A multinational closes a joint-venture agreement in Q4. Twelve weeks later, one of the target's indirect shareholders appears on OFSI's consolidated list. The acquiring party's legal team turns to the transaction documents: what do the sanctions representations and warranties actually cover? Do they speak to the position at signing, at completion, or on an ongoing basis? And if the EU-law documents answer the question differently from the UK-governed schedule, which standard governs? These are the questions that determine whether the buyer has a claim, a right to terminate, or simply a loss with no contractual remedy.
Sanctions representations and warranties (contractual statements about sanctions status and compliance, breach of which gives the other party a claim or termination right) are a standard feature of cross-border commercial and financial transactions. Under OFSI's enforcement regime, a breach of sanctions post-signing can crystallise liability even where the parties acted in good faith; the EU position under the relevant Council regulations imposes a broadly comparable prohibition but tests ownership and control differently. The drafting choices made at heads-of-terms stage directly determine which party bears the residual risk.
This analysis compares the OFSI and EU approaches across five dimensions – the legal basis and governing authority, the ownership and control test, the timing and scope of typical warranty packages, the risk-allocation and indemnity question, and the cross-border divergence problem – before setting out the practical steps a transaction team should take before signing.
What is the legal basis for sanctions representations and warranties under OFSI and the EU?
Both regimes prohibit dealing with a designated person or a person owned or controlled by a designated person, and it is that prohibition – not a separate contractual regime – that gives sanctions representations and warranties their legal force. Under the UK regime, the relevant thematic sanctions regulations made under the Sanctions and Anti-Money Laundering Act (SAMLA) impose asset-freeze obligations and dealing prohibitions on UK persons and entities operating in the United Kingdom. OFSI administers those obligations and has published enforcement guidance that makes clear it may impose a civil monetary penalty without proof of intent, provided OFSI is satisfied on the balance of probabilities that a breach occurred. That strict-liability dimension is what makes the warranty worth having: it transfers to the warranting party the loss that the other party suffers if a prohibition is breached.
At the EU level, the relevant Council Regulation imposes equivalent dealing and asset-freeze prohibitions on EU persons and entities. The EU Blocking Regulation adds a further layer for transactions that also touch US secondary-sanctions risk, though its application in any specific matter depends on facts outside a standard warranty analysis. The key structural point is that both OFSI and the EU rules are public-law instruments. A contractual warranty cannot override the prohibition; it can only determine who bears the private-law consequences of a breach.
One question practitioners raise early: is a sanctions representation a warranty about current fact, or a forward-looking undertaking? In our cross-border practice, we see both. The distinction matters enormously. A representation is a statement of present fact; if false, it gives rise to a misrepresentation claim. A warranty is a contractual promise; if broken, it triggers a damages claim under contract. Many modern transaction documents include both, but the drafting is not always internally consistent, particularly where counsel from different jurisdictions have contributed separate schedules.
How do the OFSI and EU ownership and control tests diverge?
The ownership and control test is the single most consequential point of divergence between the OFSI and EU positions for the purposes of sanctions representations and warranties. Under OFSI's guidance, a person is treated as owned or controlled by a designated person if the designated person holds a majority of shares or voting rights, has the right to appoint or remove a majority of the board, or otherwise controls the company. The EU position under the relevant Council Regulation adopts a broadly similar structure but expressly includes a facts-and-circumstances control test that can catch minority interests combined with contractual dominance.
OFAC's 50 percent rule (the US rule treating entities owned 50 percent or more by one or more blocked persons in the aggregate as themselves blocked, whether directly or through a chain of ownership) operates differently again. It is mechanical: ownership is aggregated, and intention is irrelevant. A company owned 49 percent by a blocked person is not itself blocked under that rule. OFAC's guidance has confirmed that the aggregation applies across multiple listed persons. OFSI does not have a published bright-line percentage equivalent to OFAC's 50 percent rule; the analysis under OFSI turns on the factual control test set out in the relevant thematic regulations and guidance.
