M&A team should bring in specialist sanctions counsel.
What each regime requires: the governing authority and the legal basis
OFAC administers US economic sanctions under the authority of IEEPA and a series of programme-specific executive orders. Its rules operate as strict-liability prohibitions: a US person that acquires a blocked entity – or that provides services to one – commits a violation regardless of intent. The SDN List and its companion lists are the primary designation instruments. Compliance is not a matter of good faith; it is a matter of confirmed status.
OFSI administers UK financial sanctions under the Sanctions and Anti-Money Laundering Act ("SAMLA") and the relevant thematic sanctions regulations. The UK system has operated independently of EU sanctions since the end of the Brexit transition period. OFSI can impose civil penalties and pursue criminal referrals, and it has a published enforcement policy. Critically, OFSI's enforcement posture includes a knowledge-and-suspicion element in some provisions, but the asset-freeze prohibitions themselves require no intent. The base position is strict, even if the penalty calculus takes reasonable steps into account.
Both regimes are extraterritorial in different ways. OFAC's reach follows US persons, US-dollar clearing, and US-origin goods or technology. OFSI applies to UK persons and conduct within the United Kingdom. Where a cross-border deal involves both US and UK elements – which is the typical M&A fact pattern in a transatlantic transaction – both regimes bite simultaneously, and the stricter prohibition governs each leg of the transaction.
The position above covers the standard case. Your facts – the counterparty, the chain of ownership, the jurisdiction of the target, the currency of the consideration, and the regime in play – change the analysis significantly. For a structured assessment of which regimes apply to your transaction, contact Calder & Vance at info@caldervance.com.
How the ownership tests differ in practice
The divergence between OFAC and OFSI on ownership is the single most important structural difference for M&A diligence, and it is also the most frequently misunderstood.
Under OFAC, the 50 percent rule is binary and aggregative. A target entity is blocked if blocked persons own it – directly or through a chain of intermediaries – in an amount equal to or exceeding 50 percent in the aggregate. Two listed persons each holding 24 percent of the same target do not individually reach the threshold. Together they do. The rule is indifferent to how the ownership is structured, how many layers separate the listed person from the target, and whether the listed person exercises any operational control. Ownership at the threshold level is sufficient. The result: any diligence exercise that traces only first-level shareholders will miss exactly the aggregation scenarios that produce the greatest exposure.
Under OFSI and the parallel EU approach, the test is ownership or control. Ownership follows a comparable threshold logic, but control operates independently. A listed person who controls a non-listed entity – through contractual rights, board appointment powers, veto rights over material decisions, or other mechanisms of direction – may cause that entity to be treated as subject to the financial-sanctions prohibition even if ownership sits below any numerical line. The word "control" is interpreted broadly, and in our experience of advising on UK-side diligence, the control limb catches structures that have been deliberately engineered to avoid the ownership threshold.
A practical consequence: an acquisition target may show no listed beneficial owner above 50 percent, yet still be controlled by a listed person through a shareholder agreement, a board-seat arrangement, or a contractual right over key commercial decisions. Under OFAC, that target may be clear. Under OFSI, it may be prohibited property. A diligence programme designed only around the US ownership test will not surface this risk.
Where the regimes diverge on the treatment of minority stakes and control
Minority positions are the most contested area in comparative M&A sanctions diligence. The divergence here is not merely technical; it affects deal structure, representations and warranties, and escrow arrangements.
Under OFAC, a listed person holding less than 50 percent – say, 30 percent – of a target does not automatically block that target. The target is not itself an SDN. However, the acquiring party must still ask whether a transaction with that target would provide a prohibited benefit to the listed minority shareholder. OFAC's rules prohibit transactions that benefit blocked persons even when those persons are not the direct counterparty. A dividend stream flowing to a 30 percent SDN-held stake is a problem. A management fee paid to a related entity of the same SDN is a problem. The acquisition price itself, if it creates a distributable return to the SDN, is a problem. The 50 percent rule answers the "is the entity blocked" question. It does not answer the "does the transaction benefit a blocked person" question.
