A counterparty in Singapore presents a contract with a standard sanctions clause. Your UK entity signs. Six months later, OFSI designates one of the counterparty's shareholders. Is the clause triggered? Does it matter that the shareholder held only a minority stake? And would the analysis differ if this were governed by US or EU law rather than English law?
Sanctions clauses in contracts serve a practical function: they allocate the risk that a party becomes subject to a sanctions prohibition during the life of the deal. Under OFSI, the governing authority for UK financial sanctions, the effectiveness of such a clause depends not only on its drafting but on how the UK ownership-and-control test operates against the specific counterparty structure. As of July 2026, OFSI's enforcement posture has sharpened considerably, and poorly drafted clauses are leaving UK businesses exposed to both contract disputes and regulatory scrutiny at the same time.
This analysis sets out the key divergences between OFSI and the principal comparator regimes – OFAC in the United States and the EU Council regulation framework – on how sanctions clauses interact with the underlying prohibitions, what the clauses must do to be operationally useful, and where the common drafting failures occur.
What is the function of a sanctions clause and why does it matter under OFSI?
A sanctions clause is a contractual provision that suspends, terminates, or limits a party's obligations when performance would breach an applicable sanctions prohibition. Under OFSI, the relevant prohibition is typically on making funds or economic resources available to a designated person, or to a person owned or controlled by a designated person. The clause does not override the prohibition; it governs the contractual consequences of the prohibition biting.
This distinction is not semantic. A party that performs a prohibited payment in reliance on a poorly drafted sanctions clause has still committed a strict-liability breach. The clause may resolve the private-law dispute between the contracting parties, but it cannot cure the regulatory position. In our experience, in-house teams sometimes treat the sanctions clause as a shield against both dimensions of risk. It is not. The regulatory exposure stands independently.
For OFSI's purposes, what matters is whether the payment or delivery was prohibited at the time it was made. A sanctions clause cannot retrospectively authorise a payment. It can, however, prevent a party from being in breach of contract for refusing to make one. Those are different legal outcomes, and a well-advised business keeps them clearly separate in its risk assessment.
The position under OFSI is also complicated by the UK's ownership-and-control test (the test by which a non-listed entity is caught because a designated person owns or controls it). Unlike OFAC's mechanical 50 percent or more aggregated-ownership rule, the UK test reaches entities that a designated person controls in fact, even where ownership falls below any bright-line figure. A sanctions clause that triggers only on formal designation of the counterparty will miss the case where the counterparty is caught through control by a designated person who holds no majority stake.
How does the OFSI ownership-and-control test diverge from the OFAC 50 percent rule?
The OFAC 50 percent rule is the clearest bright line in international sanctions practice: if blocked persons own, in the aggregate, 50 percent or more of an entity, that entity is itself treated as blocked, regardless of whether it appears on the SDN List. The test is ownership, it is mathematical, and it does not require any assessment of how the entity is actually managed. For contract drafting purposes, this produces a relatively predictable trigger: if the ownership chain produces an aggregate of fifty percent or more, the counterparty is blocked.
OFSI's test is materially different. The UK legislation captures persons owned or controlled by a designated person. Control is not defined by a single percentage threshold. It can be established through direct or indirect ownership of the majority of voting rights, through rights to appoint or remove the majority of directors, or through the ability to direct the activities of the entity by agreement or other means. That last limb – effective control through agreement or influence – is broader than anything in the OFAC framework, and it is the limb that most frequently produces unexpected results in cross-border supply chains.
What does this mean in practice for a sanctions clause? A clause drafted around the OFAC model – triggering on designation or on the counterparty exceeding the fifty percent ownership threshold – will not capture the OFSI control scenario. A UK counterparty relying on that clause for protection may find that its contractual right to exit has not been triggered, even though OFSI's prohibition has. The legal analysis then becomes whether performance is excused by the prohibition itself or by the contract, and those two paths carry different consequences.
The EU framework occupies a middle position. Under the relevant Council regulations, the concept of "owned or controlled" is used, and the Commission has issued guidance that draws on both the ownership-percentage approach and a functional control assessment. In our cross-border practice, we regularly advise clients with contracts governed by English law but with counterparties in EU member states, where the EU and UK tests both apply but produce different answers on the same facts. The stricter prohibition governs: that principle is well-established across regimes, but it does not tell the drafter which clause to include – it tells the compliance officer which law produces the prohibition.