Why does this divergence matter for transaction documents? Because a warranty that says "no sanctioned person owns or controls the company" may be interpreted against OFAC's bright-line rule under New York law, against OFSI's control-based test under English law, and against the EU's facts-and-circumstances test under the governing EU instrument – and the three analyses may yield different answers for the same ownership structure. In our experience, poorly drafted multi-jurisdictional warranty packages use a single definition of "sanctioned person" without specifying which regime's test applies. That gap is routinely exposed in post-completion disputes.
The practical consequence is that a warranting party that passes the OFAC 50 percent test may still be in breach of an OFSI-governed warranty if a designated person exercises effective control through contractual rights short of majority ownership. The reverse is also possible: a company that is technically blocked under the OFAC rule (because aggregated holdings cross 50 percent) may not be caught under the EU control analysis if the individual holdings, considered separately, do not confer control. Compliance counsel advising on either side of a transaction must map the ownership and control chain against each applicable test explicitly.
What should a standard sanctions warranty package cover under English law?
A well-constructed sanctions warranty package under an English-law transaction document should address at least four elements: the status of each party and its direct and indirect owners, the transaction itself, the use of proceeds, and the ongoing obligations. Omitting any one of these creates a gap that may be unenforceable or may not cover the most likely risk event.
The status warranty is the most common element. It states that, as of the signing date, no party, no member of its group, and no person who owns or controls it is a designated person (a person listed on a sanctions list maintained by OFSI, the EU, OFAC, or another relevant authority, as defined in the agreement). The regime-specific definitions matter: a group of companies with subsidiaries in multiple jurisdictions may be caught by more than one definition simultaneously.
The transaction warranty confirms that the proposed transaction does not violate any applicable sanctions prohibition. This is more than a status check. A transaction may involve parties who are not themselves designated but whose business is principally located in, or substantially transacts with, a sanctioned territory or sector. Under OFSI's sector-specific financial-sanctions rules and the equivalent EU prohibitions, certain categories of transaction are restricted regardless of whether the counterparty is individually designated. A transaction warranty that looks only at counterparty status will not catch those restrictions.
The proceeds warranty addresses the use of funds following completion. This element is increasingly included in financing transactions following guidance from financial-institution compliance teams who need assurance that loan proceeds will not be transferred to a sanctioned person or used in a sanctioned transaction. In our practice, we regularly advise lending syndicates whose conditions precedent include a compliance certificate covering precisely this point.
The ongoing undertaking – sometimes called a sanctions covenant rather than a warranty – requires the warranting party to notify the other side promptly if its sanctions status changes during the life of the agreement and to maintain adequate screening procedures. Under OFSI's reporting obligations, a person who knows or suspects that they hold frozen assets or have information relevant to a sanctions breach has a duty to report to OFSI within a short statutory window. A contractual obligation to notify the counterparty is distinct from that regulatory duty and should be drafted as a separate covenant.
The position above covers the standard case. Your specific transaction – the counterparty structure, the sector, the governing law, and the regimes in play – will change the analysis materially.
For a review of your transaction documents before signing, contact Calder & Vance at info@caldervance.com.
How should risk allocation and indemnities be structured for sanctions exposure?
Risk allocation in a sanctions warranty package turns on two structural choices: the remedy for breach, and the scope of the indemnity. These are separable questions, and conflating them produces documents that are either over-broad or that leave material exposure unallocated.
The remedy for breach of a warranty is typically a damages claim under the sale and purchase agreement or the relevant facility document. Where the breach is of a representation (a statement of present fact), the remedy may additionally include rescission or a misrepresentation claim under applicable law. In cross-border transactions, the governing-law clause determines which of these remedies is available and how damages are calculated. English law and the laws of various EU member states produce different results on questions of remoteness and mitigation; this is not a theoretical concern where sanctions exposure can move from potential to actual very quickly.
