A multinational distributor closes terms on a cross-border supply contract. The escrow agent is in New York. The counterparty's ultimate parent sits in a jurisdiction that appears on both the OFAC and EU sanctions lists. The question is not whether sanctions apply. The question is which sanctions apply, how they apply differently, and whether any payment structure can proceed lawfully at all.
Payment and escrow structuring under OFAC and the EU rules differ in three critical respects: the nexus triggers that bring a transaction within each regime's reach, the ownership-and-control tests that determine whether a counterparty is caught, and the licensing routes available to unblock a payment that would otherwise be prohibited. Under OFAC, the test for blocked entities 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) operates regardless of control. The EU and UK regimes add a control layer that can catch entities below that threshold, and the EU Blocking Regulation may impose a countervailing obligation where US secondary-sanctions pressure is in play.
This analysis works through both regimes side by side, maps the points of divergence that matter most to cross-border payment flows, and sets out the questions a compliance or treasury team must answer before a payment instruction is issued or an escrow is released.
What governs payment and escrow structuring under OFAC?
OFAC's authority to block payments derives from IEEPA and the Executive Orders issued under it; the agency's programme-specific regulations implement those orders across individual country and thematic programmes. Any payment that is processed through the US financial system, involves a US person, or touches US-dollar clearing is within OFAC's reach, regardless of where the originating party is incorporated.
For payment and escrow structuring purposes, the key question is whether any party in the transaction chain – including the beneficiary, the escrow agent, the correspondent bank, or an intermediate payee – is a Specially Designated National or a person treated as blocked by the 50 percent rule. If any such person is present, the payment must be blocked and reported to OFAC within a short statutory window. Releasing funds from an escrow to a blocked person, or structuring payment tranches to avoid triggering a block, is a violation regardless of intent.
In our cross-border practice, we regularly advise clients who discover a designation issue only after an escrow has been opened. At that point, the escrow agent – often a US bank or a bank operating through a US-dollar correspondent – has legal obligations that override the commercial agreement. The agent cannot release funds without an OFAC specific licence or a clear conclusion that the transaction is not within a blocked programme. Waiting to seek advice until a release date approaches is, in our experience, the single most common source of entirely avoidable enforcement exposure.
How does the EU sanctions regime approach the same transaction?
EU sanctions on payments and asset flows operate through Council regulations that directly bind all EU persons and all transactions conducted in whole or in part within the EU, regardless of currency. An EU person who releases escrowed funds to a designated counterparty violates the applicable Council regulation even if the payment is denominated in a non-EU currency and cleared outside the EU financial system.
The EU's ownership and control test is broader than OFAC's in one important respect. Where OFAC's 50 percent rule is triggered by aggregated ownership reaching that threshold, EU regulations also catch entities that a designated person controls – including through contractual arrangements, board influence, or de facto decision-making power – even where that person's direct or indirect ownership stake falls below any mechanical threshold. This means a payment to a company that a designated person effectively controls, but does not own above 50 percent, may be prohibited under EU law while falling outside OFAC's blocking rules.
The practical implication for escrow structuring is significant. A transaction that passes OFAC screening may still fail EU screening. Where the escrow agent, the payee, or an intermediary bank is EU-domiciled, or where an EU person is a signatory to the escrow agreement, EU rules apply in full alongside whatever US obligations are present.
There is a further complication. The EU Blocking Regulation – the instrument designed to counter certain extraterritorial effects of US sanctions – prohibits EU persons in some circumstances from complying with US sanctions measures designated by the regulation. Where it applies, an EU party to an escrow may face a legal conflict between its obligations under OFAC's reach and its obligations under EU law. This is not a theoretical tension. It has surfaced in cross-border payment disputes where an EU bank has sought to refuse a dollar transfer on OFAC grounds and the EU counterparty has argued that the refusal itself violates EU law. Resolving it requires advice on both regimes simultaneously.
Where do the regimes diverge on the ownership and control test?