Under OFSI, the same 30 percent minority stake raises the control analysis described above and also triggers an assessment of whether funds or economic resources would be made available to a designated person. The UK prohibition on making resources available to designated persons is broad. It can reach indirect availability – situations in which the designated person would receive value through a structure rather than directly. Deal consideration that flows through an entity partly owned by a designated person requires careful mapping.
The EU position – relevant for deals with EU-nexus counterparties, EU-currency funding, or EU-established entities in the chain – follows a broadly similar ownership-or-control test and adds the layer of the EU Blocking Regulation, which can restrict EU operators from complying with certain third-country unilateral measures. That interaction is material in deals where both OFAC-exposed and EU-exposed entities sit in the same structure.
The diligence process: how to map exposure across both regimes
Effective sanctions diligence in a cross-border M&A context is not a screening exercise. Screening – running entity names against the SDN List, the UK Consolidated List, and the UN Consolidated List – is necessary but not sufficient. It answers only whether a named entity appears on a list. It does not answer whether the un-named beneficial owners of that entity are listed, whether a listed person controls the structure without appearing in formal ownership documents, or whether the transaction produces a benefit to a listed person through a mechanism the screen does not capture.
A structured diligence programme for a cross-border deal typically runs in three phases. First, a mapping phase: identify the full beneficial ownership chain of the target to the level of natural persons, verify that the data is current (not drawn from a filing that is one or more years old), and identify any shareholder whose identity cannot be confirmed. Second, a screening phase: run every identified entity and person against the applicable lists for each regime in scope – OFAC, OFSI, EU, UN, and any regime relevant to the deal's geography. Third, an analysis phase: apply the ownership test for each regime to the confirmed facts, apply the control test for OFSI and EU, and map whether any element of the transaction consideration produces a benefit to a listed person under OFAC's broader prohibition.
The analysis phase is where specialist counsel adds the most value. The mapping and screening can be run by an experienced compliance team. The ownership aggregation under OFAC across multi-layered structures, the control analysis under OFSI across contractual and governance rights, and the benefit-tracing under both regimes – these are legal analyses, not screening exercises.
In a recent matter, an energy-sector acquirer engaged Calder & Vance to review the ownership chain of a target with operations across two continents. The initial screen was clear. Tracing the ownership chain to the level of natural persons revealed a listed person with an indirect 22 percent holding and contractual board-appointment rights. Under OFAC, the 50 percent threshold was not met. Under OFSI, the control analysis indicated a potential issue. We advised on a transaction structure that routed consideration through a compliant mechanism, alongside a licence inquiry to OFSI. The matter proceeded without the acquirer being exposed to a clear prohibition. We do not describe this as a guaranteed outcome; every set of facts produces its own risk profile.
If a transaction has already been flagged, or a diligence finding has raised a potential issue, the time available to address it before signing narrows quickly. An early review preserves options that are not available post-close. For a confidential review of a potential exposure, contact Calder & Vance at info@caldervance.com.
Risk flags specific to M&A: where diligence most commonly fails
Acquirers most commonly encounter sanctions problems in M&A diligence in five recurring situations. Each reflects a gap between what standard AML diligence is designed to find and what sanctions diligence requires.
The first is stale beneficial-ownership data. Corporate registries are often months or years behind the actual ownership position. A target that was clean when last filed may have changed hands. An entity that acquired a listed person as a shareholder may not yet have updated its filings. Sanctions diligence must be anchored to a date as close to signing as the data permits, and representations and warranties should require the seller to confirm the ownership position as of a specified date.
The second is structural opacity. Complex holdco structures, trust arrangements, and nominee shareholdings are used for entirely legitimate reasons. They also reduce the visibility of beneficial ownership to anyone running a standard screen. Where a target has a layered structure that does not resolve to identifiable natural persons, that gap is itself a risk flag – not evidence of a problem, but an absence of evidence that requires resolution before signing.
The third is jurisdiction-specific list coverage. A person who does not appear on the OFAC SDN List may appear on the UK Consolidated List, the EU Consolidated List, or the UN Consolidated List. Running only one list is inadequate for any cross-border transaction. The lists are not identical. Designations do not always sync across regimes. A multi-regime screen is the minimum standard for an international deal.