The indemnity approach provides a stronger remedy. A sanctions-specific indemnity requires the warranting party to hold the other harmless on a pound-for-pound (or euro-for-euro) basis for any loss arising from a breach of the sanctions representations and warranties, including regulatory costs, fines, and third-party claims. Indemnities of this kind are now common in leveraged-finance and M&A transactions involving parties or assets with material exposure to OFSI-regulated activities or EU sanctions programmes.
A common myth in this area is that a sanctions representation from a counterparty provides full protection. It does not. An indemnity shifts the private-law burden; it does not make the underlying transaction lawful. If the transaction itself is prohibited under the applicable sanctions regime, no contractual indemnity will make it permissible. The only route to lawful completion in those circumstances is a specific licence from OFSI, the EU competent authority, or OFAC – or a restructuring of the transaction so that the prohibition does not apply. We regularly advise clients who receive a sanctions warranty package from the other side and mistakenly treat it as a substitute for their own compliance analysis.
Caps on liability under a sale and purchase agreement are another structural point. Many standard agreements include a cap on warranty liability set as a percentage of the purchase price. Sanctions-specific indemnities are typically carved out of that cap and treated as uncapped, unlimited liability, reflecting the potentially catastrophic scale of a regulatory penalty or asset freeze. If a cap applies to sanctions claims by operation of the agreement's general limitation provisions, that should be a negotiating point rather than an inadvertent outcome.
If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time. Contact us at info@caldervance.com for a confidential assessment.
What are the principal risk flags in cross-border sanctions warranty drafting?
Five patterns recur in the warranty packages that reach us for review, and each carries a distinct risk profile.
The first is the undefined "sanctions authority" problem. A warranty that promises the warranting party is not designated under "any applicable sanctions" without defining which regimes are in scope creates an unresolvable ambiguity. Is Japan's asset-freeze regime included? Singapore's? Australia's? Unless the agreement specifies the relevant authorities – OFSI, the EU, OFAC, and any other named regimes – the scope of the representation is effectively unlimited and potentially unenforceable as written.
The second risk flag is the "as of signing" gap. A representation of fact made at signing does not automatically continue through to completion or post-completion. If the sanctions position changes between signing and completion – because a new designation is made, because an ownership structure changes, or because new sector restrictions come into force – a representation limited to the signing date will not cover that event. Transaction documents should include a "bring-down" mechanism by which the representation is repeated at completion and, in financing transactions, at each drawdown.
The third pattern is the omission of indirect ownership. A warranty that covers only the direct owners of the warranting party may miss a designated person who holds an indirect stake through two or three intermediate vehicles. The OFSI guidance and the EU test are both directed at ultimate ownership and control, not just the immediately visible share register. Diligence limited to the first layer of ownership is structurally inadequate for OFSI compliance purposes.
Fourth: the proceeds and use-of-funds gap in financing documents. Lenders who rely on a standard condition-precedent certificate from the borrower, without a specific sanctions undertaking covering the application of proceeds, may find that the certificate does not cover the key risk event – a transfer of loan proceeds to a sanctioned counterparty by the borrower after drawdown.
Fifth: the absence of a change-of-control trigger. Where a transaction involves ongoing obligations – a joint-venture agreement, a long-term supply arrangement, or a continuing facility – the risk profile is not fixed at completion. It evolves as ownership structures change. A sanctions warranty package without a change-of-control notification obligation leaves the non-warranting party exposed to a risk it cannot monitor. We have acted for parties in this situation, where a post-completion change in the warrantor's ownership structure brought a sanctioned person into the chain and generated a potential OFSI reporting obligation that had not been anticipated at the time of signing.
Where do the OFSI and EU positions diverge most sharply in practice?
The deepest divergence in practice is not on the prohibition itself – both regimes prohibit dealing with designated persons and persons owned or controlled by them – but on three secondary points that have direct consequences for warranty drafting and due diligence design.
