A multinational buyer and a European seller agree terms on a significant cross-border supply contract. The parties elect to use an escrow arrangement to bridge payment risk. Three weeks before closing, a compliance review flags a potential nexus to a designated entity. At that point, the question is no longer whether to use an escrow – it is whether the payment mechanism itself exposes either party to liability under two different legal regimes that approach the same structure in materially different ways.
Under OFAC, the primary question in payment and escrow structuring (the design of payment flows, intermediary arrangements, and conditional disbursement mechanisms to satisfy sanctions compliance) is whether a US jurisdictional nexus exists and whether any blocked person is a direct or indirect beneficiary. Under the EU regime, the analysis turns first on the prohibitions attached to the listed person or entity, and then on whether the payment constitutes making funds or economic resources "available." These are distinct legal tests – and structuring a compliant payment for one regime does not guarantee compliance with the other.
This analysis examines the OFAC framework and the EU equivalent across six operational dimensions: jurisdictional reach, the blocking and freezing distinction, escrow account treatment, US dollar clearing, licensing routes, and record-keeping obligations. Where the regimes diverge, we flag the risk directly. As of January 2026, both regimes are actively enforced, and the cost of structuring errors remains significant.
How do OFAC and the EU assert jurisdiction over cross-border payment flows?
OFAC's jurisdictional reach in payment transactions is broader than many cross-border businesses expect. US jurisdiction attaches whenever a US person is involved, whenever the transaction is processed through a US correspondent bank, or whenever the payment is denominated in US dollars and cleared through the US financial system. That last limb – US dollar clearing – is the most frequently overlooked. A transaction between two non-US parties, with no US goods or services involved, can still fall within OFAC's jurisdiction if the payment clears through a US correspondent institution.
The EU regime operates on a different logic. EU financial sanctions apply to EU-established credit institutions and financial intermediaries acting within the EU, to transactions involving EU-established parties, and to transactions conducted in whole or in part within EU territory. There is no equivalent to OFAC's dollar-clearing limb. A payment routed entirely outside EU territory, between non-EU parties, does not engage EU sanctions even if one party is designated under an EU regime – unless an EU bank or payment infrastructure forms part of the chain.
In practice this divergence creates layered exposure. A transaction may be outside EU jurisdiction but inside OFAC's reach by virtue of dollar clearing. Conversely, a euro-denominated payment between two EU-established parties may engage EU prohibitions while falling outside OFAC's scope entirely. For any cross-border payment structure, mapping jurisdictional exposure across both regimes before selecting the payment mechanism and currency is an essential first step. We regularly advise clients on precisely this sequencing – and the majority of structuring errors we encounter arise not from a failure to run sanctions checks but from a failure to map jurisdiction first.
The position above covers the standard case. Your facts – the counterparty, the payment currency, the correspondent banking chain, and the regimes in play – will determine which analysis governs and whether both bite simultaneously.
For a confidential assessment of jurisdictional exposure in a specific payment structure, contact Calder & Vance at info@caldervance.com.
Blocking versus freezing: how the regimes differ in what they require of the payment intermediary
The conceptual difference between "blocking" under OFAC and "freezing" under the EU regime is not merely terminological – it has direct operational consequences for how an escrow agent or paying bank must handle funds once a sanctions hit is identified.
Under OFAC, property in which a blocked person has any interest must be blocked: it must be placed in a segregated, interest-bearing account, reported to OFAC within a short statutory window, and held pending OFAC authorisation or a general licence permitting release. The blocked property cannot be returned to the transferor without OFAC authorisation. It cannot be released to the beneficiary. It sits in suspense, legally immobilised, until OFAC acts. The statutory obligation is not discretionary. An escrow agent that identifies a blocked party mid-transaction must freeze the escrow account immediately and report. Returning funds without authorisation – even to the original payer – is itself a prohibited transaction.