The fourth is the deal-consideration benefit problem noted above. Even where a target entity is clean – not itself blocked and not itself controlled by a listed person – the transaction structure may route economic benefit to a listed person. This is not a question that a standard ownership analysis answers. It requires a transaction-flow analysis: tracing the economic consequence of each element of the consideration, the treatment of existing debt, and any post-close arrangements (earn-outs, deferred payments, licensing fees) that create future flows.
The fifth is secondary-sanctions risk. OFAC's secondary-sanctions programmes impose consequences on non-US persons who engage in significant transactions with entities in certain programmes. An EU-established acquirer may face secondary-sanctions exposure for a deal involving a target with material business in a relevant programme, even if the target is not itself listed. Secondary-sanctions risk is not an OFSI issue, but it is squarely an OFAC issue for any deal with US-nexus elements or US-business implications.
What happens when diligence finds a problem: the options and the timing
A positive finding in sanctions diligence does not automatically block a transaction. It opens a set of options whose availability depends on the regime, the specific prohibition engaged, and the time available before signing.
Under OFAC, the standard route for a transaction that would otherwise be prohibited is a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction). OFAC publishes general policy statements for certain categories of transaction, and in some programme contexts a general licence (a standing authorisation that permits a defined category of transactions without a separate application) may cover the activity. Specific-licence applications require a full factual presentation, a legal analysis of the applicable prohibitions, and – where relevant – an argument under the OFAC general licensing policy. Processing times vary by programme and complexity; they are measured in months for complex applications, and the timeline is not within the applicant's control.
Under OFSI, a licence may be sought for a specific transaction that would otherwise engage the financial-sanctions prohibition. OFSI publishes licensing grounds under the relevant thematic regulations, and the applicable licensing criteria vary by programme. OFSI also has a reporting obligation that applies to relevant firms who know or suspect that a person is a designated person or is otherwise subject to financial sanctions. That reporting obligation is independent of and prior to any licence application.
Transaction structuring is a parallel option where the deal can be redesigned to avoid the prohibited element. This might mean restructuring the consideration so that it does not flow to a listed person, redesigning the ownership chain post-close to remove a prohibited element, or carving out a specific asset or operation that carries the sanctions exposure. Structuring is not evasion: it is the legitimate re-design of a transaction to comply with the applicable prohibition. The distinction between compliant restructuring and impermissible evasion is a legal line, and it is one the adviser must draw clearly. We do not advise on circumventing or evading sanctions.
The practical point is timing. A specific-licence application filed two weeks before a scheduled signing will not produce a result in time. Diligence that surfaces a problem three months before the anticipated close gives counsel the time to assess the options, prepare a filing if needed, and advise the deal team on the realistic range of outcomes. That window matters.
The myth of the "clean screen": what standard diligence misses
There is a widespread assumption among deal teams – and, in our experience, among some advisers – that a clean screen means a clean deal. It does not.
A clean screen means that no identified entity or person, whose name was submitted to the screening tool, returned a match on the lists checked, on the date the screen was run. That is all it means. It says nothing about the beneficial owners who were not identified. It says nothing about entities who control the target without appearing in ownership documents. It says nothing about transaction flows that benefit listed persons. And it says nothing about the position under regimes whose lists were not checked.
This is not a criticism of screening technology. Screening is a necessary first step. The problem arises when it is treated as the final step. In a transaction context, the stakes of that mischaracterisation are high. Post-close discovery of a sanctions issue can require unwinding a transaction, freezing assets, making a voluntary self-disclosure – a VSD (voluntary self-disclosure to a regulator) – and managing a potential penalty. Post-close, the options available before signing are largely gone.
Deal teams that have encountered a sanctions flag, received a result they cannot immediately interpret, or are entering a market where the counterparty's ownership is opaque are exactly the clients for whom specialist sanctions counsel adds determinative value. Is your diligence programme designed for the regime that actually applies to your deal?
Related practices
- Correspondent banking and de-risking under OFAC – sanctions exposure analysis for correspondent and cross-border banking relationships
- Sanctions diligence in M&A: OFAC analysis continued – extended analysis of OFAC licensing and deal structuring in cross-border acquisitions
- OFSI vs EU: M&A sanctions diligence compared – how UK and EU ownership-and-control tests diverge in a transaction context