A cross-border acquisition closes smoothly. Six months later, the buyer's compliance team discovers that a key counterparty of the acquired entity had been subject to OFAC-administered restrictions throughout the transaction period. The representations and warranties in the purchase agreement were silent on the point. The question that follows – who bears the liability, and can it be remedied – is answered entirely by what the contract said and what the applicable regime requires.
Sanctions representations and warranties (contractual statements that the parties to a cross-border transaction are not listed persons and are not engaging in sanctionable activity) sit at the intersection of private contract law and public regulatory obligation. Under OFAC, the governing standard derives from IEEPA and the applicable programme regulations; under Canada's autonomous sanctions regime, administered by Global Affairs Canada (GAC), the obligations flow from the Special Economic Measures Act (SEMA) and the Freezing Assets of Corrupt Foreign Officials Act. As of January 2026, both regimes have tightened their enforcement postures, and the gap between what a well-drafted clause must do in a US-nexus deal and what it must do in a Canadian-nexus deal has widened.
This analysis maps that divergence across seven dimensions: scope and coverage, the ownership-and-control test, bring-down mechanics, the treatment of secondary sanctions risk, enforcement consequences for contractual breach, the role of voluntary self-disclosure, and the practical drafting choices that follow.
What do sanctions representations and warranties actually cover under each regime?
Sanctions reps and warranties are not uniform instruments. Their scope depends directly on which regime – or combination of regimes – governs the transaction. Under an OFAC-driven analysis, a well-formed representation will cover at least four distinct dimensions: (1) no party or beneficial owner is on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) or any other OFAC-administered list; (2) no party is owned 50 percent or more in the aggregate, directly or indirectly, by one or more blocked persons; (3) no transaction proceeds will benefit a sanctioned person or territory; and (4) the transaction does not involve conduct that would require an OFAC licence that has not been obtained.
The Canadian position under SEMA is structurally similar but operationally different in two respects. First, the ownership-and-control test under the Canadian regime does not map mechanically onto the OFAC 50 percent threshold. Canadian prohibitions extend to entities "owned or controlled" by designated persons, and "control" under Canadian law can be established through means that fall short of majority ownership – including board control, contractual control, or the ability to direct management. Second, Canadian programme regulations vary by thematic regime, and a representation drafted for one GAC regime may not be adequate for another. A transaction counsel who imports boilerplate from a US-law agreement without adjusting for the Canadian control test takes a material risk.
The practical implication is that a single consolidated representation clause – common in time-pressured cross-border deals – may satisfy OFAC's requirements while leaving gaps under the Canadian regime, or vice versa. In our cross-border practice, we regularly advise clients to run a jurisdiction-by-jurisdiction mapping exercise before the representation language is finalised, not after the signatures are on the page.
How does the ownership-and-control test differ between OFAC and Canada?
The single most consequential structural difference between the two regimes is how they define which non-listed entities fall within their prohibitions. Under OFAC, the rule is mechanical: the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by one or more blocked persons in the aggregate as themselves blocked) is the operative standard. If combined blocked-person ownership is below that line, OFAC's automatic blocking rule does not apply – though OFAC retains the authority to designate such an entity separately if the facts warrant.
Canada's test is not anchored to a numerical threshold in the same way. Ownership and control (the UK and EU test for whether a non-listed entity is caught through a listed person) under SEMA operates on a functional basis: what matters is whether a designated person has the practical ability to direct the entity. This creates a broader zone of uncertainty. A party holding forty-two percent of the equity may nevertheless "control" the entity within the meaning of the Canadian regime if its voting agreement, board appointment rights, or contractual veto powers give it effective direction of management.
Why does this matter for reps and warranties drafting? Because a representation that states only "no party is owned by a designated person" is facially accurate under a OFAC framework when ownership sits below fifty percent, but may be substantively false under Canadian law if the functional control test is met. A deal between a US seller and a Canadian buyer – or a Canadian target with US beneficial owners – creates exactly this layering risk. The representation must address both tests explicitly, using language calibrated to each regime's definition.
