A multinational technology exporter closes a deal with a buyer in a third market. The escrow agent is a US bank. The goods are dual-use items with both a commercial and a potential military application. Before the first payment instruction goes out, two separate US regulatory authorities have something to say – and their requirements do not align. One focuses on who receives the money; the other focuses on what the money buys. Getting that distinction wrong exposes the exporter, the bank, and the deal itself.
Payment and escrow structuring for cross-border transactions sits at the intersection of two distinct US regulatory regimes: OFAC's sanctions rules, which govern with whom funds may move, and the BIS / EAR (the Bureau of Industry and Security's Export Administration Regulations), which govern what may be exported and under what conditions payment terms and escrow arrangements can be used to structure a controlled transaction. As of January 2026, neither regime defers to the other, and the stricter obligation governs in every case of conflict.
This analysis maps the key divergences between OFAC and BIS / EAR on payment and escrow structuring, sets out the practical tests that apply at each stage of a cross-border transaction, identifies the risk flags that experienced practitioners watch for, and explains when the complexity of a given deal requires dedicated counsel.
Two Authorities, Two Distinct Legal Frameworks
OFAC administers US economic sanctions under IEEPA and related statutes; BIS administers the Export Administration Regulations under the Export Control Reform Act. The two share an enforcement geography – the United States and US persons worldwide – but their operative logic diverges sharply when it comes to payments and escrow.
OFAC's core concern is blocked property (any asset or interest in which a sanctioned person has a legal or beneficial interest). If a designated party has any interest in the payment stream – as payer, payee, intermediary, or beneficial owner of either – the transaction is prohibited and the funds must be blocked. The identity of the goods being paid for is largely irrelevant to OFAC's analysis. What matters is the sanctioned nexus in the payment chain.
BIS, by contrast, starts with the goods or technology. It asks whether the item has an ECCN (Export Control Classification Number under the US Commerce Control List) that requires a licence for the destination, end-user, or end-use. Payment and escrow terms become relevant to BIS when they form part of the structure of a controlled transaction: advance payment, instalment, escrow release tied to delivery, or deferred payment arrangements can all raise questions about the timing of the "export" for licence-condition purposes and about the adequacy of end-use commitments.
In our cross-border practice, the most common structuring error is treating OFAC clearance as sufficient for BIS purposes, or vice versa. The two checks are sequential, not substitutes. A payment that clears OFAC screening – no designated party in the chain – can still violate the EAR if the escrow release terms conflict with a licence condition or if the transaction structure inadvertently facilitates diversion.
How OFAC Analyses a Payment or Escrow Arrangement
OFAC's analysis of a payment or escrow arrangement begins with a counterparty check against the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) and the full suite of OFAC-administered lists, followed by application of the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked, whether or not they appear on any list by name).
For escrow, the key question is whether a blocked person holds any legal or beneficial interest in the escrow account or in the funds held within it. This includes the position of beneficiary, not merely named account holder. Escrow agents – typically banks or trust companies – are obligated to identify and block any such interest. Releasing escrow funds to a beneficiary that is itself owned 50 percent or more by a designated entity is a violation, regardless of whether the escrow instruction names the blocked person directly.
OFAC's approach to indirect exposure also catches payment routing. A USD-denominated wire that clears through a US correspondent bank causes a US nexus even if neither the payer nor the payee is a US person. That US correspondent bank is subject to OFAC and will block the transaction if any party in the payment chain is designated. This is the practical mechanism by which OFAC's jurisdiction reaches non-US parties using the US financial system.
What does OFAC not look at? In a straightforward payment review, OFAC does not independently assess the nature of the goods. That is BIS's domain. However, where OFAC administers a comprehensive country-based programme, the payment prohibition applies regardless of the goods – even wholly civilian, uncontrolled items cannot be paid for if the transaction violates the applicable country regime. The country-level prohibition swallows the goods question entirely in those cases.
The position above covers the standard case. Your facts – the counterparty's ownership structure, the currency, the correspondent bank, the jurisdiction of the escrow agent, and the applicable country regime – change the analysis materially. For an early-stage assessment of OFAC exposure in a structured transaction, contact Calder & Vance at info@caldervance.com.
How BIS / EAR Analyses the Same Transaction
BIS starts one step earlier: before any payment is discussed, the question is whether the item being sold is subject to the EAR and, if so, what its export classification is. An item with an ECCN requiring a licence for the relevant destination and end-use cannot be structured around by manipulating the payment or escrow terms. Payment structuring that appears designed to obscure the export of a controlled item – for example, separating the goods delivery from the payment in a way that evades licence conditions – will attract BIS scrutiny.
Where a BIS licence is required and granted, its conditions frequently speak directly to payment. A licence may require proof of delivery before funds are released, may prohibit advance payment above a defined threshold, or may condition final disbursement on receipt of a completed end-use certificate. Escrow arrangements must be designed to satisfy these conditions, not merely to satisfy commercial terms agreed between the parties.