The EU framework uses the term "freezing." It requires that funds and economic resources belonging to, owned, held, or controlled by a listed person be frozen: they may not be moved, transferred, altered, used, or accessed in any way that could benefit the listed person. Crucially, however, the EU rules do not in all cases prohibit returning funds to the originating non-listed party, provided that doing so does not benefit the listed person and that the competent authority is notified. Whether such a return is permissible turns on the specific regulation, the circumstances of the transaction, and – in some member states – the prior approval of the national competent authority.
For an escrow agent or trustee operating under both regimes simultaneously, this divergence is material. The OFAC position: block and hold, report, await authorisation. The EU position: freeze, assess whether a return route is open, notify the competent authority. Getting the response wrong for either regime – applying the EU return logic to a OFAC-blocked transaction, or over-blocking under OFAC rules when the EU position would permit a partial release – creates legal exposure in one direction or the other.
How do the regimes treat escrow accounts when a listed party is identified mid-transaction?
Escrow arrangements occupy a structurally complex position under sanctions law because they involve a three-party relationship: the depositing party, the beneficiary, and the escrow agent. When a sanctions hit arises at any point in that triangle, the treatment under OFAC and the EU diverges significantly.
Under OFAC, if the beneficiary of an escrow is a Specially Designated National (a person or entity on OFAC's SDN List of blocked parties), the escrowed funds are blocked property from the moment the interest of the blocked person is established – even if disbursement has not yet occurred. The escrow agent, as the holder of the funds, assumes the blocking obligation. It must not disburse to the SDN, must report the blocked property, and must maintain the funds in a segregated account pending OFAC's direction. The depositor's interest in a return of the funds is not automatically superior: the funds are blocked, and returning them without authorisation may itself require a specific licence.
The EU position treats the escrow account itself as a vehicle through which economic resources might be made available to a listed person. The key question is not whether title has passed, but whether disbursement under the escrow terms would make funds "available" to the listed party. If it would, the disbursement instruction is prohibited. However – and this is where OFAC and the EU part company in practice – certain EU regulations contain carve-outs for payments due under pre-existing contracts concluded before a designation, subject to prior notification to or authorisation from the competent authority. OFAC contains comparable but differently structured general licences for certain pre-existing contractual obligations; the scope and timing conditions differ by OFAC programme and are not co-extensive with EU carve-outs.
In our cross-border practice, escrow agents and trustees routinely ask whether they can rely on one set of rules as the primary standard. The answer is no. The safer course is to identify which regimes apply based on the parties, the governing law, and the payment infrastructure, and then apply the more restrictive obligation where both bite simultaneously. The rule that stricter prohibition governs is not mandated by a specific instrument – it is a practical compliance standard that avoids the alternative: satisfying one regime while breaching the other.
What is the risk profile of US dollar clearing for payments involving restricted counterparties?
The US dollar clearing risk is among the most consistently underestimated exposure in cross-border payment structuring. Almost all major US dollar transactions clear through US correspondent banks, and those banks – as US persons – are themselves subject to OFAC's full jurisdictional reach. They are not passive conduits. They are independent compliance actors with their own obligation to screen and, where a transaction would violate OFAC regulations, to reject or block it.
For a non-US exporter or financial institution that has concluded that its domestic law permits a transaction, the reality of US dollar clearing imposes a second compliance gate – one controlled by a third party with no contractual obligation to complete the payment. In practice, US correspondent banks apply conservative screening, and a rejection or delay at the correspondent level can unwind the commercial transaction entirely, even if the originating bank and its client have concluded the payment is lawful under their home regime.
The EU does not operate a comparable mechanism. Euro-denominated transactions clearing through the TARGET2 system do involve EU-regulated payment infrastructure, but the obligation to screen and block arises from EU sanctions regulations binding on the EU institutions in the chain – not from a structural adjunct to the currency system as such. A euro payment between a Swiss entity and a Singapore entity clearing through a non-EU bank does not engage EU clearing-system obligations, even if both the EU and OFAC have listed the same counterparty.