What are the critical drafting differences in sanctions clauses across these regimes?
A sanctions clause that is fit for a cross-border contract in 2026 does at least four things: it defines the triggering condition with reference to the applicable prohibitions (not only to formal lists); it allocates the economic consequences of a trigger (who bears costs, whether notice is required, how long a suspension can run); it imposes a reporting or notification obligation on the party that becomes aware of the trigger; and it specifies the governing law for its own interpretation. Most standard commercial clauses do only the first, imperfectly, and omit the other three.
The triggering condition is where the OFSI/OFAC divergence bites hardest. An OFAC-oriented clause typically refers to the SDN List and to the 50 percent rule. An OFSI-oriented clause must extend the trigger to entities owned or controlled by a designated person under the UK regime, using the functional control test. A clause that simply cross-references a list will fail to capture the entity that is caught only through control, which is exactly the case OFSI enforcement increasingly targets.
The economic consequence allocation is equally important. Some clauses provide for immediate termination on trigger. Others provide for suspension pending a licence. OFSI does issue specific licences – case-by-case authorisations for otherwise prohibited transactions – and a well-drafted clause should acknowledge the licensing route as an alternative to termination. Simply terminating may deprive the parties of the ability to regularise the position through a licence, and it may also crystallise a payment obligation that would otherwise have been suspended. In our experience, contracts with termination-only clauses are harder to manage than those that build in a suspension period and a licensing option.
Notification obligations are frequently absent from standard clauses. OFSI's reporting regime requires that certain persons report knowledge or reasonable cause to suspect a designated person's interest in funds. A sanctions clause that does not impose a corresponding contractual notification obligation on each party creates an information asymmetry: one party may know that the trigger condition has arisen without the other being contractually required to inform them. That gap is a commercial and regulatory problem simultaneously.
Where do the regimes diverge on termination, suspension, and licensing?
The licensing landscape under OFSI, OFAC, and the EU Council regulation system differs in ways that directly affect how a sanctions clause should be drafted. Under OFAC, specific licences (case-by-case authorisations to conduct an otherwise prohibited transaction) and general licences (standing authorisations covering a defined category of transactions without a separate application) coexist, and an experienced drafter will build in a reference to both. The timeline for a specific licence decision can run to several months in complex matters, which a suspension clause should accommodate.
OFSI's licensing regime is narrower in the range of available general licences and, in practice, relies more heavily on specific licences for cross-border commercial matters. A suspension clause that assumes the availability of a general licence may be operationally useless if no relevant general licence covers the transaction type. The clause should instead provide for a suspension period of sufficient length to permit a specific licence application to be made and determined.
The EU framework adds a further layer. EU operators dealing with counterparties subject to both UK and EU designations need to consider whether a licence granted by one authority covers the transaction in both jurisdictions. It does not, automatically. A UK-specific licence from OFSI does not authorise what would otherwise be a breach of an EU Council regulation prohibition. A sanctions clause that refers only to UK law and OFSI licensing may leave the EU-dimension exposure unaddressed, which is a significant gap for any business with operations or counterparties in EU member states.
The position under OFAC is different again. US secondary-sanctions risk – the exposure of non-US persons to OFAC consequences for transactions in US dollars, involving US-origin goods, or touching the US financial system – is a cross-regime pressure that a sanctions clause in an English-law contract cannot simply exclude. A well-constructed clause will acknowledge the extraterritorial reach of the US regime, at least to the extent of providing a trigger if either party determines that performance would expose it to secondary-sanctions consequences under applicable US law.
In a recent matter, a mid-size UK distributor had a supply agreement with an Asian manufacturer. The contract contained a sanctions clause that referenced only UK and EU designations. When OFAC added a connected entity to the SDN List, the UK distributor's bank declined to process payments – citing secondary-sanctions risk under US law – but the sanctions clause did not technically trigger, leaving the commercial position unresolved for weeks. We were instructed to advise on the regulatory exposure and to assist in renegotiating the clause. The lesson: a cross-regime clause is not a luxury for large multinationals; it is a baseline requirement for any business transacting in dollars or dealing with US-connected goods.
What are the common risk flags and drafting failures compliance teams should identify?