Aggregation compounds the issue. Under OFAC, two blocked persons each owning twenty-six percent of the same entity cross the fifty-percent threshold in aggregate. Canadian aggregation rules differ and are applied with reference to the definitions in the specific programme regulation. A representation clause that groups all sanctions programmes into a single sweep can inadvertently import the more restrictive definition across the board – or, worse, apply the less restrictive definition to a regime that demands more.
What is the bring-down mechanic and why does it create risk at closing?
The bring-down mechanic – the requirement that representations remain true at closing, not merely at signing – is standard in material acquisition agreements, but its interaction with live sanctions designations is frequently underestimated. A counterparty who was clean at signing may be designated in the interval between sign and close. Under OFAC, the consequences of closing a transaction when a party has become a blocked person are severe and do not depend on the buyer's knowledge of the designation at the time of closing.
This creates a structural tension in longer-dated transactions. Private equity acquisitions, infrastructure deals, and commodity supply contracts often have sign-to-close periods measured in months. A bring-down representation that is not accompanied by an obligation to refresh screening immediately before closing – and a genuine process for doing so – provides only partial protection. In our experience, the gap between the last pre-signing screen and the closing date is where liability most often accumulates undetected.
Under the Canadian regime, the bring-down obligation operates in a legally similar way, but GAC's enforcement posture means that a Canadian counterparty faces an independent obligation to verify. SEMA imposes positive duties on Canadian persons to avoid dealings with designated persons; the contractual representation does not override the statutory prohibition. A Canadian buyer cannot point to a seller's bring-down warranty as a defence to a GAC enforcement action. What it can do is use the warranty to seek contractual indemnification from the seller – a different, purely civil remedy.
Practically, every cross-border agreement that has a sign-to-close gap of more than two weeks should contain an obligation on both parties to re-run sanctions screening within a defined number of business days before the closing date, with a right to terminate or seek an emergency licence if a designation has occurred. This is not boilerplate; it is a substantive risk-management provision whose absence is increasingly scrutinised in deal post-mortems.
How should secondary-sanctions risk be addressed in the representation language?
Secondary-sanctions risk – the risk that dealings with certain non-US, non-sanctioned persons nevertheless engage OFAC's extraterritorial enforcement authority – is almost entirely absent from Canadian autonomous sanctions law. This asymmetry is one of the most important divergences between the two regimes and one of the most frequently misunderstood by deal teams operating across the US-Canada corridor.
OFAC administers a number of programmes that impose restrictions on non-US persons conducting business in sectors or with counterparties that, while not themselves designated, trigger secondary-sanctions exposure. A Canadian company that is not a US person, that holds no US-dollar accounts, and that processes no transactions through US correspondent banks may still be exposed to OFAC secondary-sanctions risk if its activities fall within the scope of a relevant programme. OFAC's extraterritorial reach is a function of the statutory authority underpinning each programme; it is not uniform, and its application to a specific transaction depends on a careful programme-by-programme analysis.
The representation clause implication is significant. A warranty that a party "is not in violation of any applicable sanctions laws" may, under US law analysis, capture secondary-sanctions exposure. Under Canadian law, the equivalent warranty relates to compliance with SEMA and the applicable GAC regulations, which do not contain secondary-sanctions provisions. A sophisticated counterparty on the Canadian side may not appreciate that by accepting a US-law governed agreement with standard OFAC representations, it has assumed warranty exposure for conduct that is entirely lawful under Canadian law but that may engage OFAC's secondary reach.
In our cross-border practice, we advise that secondary-sanctions representations be separated from primary-sanctions representations, with explicit governing-law anchors for each. The clause might read, in substance: the party represents that it is in compliance with all applicable sanctions under the primary regimes; and separately, with respect to OFAC, that no activity of the party would, as a matter of US law, constitute a violation of any OFAC programme including secondary-sanctions provisions. This bifurcation allows a Canadian counterparty to negotiate the secondary-sanctions limb as a risk allocation question under contract, rather than unknowingly assuming warranty exposure for a category of law that does not exist in its home regime.