Practical implication: for any transaction with a restricted-counterparty risk, the currency selection is a compliance decision, not merely a commercial one. Moving to a non-USD currency does not eliminate OFAC exposure if US persons are involved elsewhere in the structure. But for purely non-US transactions, it removes the clearing-system gateway entirely. Counsel should assess this before the currency election is made.
If a transaction has already been flagged at the correspondent level, or a payment has been rejected or placed on hold, an early review can preserve options that narrow with time. Contact us at info@caldervance.com.
Where do the licensing routes diverge, and what does that mean for structuring an authorisation strategy?
Obtaining authorisation to proceed with an otherwise-restricted payment structure requires separate applications to separate authorities, under separate legal standards, on separate timelines – and a licence from one authority confers no protection under the other regime.
Under OFAC, authorisation takes the form of a specific licence (a case-by-case authorisation for a transaction that is not covered by a general licence) or a general licence (a standing authorisation that permits a defined category of transactions without a separate application). For payment and escrow structures, the most relevant general licences cover certain pre-existing contractual obligations, wind-down transactions, and the unblocking of funds to specific categories of recipients. Where no general licence applies, a specific licence application must be filed with OFAC, setting out the parties, the transaction, the basis for the request, and the proposed safeguards. OFAC's review timelines for specific licence applications are not fixed by statute; in our practice experience, complex matters take several months.
The EU licensing equivalent is a derogation or a specific authorisation granted by the competent national authority of the relevant member state – typically the finance ministry or its delegated agency. EU derogations are available under most programmes for certain defined purposes: humanitarian payments, legal fees, pre-designation contractual obligations, and a limited set of other categories specified in the relevant Council regulation. The competent authority differs by member state, which means that a business with EU-established counterparties in multiple jurisdictions may need to file applications in multiple member states simultaneously. There is no single EU licensing authority equivalent to OFAC.
This decentralised structure creates a practical sequencing problem for cross-border payment structures. An OFAC-licensed transaction may be refused authorisation in one or more EU member states. An EU-authorised payment may still be blocked at the US dollar clearing stage if OFAC has not issued a corresponding licence. A coherent authorisation strategy must therefore address both regimes in parallel, map the competent authorities correctly, and build realistic timelines that account for multi-authority review periods. Relying on authorisation from one regime while the other remains open is not a safe position.
How do record-keeping and reporting obligations compare across the two regimes?
Record-keeping and reporting obligations in payment and escrow transactions are not merely administrative. They are the primary mechanism by which regulators reconstruct a firm's compliance at the point of review – and failures here have drawn enforcement action even where the underlying transaction was ultimately compliant.
Under OFAC, a US person that holds blocked property must report it to OFAC within a short statutory window after the blocking occurs, and must file an annual report while the property remains blocked. The five-year record-keeping requirement applies to all records of transactions, including rejected transactions. Rejected transactions – payments refused because screening identified a potential sanctions nexus – must themselves be reported to OFAC within a short statutory period. The reporting obligation for rejected transactions is frequently missed by firms that correctly block or reject a payment but do not appreciate the independent reporting duty.
EU record-keeping obligations are set out in the relevant Council regulations and vary in detail by programme and by member state implementation. The general standard requires that relevant records be retained for a period specified in the applicable regulation. Reporting of frozen assets is typically required to the national competent authority within a defined period of the freeze, with annual updates in many programmes. What the EU regime does not impose, in the same way as OFAC, is a freestanding obligation to report rejected transactions as a category distinct from frozen assets.
For an escrow agent or financial intermediary operating under both regimes, the consequence is that record-keeping and reporting must satisfy two distinct standards simultaneously. A records policy calibrated only to the EU requirement may not satisfy OFAC's more detailed reporting obligations. A policy built around OFAC's framework may miss member-state-specific requirements in EU jurisdictions where national implementation has added obligations beyond the Council regulation baseline. In our experience, the reporting gap – particularly around rejected transactions – is one of the most common compliance deficiencies we identify in payment-sector reviews.