BIS also operates the Entity List – a list of foreign persons subject to licence requirements for specified items – and the Denied Persons list. These are separate from OFAC's SDN List. A counterparty that clears OFAC screening may still appear on the BIS Entity List, triggering a licence requirement that the payment structure must accommodate. In our experience, combined BIS / OFAC list screening is an underperforming control at many mid-market exporters; the two list-sets are maintained independently and updated on different cycles.
One structural point deserves particular attention. BIS's deemed export rules can capture technology transfers that occur in the context of a transaction, including access to controlled technical data that forms part of a payment-linked delivery. If a deal includes post-payment technical support, training, or data access by a foreign national, the BIS analysis applies to those elements as well as to the physical shipment. Escrow release tied to delivery of technical documentation may therefore have EAR implications that a purely financial review would miss.
Where Do the Regimes Diverge on Payment and Escrow Structuring?
The clearest divergence is in the trigger for analysis. OFAC is triggered by the identity of the parties in the transaction; BIS is triggered by the nature of the goods or technology being transacted. A deal involving wholly EAR99 items (items not on the Commerce Control List) may face no BIS licence requirement at all, but still carry full OFAC exposure if a sanctioned party is involved. Conversely, a deal between two non-designated, non-restricted parties trading in a high-ECCN dual-use item may face significant BIS licensing obligations with no OFAC dimension at all.
The second divergence is in the consequence of a defect in the payment or escrow structure. Under OFAC, the consequence of a blocked-property violation is typically an obligation to block and report, followed by potential civil or criminal exposure. The transaction cannot be unwound retrospectively by amending the escrow terms; the violation crystallises at the point of processing. Under BIS, a licence condition failure may result in revocation of the licence, denial of export privileges, and civil penalty exposure – but the BIS framework also provides a route to remediation through disclosure and corrective action that can, in some circumstances, address a condition breach before it becomes a full enforcement matter.
A third divergence concerns currency. OFAC's jurisdiction over payments is triggered by any US nexus – USD clearing, US financial institution involvement, or US person participation. BIS jurisdiction attaches to the export of items subject to the EAR, which is a goods-and-technology nexus, not a currency nexus. A non-USD transaction can still be subject to both regimes, but the bases for jurisdiction are different, and the analysis changes accordingly.
The fourth, and for many cross-border businesses the most operationally significant, divergence is in the licensing and authorisation architecture. OFAC's licensing regime issues specific licences (case-by-case authorisations to conduct otherwise prohibited transactions) and general licences (standing authorisations for defined categories of transactions). BIS issues export licences that attach conditions to the approved transaction. The two licence types operate independently; holding an OFAC specific licence does not satisfy a BIS export licence requirement, and vice versa. A well-structured escrow arrangement for a controlled-goods deal may need to satisfy the conditions of both simultaneously.
Which Regime Is Stricter on Payment and Escrow Structuring?
Neither regime is uniformly "stricter" – the question depends on the specific transaction, the goods, the parties, and the jurisdictions involved. However, the regimes carry different risk profiles in practice.
OFAC's penalties for violations are among the most significant in the US regulatory space. Civil penalties can reach substantial amounts per violation or a percentage of the transaction value, whichever is higher. Criminal penalties apply where a wilful violation is established. For a financial institution serving as escrow agent, the reputational and supervisory consequences of an OFAC violation may exceed the financial penalty itself. In our practice, we regularly advise financial institutions that are weighing whether a proposed escrow structure creates acceptable residual OFAC exposure, and the analysis is rarely straightforward.
BIS penalties are also material and include both per-violation civil fines and denial of export privileges – the latter being, for an active exporter, a potentially business-ending consequence. BIS has increased its enforcement activity in recent years, and the agency's focus on payment and financing structures that facilitate unauthorised exports has sharpened noticeably.
Across our cross-border practice, the regime that creates the most acute structuring risk in any given deal is the one the transaction team least expects to apply. Technology businesses assume BIS is the primary risk; they are sometimes surprised by OFAC exposure arising through the investor base of a counterparty. Financial institutions assume OFAC is the primary risk; they sometimes miss BIS implications when they hold dual-use goods as collateral or release escrow funds tied to a controlled delivery.
If a transaction has already been flagged, or a filing has been questioned, time matters. An early review can preserve options that narrow quickly. Contact Calder & Vance at info@caldervance.com for a confidential assessment.
Cross-Border Dimensions: How Non-US Regimes Interact
Payment and escrow structuring does not occur in a US-only regulatory vacuum. Most cross-border deals with a US nexus also engage the OFSI regime in the United Kingdom, the EU Council Regulation regime, or both – and the UK and EU rules on financial sanctions can diverge from OFAC in ways that affect how a multi-currency escrow must be structured.
Under OFSI (the Office of Financial Sanctions Implementation), the ownership and control test applies to determine whether a non-listed entity is caught through a listed person. The UK test includes a control limb – meaning that a non-listed entity can be caught even where a designated person holds less than 50 percent, if that person nonetheless exercises control over the entity's decisions. This is a broader test than OFAC's mechanical 50 percent ownership threshold, and it can produce different answers on the same counterparty facts.