The most common drafting failure is a clause that references only formal lists and not the ownership-and-control tests that extend prohibition beyond listed persons. In the OFSI context, that gap is particularly dangerous because OFSI's enforcement guidance makes clear that the control test is an objective legal analysis, not a matter of the regulator's discretion. An entity can be caught without OFSI ever publishing it on a list.
The second failure is a clause that allocates all risk to the party that becomes designated, without addressing the scenario where the counterparty's shareholder becomes designated. That is the more common trigger in practice. A change in a counterparty's ownership – an acquisition, a restructuring, a new investor – can cause a previously clean contract to become a compliance problem overnight. Have you built a screening covenant into your contracts, requiring counterparties to notify you of material changes in ownership?
The third failure is the absence of a governing-law specification for the clause itself. Where a contract is governed by one law but performance obligations arise in multiple jurisdictions, a sanctions clause that does not specify which regime's designation is the trigger produces interpretive disputes. The clause should specify that it triggers on designation under any of the applicable regimes – typically the UK, EU, and US as a minimum – and that the applicable standard for each trigger is determined by reference to the relevant regime's rules as they stand at the time of performance.
A further risk flag, which we regularly identify in compliance audits, is the absence of any provision for the ongoing monitoring obligation. A sanctions clause that operates only at signing does not protect against the scenario where designation occurs mid-contract. The clause must be forward-looking, and the compliance programme must include periodic rescreening of counterparties for the duration of long-term contracts. Under OFSI's enforcement approach, the fact that a counterparty was clean at signing is not a defence to the continued performance of a prohibited contract.
The position under OFAC on this point is similar but framed differently. OFAC's enforcement guidelines – which treat voluntary self-disclosure, prompt remediation, and robust compliance programmes as significant mitigating factors – create an incentive for continuous monitoring that goes beyond what the contract alone requires. A business that can demonstrate it screened the counterparty at inception but did nothing thereafter will find that its compliance argument is considerably weaker than one that rescreened regularly and acted promptly on a hit.
The position under OFAC on this point is similar but the structure of the mitigating factors is explicit in OFAC's enforcement guidance. What compliance teams across regimes share is the expectation of a proactive, documented monitoring process – not a one-time check.
The bridge between a well-drafted clause and a well-run compliance programme is not automatic. A clause can be excellent and yet remain unimplemented because the operational team does not know what the triggering condition looks like in practice, or because the notification obligation is buried in a schedule that operations teams never read. Clause drafting and compliance training must be coordinated, and in our experience, they rarely are.
The position above covers the standard commercial contract. Your facts – the counterparty's ownership structure, the jurisdiction of performance, the currency of payment, the goods or services involved – change the analysis materially. For a review of your contract templates and their interaction with the applicable prohibitions, contact Calder & Vance at info@caldervance.com.
How does the myth that "a standard clause is sufficient" create regulatory exposure?
A prevalent misconception among procurement and legal teams is that a standard, market-form sanctions clause – one drawn from a trade-association template or a banking industry model – provides adequate protection for all counterparty relationships. It does not, and the reason is structural: standard clauses are drafted for the broadest common application, which means they address the clearest cases and omit the scenarios that create the hardest compliance problems.
The standard clause typically covers formal list designation of the direct counterparty. It does not typically cover the OFSI control test applied to a counterparty's shareholder who holds a minority but controlling stake. It does not typically address US secondary-sanctions risk for a non-US entity transacting in dollars. It does not typically impose an ongoing monitoring covenant or a notification obligation on the counterparty.
That set of omissions maps precisely onto the scenarios that OFSI, OFAC, and the EU enforcement authorities have pursued in recent periods. A business that relies on a standard clause and does not periodically test it against its actual counterparty population is effectively self-certifying that its compliance programme is adequate, when the clause itself is the weakest element of that programme.
We regularly advise businesses that discover this gap during a transaction or, worse, during an enforcement investigation. The cost of revising a clause portfolio before a problem arises is materially lower than the cost of managing the consequences after one. A compliance audit that includes contract-clause review is not a formality; it is a risk-quantification exercise. Does your current clause portfolio reflect the ownership-and-control tests that each applicable regime applies?
If a transaction has already been flagged, or a contract has been suspended pending regulatory clarity, an early review can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential assessment.
When should a business involve sanctions counsel on contract clauses?