The divergence between OFAC and the EU on ownership and control is the point most likely to produce a gap in a compliance assessment. OFAC's position is binary: if blocked persons own 50 percent or more in the aggregate, the entity is blocked. Below that, absent a specific designation, the entity is not blocked by the rule alone (though other prohibitions may apply). The analysis is ownership-focused and quantitative.
EU law does not draw the same bright line. The relevant Council regulations define control broadly, and EU competent authorities have confirmed that a designated person need not hold a majority stake for an entity to fall within the prohibition. Indicators of control include the ability to appoint or remove board members, the holding of blocking minority rights, contractual rights that give veto power over commercial decisions, and factual dominance in a corporate group. In our experience, these indicators emerge most often in joint-venture structures and in group companies where a designated parent has divested nominal ownership to a third party while retaining operational authority.
For an escrow arrangement specifically, the control question is most acute where the escrow beneficiary is a holding vehicle, a special-purpose entity, or a recently restructured entity in a group that includes a designated person. The beneficial-ownership analysis must go to the level of identifying who holds the economic interest and who directs the release of the funds – not merely who holds legal title to the shares.
The UK position under OFSI broadly mirrors the EU control test. OFSI's guidance makes clear that the ownership and control analysis extends beyond bare ownership percentages. A UK-connected payment or escrow arrangement must therefore be assessed under the UK rules, the EU rules (if EU persons are involved), and OFAC's rules (if US persons or US-dollar flows are present) – each applying a different test to the same underlying facts. Does your internal screening process apply all three tests, or only the one most visible to your primary regulator?
What licensing routes are available, and how do they differ?
Where a payment or escrow release is prima facie prohibited, the question shifts to whether a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) or a general licence (a standing authorisation permitting a defined category of transactions without a separate application) is available. The licensing architecture differs materially between OFAC and the EU.
OFAC issues specific licences for individual transactions where the applicant can demonstrate that the proposed activity meets the agency's policy criteria. There is no guaranteed timeline, and OFAC does not commit to a processing period. Applications must be detailed: the parties, the goods or services, the payment route, the escrow terms, the amounts, and the legal basis for the proposed licence. An incomplete application resets the process. Where a general licence covers the relevant activity, OFAC does not require a separate application – but the applicant must correctly identify and apply the general licence, and mis-application of a general licence is itself a potential violation.
EU licensing works differently. Applications are made to the competent authority of the relevant member state, not to a single EU-wide body. The governing Council regulation sets the categories of licences available. Processing timelines and the granularity of assessment vary across member states, which creates a practical asymmetry: the same transaction may be licensed more readily in one member state than another. For an escrow structured across multiple EU jurisdictions, this matters because the applicable member state is the one where the EU operator is established – and that may not be the state where the funds are held.
The UK OFSI licensing route is distinct from both. OFSI issues specific licences on its own assessment, independent of OFAC or the EU process. OFSI's licensing criteria and its stated processing timelines are set in its published guidance. Where a payment or escrow involves a UK person or a UK financial institution, an OFSI licence may be required in addition to any OFAC or EU authorisation. A business that obtains an OFAC specific licence for a payment does not thereby obtain OFSI or EU authorisation, and vice versa.
In a recent matter, a financial services group sought to structure an escrow release that had OFAC, OFSI, and EU dimensions. Each licensing application required separate preparation and separate submissions to separate authorities. The timing of each process had to be managed in parallel, as the commercial agreement contained a longstop date. We assessed the eligibility, prepared and submitted each application, and managed the regulators' queries across all three workstreams. The matter underscores a point we make regularly: a three-regime licensing exercise is not three times the work of a single-regime exercise – it is categorically more complex, because the representations made to each authority must be consistent with the others while meeting each authority's distinct criteria.
What are the risk flags for payment and escrow structuring across these two regimes?
The most serious risk flags in cross-border payment and escrow structuring arise from gaps between what the commercial documents show and what the underlying ownership analysis reveals. A signed escrow agreement does not itself establish that the beneficiary is not a blocked or designated person. The agreement must be read alongside a sanctions-ownership analysis that goes to the ultimate beneficial owner.