Under the EU Council Regulation regime, a similar ownership and control analysis applies, and the EU General Court has confirmed that the control test must be applied substantively, not merely on the basis of formal ownership records. For an escrow structure involving a European bank as agent and a counterparty with complex ownership, the answer under OFSI or the EU regime may differ from the OFAC answer, and the strictest applicable prohibition governs.
There is also a UK export-control dimension (ECJU licensing) that parallels the BIS / EAR structure. Items subject to UK strategic export controls require an ECJU licence where they are exported from the United Kingdom, and the licence conditions may interact with payment and escrow terms in the same way that BIS licence conditions do. For a deal that straddles US and UK export-control jurisdictions, the escrow structure may need to satisfy both sets of conditions simultaneously.
Switzerland, Singapore, and Japan each maintain their own sanctions and export-control regimes. For a multinational with banking relationships or trade flows through those jurisdictions, the payment routing choices made in structuring an escrow can determine which additional regimes bite. This is why routing decisions are a compliance question, not merely a treasury question.
Practical Risk Flags for Compliance Teams
In a well-run sanctions and export-control compliance programme, the following transaction characteristics should trigger escalated review before payment terms and escrow instructions are finalised.
First, any counterparty with a complex or opaque ownership structure – particularly where beneficial ownership information is incomplete, recent, or potentially inconsistent with commercial representations. The 50 percent rule aggregates across multiple blocked holders; an incomplete ownership map leaves this risk unresolved.
Second, transactions where the escrow agent is located in a different jurisdiction from the payer, payee, and underlying goods. Multi-jurisdictional escrow arrangements create multiple nexus points, each of which may independently trigger a sanctions or export-control obligation. Have you identified which jurisdiction's rules govern the escrow agent's obligation to block or freeze?
Third, deals where the goods being transacted include items with potential dual-use characteristics – particularly electronics, software, sensors, telecommunications equipment, and materials with both commercial and military applications. These items are most likely to carry ECCN classifications that impose licence requirements and payment conditions.
Fourth, instalment-payment and deferred-payment structures where the final payment will be made after delivery. These arrangements create a window in which the facts may change – ownership, listing status, licensing conditions – between the point of goods delivery and the point of final payment. Ongoing monitoring through the payment lifecycle is required, not merely a one-time screen at deal signing.
Fifth, transactions where a US bank or US financial institution is in the payment chain in any capacity, including as correspondent, clearing bank, or escrow agent. Any such involvement creates a US nexus that subjects the entire payment stream to OFAC's jurisdiction, regardless of the nationalities of the payer and payee.
A common objection from transaction teams is that a deal has been "pre-cleared" by one authority or one compliance function and therefore needs no further review. This is a misunderstanding. An OFAC clearance is not a BIS clearance. An export licence is not a sanctions authorisation. Pre-clearance by a bank's trade-finance desk does not address OFAC obligations that sit with the exporter separately. Each obligation must be satisfied on its own terms.
Related practices
- Correspondent Banking and De-risking (OFAC) – managing OFAC exposure in correspondent and clearing bank relationships
- OFAC vs EU: Payment and Escrow Structuring – key divergences between the OFAC and EU sanctions regimes for structured payments
- Payment and Escrow Structuring: EU Regime in Depth – detailed analysis of EU Council Regulation requirements for escrow and payment structures
What Should a Cross-Border Business Do?
The answer depends on where the business sits in the transaction and what the deal involves. Below is a decision sequence that works across the most common fact patterns.
Situation A – Exporter of goods with a potential ECCN classification, USD-denominated deal, US bank in the escrow chain. Both BIS and OFAC apply. The first step is to classify the goods and determine whether a BIS licence is required for the destination and end-user. Concurrently, run a full OFAC counterparty screen including beneficial ownership analysis to the 50 percent threshold. If a BIS licence is required, the escrow release conditions must be drafted to satisfy the licence conditions. If OFAC exposure exists, a specific licence or a general licence must be identified before payment instructions are issued. Indicative timeline for a straightforward dual-review: several weeks minimum; longer if a BIS licence application is needed.
Situation B – Financial institution acting as escrow agent for a cross-border M&A transaction. OFAC applies to the escrow account and the funds. BIS may apply if the target's assets include controlled technology. The first step is a sanctioned-party screen of all principals, beneficial owners, and transaction parties. The second step is an assessment of whether the target's technology assets are subject to EAR controls that require a BIS licence for the transfer. The escrow agent must also consider its own obligations under OFSI and EU law if it has UK or EU connections. Where the analysis is uncertain, a specific licence application or a voluntary engagement with OFAC may be appropriate before escrow is established.
Situation C – Non-US business with no US operations, non-USD transaction, no US bank in the chain. The US nexus for OFAC and BIS is significantly reduced, but not necessarily absent. If the goods originated in the United States or incorporate US-origin technology above the applicable de minimis threshold, the EAR may apply to the re-export. If the non-US party is a US person (a US citizen or permanent resident acting in a personal capacity), OFAC applies regardless of currency or geography. The applicable country regime for the destination country must also be assessed. Local counsel in the relevant jurisdiction should be instructed where the non-US regime is unclear.