The first is the control-test methodology. OFSI's guidance applies a control analysis that is grounded in the factual question of who actually controls the entity, taking into account both formal rights (voting, appointment) and informal influence. The EU position under the relevant Council Regulation is structured similarly but has been developed through a larger body of EU General Court litigation, which has produced more granular guidance on what constitutes control for these purposes. That body of case law does not apply in the UK post-Brexit. English courts applying SAMLA-era designations and OFSI guidance are developing their own interpretive approach. The two bodies of authority are moving in parallel and are not identical.
The second divergence is on the licensing regime. OFSI issues specific licences (case-by-case authorisations to conduct otherwise prohibited transactions) under the relevant thematic regulations. The EU licensing process runs through the competent authority of the relevant member state, and the criteria and timescales vary across member states. A transaction that requires licensing under both regimes will involve parallel processes with different timelines, different documentation standards, and different criteria. A warranty that requires the warranting party to have obtained "all necessary licences" before completion must therefore contemplate a parallel-licensing timeline, which may not be achievable within a standard long-stop period.
The third divergence concerns reporting obligations. OFSI imposes a duty on persons who know or suspect they hold frozen assets or have information about a sanctions breach to report to OFSI within a statutory window. The EU equivalent obligation is implemented differently across member states, with some jurisdictions imposing a shorter reporting window and others a longer one. A warranty package that references "compliance with all applicable reporting obligations" without specifying which regime's deadlines apply may generate disputes if the applicable regimes produce different results on the same facts.
Cross-border transactions that are subject to both UK and EU sanctions – a joint venture between a UK-headquartered company and a German entity, for instance, or a cross-border financing with a UK lender and an EU borrower – require warranty packages that address each regime's tests distinctly. A single consolidated warranty that blurs the tests together will satisfy neither authority's standard if tested on enforcement.
What are the common misconceptions about sanctions warranties in cross-border transactions?
The most persistent misconception is that a clean sanctions warranty from the counterparty substitutes for the buyer's or lender's own diligence. It does not. A warranty is a private-law allocation of risk. It creates a damages right against the warranting party if the warranty is false. It does not make the buyer's or lender's own position lawful if they transact with a sanctioned person. OFSI and the EU competent authorities assess compliance by reference to what the regulated person knew or should have known, not by reference to what the other side told them. Reliance on a warranty is evidence of reasonable care; it is not a complete defence.
A second misconception is that sanctions warranties are primarily relevant to M&A and equity transactions. In our experience, the risk is at least as acute in trade-finance and lending transactions, where the counterparty chain is often longer, the goods or services involved may be subject to sector-based restrictions, and the proceeds may be applied by the borrower in a way that the lender cannot monitor at drawdown. Financial institutions acting as compliance counsel in lending transactions should ensure that the sanctions warranties in their standard-form facility agreements are calibrated to the OFSI and EU tests applicable to the specific transaction, not simply carried over from a precedent designed for a different counterparty profile.
A third misconception is that a well-drafted warranty package eliminates the need for independent screening. Screening the warranting party and its ownership and control chain against the SDN List (OFAC's list of Specially Designated Nationals and blocked persons), OFSI's consolidated list, and the EU consolidated list is a distinct obligation. The warranty confirms the warrantor's own assessment; independent screening allows the warranted party to verify that assessment against the publicly available designations. Where the two diverge – where the warranty says "no designated person" but the screening exercise surfaces a potential match – the discrepancy itself is a risk event that requires resolution before completion.
Related practices
- Correspondent banking and de-risking under OFAC – financial-institution sanctions exposure in correspondent relationships
- Supply chain mapping: BIS/EAR vs EU compared – dual-use export control across two major regimes
- Supply chain mapping: BIS/EAR vs EU (part 2) – extended analysis of end-use controls and red-flag indicators