Sanctions counsel should be involved at three points: when a new contract template is being drafted or a legacy template is being reviewed; when a counterparty relationship changes materially – through acquisition, restructuring, or a change in beneficial ownership; and when a sanctions clause is triggered or potentially triggered and a response is required within a short operational window.
The first point is the most cost-effective. Revising a clause at drafting costs a fraction of managing a dispute or a regulatory query arising from an inadequate clause. Specifically, a business entering into multi-year supply agreements, financial contracts, or joint ventures in jurisdictions where OFSI, OFAC, and EU Council regulation prohibitions all apply simultaneously should instruct counsel to produce a cross-regime clause that is tailored to the counterparty profile and the transaction structure.
The second point – a material change in counterparty ownership – is frequently missed because the triggering event happens after contract signing and the compliance team does not have a mechanism for monitoring it. A well-designed compliance programme includes a periodic rescreening obligation and a contractual notification covenant, so that changes in the counterparty's ownership chain are surfaced in a structured way rather than discovered by accident or at a bank's request.
The third point – managing a live trigger – requires prompt action. The decision sequence is: confirm the trigger condition under each applicable regime; identify whether a licensing route is available; determine whether performance must cease immediately or whether a suspension period applies; notify the relevant regulator if required; and document the response. Under OFSI's enforcement approach, the speed and quality of that response affects how the regulator views subsequent enforcement action. Under OFAC's framework, prompt voluntary self-disclosure is a significant mitigating factor. The two regimes differ in the mechanics of disclosure, but both reward prompt and documented action.
A decision matrix in brief: if the trigger is a formal designation of the direct counterparty, cease performance and seek a licence or an opinion before resuming. If the trigger is a potential control-test scenario, take a legal analysis of the ownership chain before acting – the wrong action can itself be a breach. If the trigger involves US secondary-sanctions risk only, assess the nexus (US-origin goods, US dollar payment, US persons in the chain) and take advice on whether the nexus is sufficient to engage the prohibition, before treating the contract as unperformable.
Related practices
- Sanctions compliance audit and testing – Australia – structured review of screening programmes and contract clause adequacy under the Australian regime.
- Sanctions clauses: OFSI versus Australia – comparative analysis of divergences between UK and Australian contract clause standards.
- Sanctions clauses in contracts – UAE – analysis of the UAE regime's approach to contractual sanctions provisions and enforcement risk.
Frequently asked questions: sanctions clauses in contracts under OFSI
Where do the regimes diverge on sanctions clauses in contracts?
The principal divergence is between the ownership-and-control tests. OFAC applies a mechanical 50 percent or more aggregate-ownership rule, which produces a defined trigger. OFSI's control test extends beyond ownership percentages to effective control through agreement or influence, producing a broader but less predictable trigger. The EU framework sits between the two, using an ownership-and-control concept that the Commission has elaborated through guidance. A sanctions clause must address all three tests where all three regimes apply, which is the standard position for any cross-border commercial contract of meaningful scale.
Which regime is stricter on sanctions clauses in contracts?
Strictness varies by dimension. OFSI's control test is broader than OFAC's ownership rule and may capture entities that OFAC does not. OFAC's secondary-sanctions framework extends to non-US parties in ways that OFSI does not replicate, making it stricter in extraterritorial reach. The EU regime's prohibition on circumvention – which can reach transactions structured to avoid the formal trigger – is one of the most broadly drafted in any major sanctions regime. In practice, the principle that the stricter prohibition governs means a cross-border contract clause must be drafted to the most demanding applicable standard, not the most convenient one.
What should a cross-border business do about sanctions clauses in contracts?
A cross-border business should audit its existing contract templates to identify whether the triggering conditions reflect the ownership-and-control tests of each applicable regime. It should assess whether its clauses address ongoing monitoring, notification obligations, and the licensing route as an alternative to termination. It should train the operational teams responsible for contract performance on what a trigger looks like in practice. Where a trigger has occurred or may have occurred, it should take legal advice promptly, document its response, and assess whether a voluntary self-disclosure to OFSI or another applicable authority is appropriate. Calder & Vance regularly advises on each of these steps; contact info@caldervance.com to discuss your position.
About the author
Henry Ashworth advises on UK financial sanctions and export controls, including OFSI licensing and enforcement, and judicial-review challenges to designations. He advises multinationals, financial institutions, and trading businesses on the interaction between UK sanctions obligations and those of the major comparator regimes. 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.