Several patterns recur in our cross-border practice. First, the payee has changed name or jurisdiction since the original counterparty screening was conducted. Screening is not a one-time exercise; it must be refreshed whenever material facts change, and that includes at the point of each escrow release, not only at the point of contract execution. Second, the correspondent bank for the payment route is subject to a different regime than the originating bank. A payment instruction that passes OFAC screening at the originating bank may be blocked by an EU correspondent or a UK clearing institution applying a stricter interpretation of the same designation. Third, the escrow release mechanism itself creates a payment obligation that did not exist at the time of the original screening – for example, a milestone payment triggered by a counterparty event, where the event occurs after a new designation is published.
A fourth risk flag is more structural. Some escrow agreements include an automatic-release provision – a mechanism by which funds are released without a further payment instruction if a specified condition is met. Under OFAC, release of funds to a blocked person is a violation regardless of whether it is automatic or manual. An automatic-release clause in an escrow agreement does not provide a defence. The escrow agent must be instructed to include a sanctions condition precedent in any release mechanism, and that condition must be assessed at the time of the release event, not only at the time the agreement is executed.
How does secondary-sanctions risk interact with escrow structuring decisions?
Secondary sanctions are distinct from the primary prohibitions described above. Primary sanctions prohibit US persons and, in relevant respects, other persons with US nexus from engaging in transactions with blocked or designated parties. Secondary sanctions target non-US persons who engage in significant transactions with parties or sectors that OFAC has identified as priorities – even without a US nexus in the transaction itself.
For an escrow structured by a non-US party with no US-dollar leg and no US-person involvement, the primary OFAC analysis may yield a clean result. But secondary-sanctions exposure can still arise if the transaction falls within a designated sector or involves a jurisdiction subject to secondary-sanctions risk. A non-US bank that processes an escrow release, or a non-US escrow agent that holds funds on behalf of a party linked to a secondary-sanctions risk area, may find itself at risk of a US correspondent-banking relationship review or, in a more serious case, a designation.
EU sanctions do not include secondary-sanctions provisions of comparable scope. This is one of the structural divergences between the two regimes. An EU operator may assess a payment as clean under EU law, only to find that a US correspondent bank declines to process it on secondary-sanctions grounds. Managing this requires an early analysis of the correspondent-banking chain, not only of the direct parties to the escrow.
For more on how correspondent-banking relationships interact with OFAC's reach, see our related practice on correspondent banking and de-risking under OFAC.
A common myth about multi-regime payment structuring
A view we encounter regularly is that obtaining a clean result under the most prominent regime in a transaction – usually OFAC for a US-dollar payment – means the transaction is cleared for all purposes. It does not. Each regime applies its own tests, its own ownership and control analysis, and its own licensing conditions. A payment that is not prohibited under OFAC may still be prohibited under the EU Council regulation or OFSI's rules. A general licence that covers a transaction under OFAC does not extend to the EU or UK regimes unless those regimes have issued equivalent authorisations.
The inverse is equally true. EU authorisation does not resolve OFAC exposure. An EU-licensed payment that passes through a US-dollar clearing mechanism or is processed by a US correspondent bank is within OFAC's jurisdiction. The licensing calculus must cover every regime that has a hook into the transaction – the parties, the currency, the correspondent-banking chain, and the jurisdiction of incorporation of the escrow agent.
We have also seen businesses assume that because a transaction was lawful when the escrow was opened, it remains lawful at the time of release. Designations are added and removed. Ownership structures change. A transaction that was clean at inception must be re-screened at every material trigger point, including at the time of each payment or release instruction.
When should a cross-border business involve sanctions counsel?
The short answer is: before the escrow agreement is signed, not after a release date is imminent. At the drafting stage, counsel can ensure that the escrow agreement includes appropriate representations and warranties, a sanctions condition precedent in every release clause, and a termination mechanism that complies with blocking obligations if a designation arises after execution. These protections cost little to include and a great deal to retrofit.
If a designation arises mid-escrow, counsel should be engaged immediately. The window to report blocked property to OFAC is short. The decision to hold funds, apply for a licence, or seek to restructure the arrangement must be made quickly and with a clear understanding of what each regime requires. Delay compounds the position.