What are the enforcement consequences for a breach of a sanctions representation?
A breach of a sanctions representation has two distinct consequences: contractual liability between the parties, and potential regulatory liability to the relevant authority. These are independent, and the contractual indemnity does not insulate either party from regulatory scrutiny.
Under OFAC, the regulatory consequence of a prohibited transaction – including one proceeding in breach of a sanctions representation – is a civil or criminal penalty under the applicable programme. OFAC's civil enforcement process involves a review of aggravating and mitigating factors; voluntary self-disclosure is a recognised mitigating factor that can reduce a civil penalty significantly. The absence of a contractual representation, or the breach of one, does not in itself constitute an aggravating factor under OFAC's published enforcement guidelines, but it is relevant to the question of whether a party exercised appropriate due diligence – which is a mitigating factor.
Under SEMA, GAC enforces through a combination of administrative and criminal mechanisms. The Canadian regime does not operate an equivalent of OFAC's voluntary self-disclosure (VSD – disclosure to a regulator of an apparent violation) scheme in the same structured form, though the fact of self-reporting is treated as a mitigating factor in enforcement decisions. A party that discovers a potential breach under the Canadian regime should take legal advice before deciding whether and how to report, since the reporting obligations and the protections that attach to voluntary disclosure differ from the OFAC framework in material respects.
The contractual dimension matters too. A well-drafted sanctions rep and warranty should contain: (1) a specific indemnification right for costs arising from a breach, (2) a termination right that preserves the ability to exit a transaction before liability is incurred, and (3) an obligation to cooperate with any regulatory inquiry that arises from the counterparty's conduct. Without the third element, a party seeking to manage a voluntary self-disclosure process may find that its contractual counterpart is not obliged to provide the factual information needed to construct the disclosure.
Does the governing law of the agreement determine which sanctions regime applies?
This is one of the most persistent misconceptions in cross-border sanctions drafting. The governing law of a contract determines which private-law rules apply to interpretation and enforcement of the contract. It has no bearing on which public-law sanctions obligations apply to the parties.
An agreement governed by New York law between a US seller and a Canadian buyer is subject to OFAC's rules because one party is a US person. The same agreement is subject to Canadian sanctions law because the other party is a Canadian person. Governing-law choice does not permit a US seller to opt out of OFAC obligations, nor does it allow a Canadian buyer to opt out of SEMA obligations. Both sets of obligations apply concurrently. Where they conflict – in the sense that compliance with one would require a breach of the other – the stricter prohibition governs (the principle that where two regimes impose conflicting restrictions, the party must comply with the more restrictive obligation). In practice, such direct conflicts are rare, but they arise most acutely in the context of the EU Blocking Regulation and OFAC's Iran-related programmes.
The practical consequence for representation language is that a clause which limits the sanctions representation to the governing law of the contract is, in most cross-border transactions, substantively incomplete. The representation should enumerate the regimes that are relevant to the parties' facts: the nationality of each party, the jurisdictions in which the transaction has nexus, the currencies and correspondent banking relationships involved, and the nature of the goods or services. Only then does the representation accurately map the regulatory exposure that it is intended to address.
We regularly advise deal teams that the governing-law-of-the-agreement approach to sanctions reps is a false economy. A representation anchored only to New York law in a deal with Canadian and European parties misses a significant portion of the applicable compliance perimeter. Drafting that takes five minutes longer to anchor to the correct regimes prevents remediation work that takes months.
Common drafting errors and the risk flags that precede them
Most sanctions representation failures in cross-border transactions are not the product of bad faith. They arise from four recurring drafting patterns that sophisticated counsel can identify and correct before execution.
The first is over-reliance on defined-term lists. Many standard-form agreements define "Sanctions Laws" by reference to a fixed enumeration of regimes. If that enumeration does not include the GAC programmes relevant to the Canadian nexus – or does not capture OFAC's secondary-sanctions authority for the relevant programme – the representation's coverage fails silently. The clause reads as complete; the risk is unaddressed.