Common structuring errors and risk flags in cross-border payment arrangements
The most consequential structuring errors in OFAC and EU payment compliance share a common feature: they arise not from a failure to screen, but from a failure to analyse the result of screening in its full legal and structural context.
The first risk flag is treating a partial ownership interest as determinative. Under OFAC's 50 percent rule (the rule treating entities owned 50 percent or more in the aggregate by one or more blocked persons as themselves blocked), a 30% shareholding held by an SDN is not sufficient alone to block the entity. But if a second SDN holds a further 25%, the aggregate reaches the threshold and the entity is blocked. Screening that checks ownership at the entity level but does not aggregate SDN interests across the cap table will miss this pattern. Escrow agents in particular must review the ownership chain of every named beneficiary, not merely the named party.
The second risk flag is the assumption that a non-USD currency removes OFAC exposure. As described above, currency selection removes the clearing-system exposure – but not the exposure arising from a US person's involvement, a US goods nexus, or a service provided from US territory. The analysis must always begin with jurisdiction, not currency.
The third risk flag is the timing of the compliance review relative to transaction milestones. A clean screen at heads-of-terms stage does not immunise the transaction against a subsequent designation of the counterparty before closing. Sanctions lists are updated frequently and without advance notice. Payment structures – particularly escrow arrangements with extended disbursement periods – require re-screening at each material milestone: execution, funding, and each disbursement event.
A common myth in cross-border payment compliance is that an escrow structure inherently insulates the originating party from sanctions liability because the escrow agent, not the payer, holds and controls the funds. This is incorrect under both OFAC and EU rules. The analysis under both regimes looks to whether the payment structure, taken as a whole, makes funds available to a restricted party or involves the property of a blocked person. The legal form of the disbursement mechanism does not override the substantive question of who benefits. Firms that structure escrow arrangements on the assumption that the escrow agent carries all the risk frequently discover, on review, that they retain concurrent exposure.
How Calder & Vance approaches payment and escrow structuring mandates
In a recent matter, a financial services business operating across European and Asian markets was party to an escrow arrangement in connection with a significant acquisition. Post-signing, a restructuring of the target's ownership chain surfaced an indirect SDN nexus in the US regime – a relationship not visible in the original screening. We assessed the jurisdictional exposure under OFAC and the relevant EU programme, mapped the ownership chain to the applicable ownership and control tests, and advised on the authorisation route – including a parallel specific licence strategy and a notification to the competent authority under the EU programme. The matter was resolved without enforcement action. We make no representation about outcomes in other circumstances.
Our practice in cross-border payment and escrow structuring covers four areas. First, we screen the counterparty and ownership chain, surface secondary-sanctions risk, and structure the transaction to satisfy the applicable regime. Second, for transactions where a restrictions nexus is identified, we assess eligibility, prepare and submit the licence application, and manage the regulator's queries under OFAC, under the relevant EU national competent authority, or both. Third, where a payment has been blocked or an escrow has been frozen, we scope the apparent violation, advise on voluntary self-disclosure, and prepare the penalty defence. Fourth, we test the screening logic, map ownership and control, and redesign the programme to the five-element standard for payment-sector clients building or upgrading their compliance infrastructure.
We work across OFAC and BIS in the United States, OFSI and ECJU in the United Kingdom, the EU Council regulations, and the regimes of Switzerland, Canada, Australia, the UAE, Singapore, and Japan. For transactions that require multi-regime analysis, we coordinate with local counsel in the relevant jurisdiction to ensure the full picture is covered.
Related practices
- Correspondent banking and de-risking under OFAC – managing financial-institution exposure in correspondent relationships
- Payment and escrow structuring: OFSI vs Australia – comparison of UK and Australian payment compliance obligations
- Sanctions representations and warranties: EU vs SECO – structuring contractual protections across EU and Swiss regimes