For businesses that operate across both regimes regularly, a proactive assessment of the payment and escrow structuring approach – before a specific problem arises – is the most cost-effective use of sanctions counsel. We regularly advise compliance and treasury teams on how to design payment procedures that are resilient to both OFAC and EU obligations, including protocols for re-screening at release, correspondent-bank instructions, and escalation procedures for hits identified post-execution.
The position above covers the standard case. Your facts – the counterparty, the ownership chain, the currency, the escrow agent's jurisdiction, and the regimes in play – change the analysis materially. For a confidential review of a specific transaction or payment structure, contact Calder & Vance at info@caldervance.com.
If a payment has already been flagged, or an escrow release has been refused by a correspondent bank, an early review can preserve options that narrow with time. Contact us at info@caldervance.com.
Related practices
- Correspondent banking and de-risking under OFAC – managing US sanctions exposure in correspondent-banking relationships
- Payment and escrow structuring: further OFAC vs EU analysis – extended analysis on structuring questions in complex transactions
- Payment and escrow structuring: OFSI vs Australia compared – comparative analysis of UK and Australian sanctions obligations
Frequently asked questions on payment and escrow structuring across OFAC and EU regimes
Where do the regimes diverge on payment and escrow structuring?
The principal divergence is the ownership-and-control test. OFAC's 50 percent rule is triggered by aggregated ownership reaching that threshold; below it, the entity is not blocked by the rule alone. EU regulations add a control test that can catch entities a designated person effectively controls, even where ownership falls below 50 percent. Licensing is also divergent: OFAC issues licences centrally, while EU applications go to the competent authority of the relevant member state, producing variable processing outcomes. The EU Blocking Regulation creates a further complication where US extraterritorial measures are in play.
Which regime is stricter on payment and escrow structuring?
Neither regime is uniformly stricter; each is more restrictive in different respects. OFAC's primary prohibitions have the broadest jurisdictional reach by virtue of US-dollar clearing and secondary-sanctions exposure. The EU control test captures entities that OFAC's ownership rule does not. Where both regimes apply, the stricter prohibition governs for each dimension of the transaction. A payment that is permissible under OFAC's rules may still be prohibited under EU law, and the converse is equally possible.
What should a cross-border business do about payment and escrow structuring?
Three steps matter most. First, conduct an ownership and control analysis at the beneficial-owner level before any escrow agreement is signed, applying the tests of every regime with a hook into the transaction. Second, ensure every escrow release clause includes a sanctions condition precedent and a re-screening obligation at the time of release, not only at execution. Third, engage sanctions counsel early if a designation arises mid-escrow or a correspondent bank declines a payment instruction – the reporting windows are short and options narrow with delay. Contact Calder & Vance at info@caldervance.com to discuss your specific situation.
About the author
Renata Costa advises banks, payment firms, and virtual-asset businesses on sanctions screening, compliance-programme design, and financial-crime controls. Her cross-border practice regularly covers OFAC, OFSI, and EU sanctions obligations as they interact in payment and escrow structuring, correspondent-banking arrangements, and transaction due diligence. Calder & Vance – International Sanctions & Export Control Counsel.
About Calder & Vance
Calder & Vance is an independent international sanctions and export-control boutique. We advise multinationals, financial institutions, exporters, and individuals on the major regimes – OFAC and BIS in the United States, OFSI and ECJU in the United Kingdom, the EU Council regulations and the EU General Court, the United Nations Consolidated List, and the regimes of Switzerland, Canada, Australia, the UAE, Singapore, and Japan. Our work is limited to lawful compliance, licensing, delisting, enforcement defence, and due diligence. To discuss a matter, contact info@caldervance.com.
Disclaimer: This material is general information, not legal advice, and is not a substitute for advice on your specific facts. Sanctions and export-control rules change frequently and differ by regime; verify the current position before relying on anything stated here. Calder & Vance does not advise on circumventing or evading sanctions. For advice on your situation, contact info@caldervance.com.