The second is failure to address the aggregation rule. A representation that a party "is not fifty percent owned by a sanctioned person" may be read as applying only to single-person ownership, missing the aggregation case. OFAC's guidance is explicit that the fifty-percent test operates on an aggregate basis across all blocked-person ownership interests. Language that does not replicate this aggregation logic under-represents the actual standard.
The third is using the term "affiliated" without definition. Affiliated-party sanctions representations are increasingly common, particularly in private equity transactions. But "affiliated" is defined differently under US corporate law, Canadian corporate law, and the applicable sanctions frameworks. A representation that no "affiliate" is subject to sanctions is only as good as the definition it is anchored to. In our experience, undefined or ambiguously defined "affiliate" representations generate the majority of post-closing disputes in this area.
The fourth is omitting a covenant to notify. A representation is a snapshot; a covenant is an ongoing obligation. Transactions with lengthy post-closing integration periods, or with earnout or escrow arrangements tied to post-closing performance, remain exposed to designation risk after closing. An ongoing covenant to notify the counterparty of any change in sanctions status – and to cooperate in any resulting licence or remediation process – extends the contractual protection beyond the closing date and reflects the operational reality of modern enforcement.
The position above addresses the standard bilateral case. Your facts – the ownership structure, the relevant programmes, the currency and banking flows, the nature of the goods or services – change the analysis in ways that generic drafting cannot anticipate. Early specialist input shapes the representation language; late input corrects problems that are already crystallised.
For an assessment of your sanctions representation exposure in a cross-border transaction, contact Calder & Vance at info@caldervance.com.
When to involve sanctions counsel on representations and warranties
The question of timing is as important as the question of substance. Sanctions counsel is most effective when instructed during the term-sheet or letter-of-intent phase, not during the final review of the long-form agreement. At the term-sheet stage, the fundamental risk allocation decisions have not yet been made: which party bears the cost of a sanctions-related termination, which party must cooperate in a licensing process, and which party bears the indemnification exposure for a breach. Once these positions are set in a signed term sheet, changing them in the long-form document is a negotiation, not a drafting exercise.
There are four specific triggers that should prompt immediate instruction of specialist counsel.
First, any transaction in which one party has beneficial owners in a jurisdiction subject to a current US, Canadian, or other programme-specific sanctions regime. The nationality of the beneficial owner, not just the counterparty itself, determines the analysis.
Second, any transaction involving goods, technology, or services that are, or may be, subject to export-control classification. Export-control warranties interact with sanctions warranties but are governed by different instruments – principally the EAR (BIS) on the US side and the applicable Export Control Regulations on the Canadian side – and the interaction requires co-ordinated drafting.
Third, any transaction in which one party has correspondent banking relationships in the United States, or processes USD-denominated payments. OFAC's jurisdiction extends, in relevant programmes, to USD-clearing transactions regardless of the nationality of the transacting parties. A Canadian company whose USD-denominated payments clear through US correspondent banks has OFAC nexus for those transactions.
Fourth, any transaction that involves an earnout, a deferred payment, or an escrow arrangement extending beyond the closing date. Post-closing payment obligations remain subject to the sanctions rules applicable at the time the payment falls due, not the rules applicable at signing. A clean transaction today can become a blocked-property situation at the date a payment is owed.
If a transaction has already been signed with inadequate representation language – or if a potential breach has been identified post-signing – an early review preserves options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential assessment.
Related practices
- Correspondent Banking and De-risking under OFAC – advice on financial-institution OFAC compliance and correspondent-banking risk management.
- Sanctions Representations and Warranties: OFAC and Canada – Part 2 – extended analysis of post-closing obligations and enforcement trends.
- Sanctions Representations and Warranties: OFAC and OFSI Compared – comparative analysis of US and UK contractual sanctions obligations.