A multinational trading house has just discovered that a longstanding counterparty – a distributor it has worked with for years – is now partially owned by a person on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons). The contract is live. Payments are scheduled. The question is not whether the relationship must end. The question is how to end it lawfully, across which regimes, and within what window. Get this wrong and the wind-down itself becomes the violation.
As of January 2026, winding down sanctioned exposure under OFAC and under OFSI follows materially different rules. OFAC typically requires a specific or general licence to complete outstanding obligations; OFSI permits unlicensed activity only within narrow statutory carve-outs. Misreading which regime's wind-down mechanics apply – or assuming they are interchangeable – is one of the most common errors we see in cross-border transactions.
This analysis maps the divergence between OFAC and OFSI on wind-down authorisations, ownership and control tests, reporting obligations, and the practical sequencing a business must follow when unwinding sanctioned exposure that spans both regimes.
Why winding down sanctioned exposure is a distinct legal problem
Winding down an existing position is not the same as declining to enter a new one. Both regimes recognise this – but they draw the line differently, and the gap between them has real operational consequences.
Under OFAC, a business that discovers a counterparty is a blocked person or is owned 50 percent or more by blocked persons faces immediate asset-blocking requirements. Existing contracts do not create a grace period by operation of law. Performance of an outstanding obligation – delivering goods, making a payment, providing a service – is itself a transaction. Without a licence or a specifically applicable general authorisation, completing that transaction is prohibited. The question is not whether to stop; it is whether the method of stopping is itself authorised.
Under OFSI, the prohibition structure is similar in form but different in several material details. The UK financial-sanctions regime, administered under the Sanctions and Anti-Money Laundering Act and the relevant thematic regulations, prohibits making funds or economic resources available to or for the benefit of a designated person. An existing contractual obligation does not authorise the performance of that obligation once a designation is in place. What the UK regime adds, however, is a specific licensing power that operates independently of OFAC's licensing system – and the tests OFSI applies are not identical to OFAC's.
In our experience, the confusion arises most acutely for firms operating out of London and New York simultaneously. They assume that OFAC compliance implies OFSI compliance, or vice versa. It does not. The two regimes share a broad family resemblance but diverge on exactly the points that determine whether a wind-down is authorised.
How does the ownership and control test differ between OFAC and OFSI?
The ownership test determines whether an entity that is not itself designated is nonetheless treated as blocked – and the divergence between OFAC and OFSI on this point shapes the entire wind-down analysis.
OFAC applies the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked). The test is mechanical. If blocked persons own, in aggregate, 50 percent or more of an entity – whether directly or through intermediate holding structures – the entity is treated as if it were itself on the SDN List. Control is irrelevant to this test. A blocked minority shareholder who holds 48 percent and exercises full operational control does not trigger the rule; two blocked persons each holding 26 percent do trigger it. Mapping the full ownership chain – not just the first layer – is therefore essential before any wind-down decision.
OFSI and the EU apply an ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person). Under this test, an entity can be caught either by ownership of more than 50 percent of its shares, or by a listed person having the ability to control it by other means – through voting rights, board appointments, or contractual arrangements. This wider control limb means that an entity with no listed shareholders can still be caught if a listed person directs its activities. The practical consequence for wind-downs is that due diligence on a counterparty's control structure must go further under the UK and EU regimes than the OFAC ownership calculation alone would require.
Does your screening tool check control structures, or only direct ownership? In a recent matter, a financial institution's automated screening passed a target entity because no shareholder appeared on any list – but a designated person held the right to appoint the majority of the board. The UK control test caught what the OFAC-calibrated ownership test missed.
What authorisation routes exist for winding down under OFAC?
OFAC's licensing architecture offers two main routes for completing or unwinding a position that has become prohibited: reliance on a general licence (a standing authorisation that permits a defined category of transactions without a separate application) or application for a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction).
General licences are regime-specific. They are published in the relevant programme regulations and on OFAC's website. Some programmes contain general licences that expressly authorise wind-down activities for a defined period after a designation – covering settlement of pre-existing contracts, receipt of payments due, or export of goods already in transit. The scope and duration of these authorisations vary between programmes. A wind-down period authorised under one programme does not carry across to another. Verify the current position before relying on any programme's general licence; these instruments are amended and revoked without a separate notice period.
Where no general licence applies, a specific licence is required. OFAC evaluates specific-licence applications against its licensing policy for the relevant programme. The application must set out the facts, the legal basis, and the policy justification. Processing times vary; OFAC does not publish binding service standards for specific-licence decisions, and timelines should be treated as indicative only. In our practice, we routinely advise clients to submit specific-licence applications before the scheduled closing date of a transaction, not after.
Two additional points apply in a wind-down context. First, even with a licence, the business must ensure that any payment route does not itself pass through a blocked financial institution. Second, blocking reports are required when a business refuses or blocks a transaction as a result of sanctions – the reporting obligation does not wait for the end of the wind-down process.
The position above covers the standard OFAC case. Your facts – the counterparty, the goods, the applicable programme, the payment route – change the analysis materially. For an assessment of your OFAC exposure and available wind-down routes, contact Calder & Vance at info@caldervance.com.
What authorisation routes exist for winding down under OFSI?
OFSI's licensing power under the UK regime operates on a purpose-based test. OFSI issues licences against a set of specified licensing grounds; a licence application that does not fit one of those grounds will not succeed, regardless of the commercial merits. This is a meaningfully different structure from OFAC's more policy-discretion-driven approach.
The licensing grounds most relevant to wind-down situations include those designed to permit existing contractual obligations to be met, to allow reasonable legal fees to be paid, and to facilitate transactions necessary for the basic needs of a designated person's employees or dependants. For a business winding down a commercial relationship, the most commonly applicable ground is the one that permits completion of a prior contractual obligation – provided that the contract predates the designation, the transaction is genuinely a completion of an existing obligation rather than a new one, and no unlicensed economic benefit reaches the designated person.
OFSI's approach to the ownership and control test in the licensing context adds a further layer of complexity. An entity caught by the control limb – rather than the 50 percent ownership threshold – may in some circumstances be licensable on terms that address the designated person's control. This requires careful structuring of the licence application and clear evidence that the transaction can be ring-fenced.
One distinctive feature of the UK regime is its voluntary self-disclosure – known in OFSI's enforcement guidance as voluntary disclosure – culture. OFSI encourages early disclosure of potential breaches and can take a disclosure into account in determining the appropriate enforcement response. This does not remove liability but it is a material factor in the enforcement calculus. A business that discovers a wind-down obligation mid-transaction and reports promptly is in a different position from one that continues silently and is investigated later.
If a filing has been refused or a transaction has been flagged, an early review preserves options that narrow with time. Write to info@caldervance.com for a confidential initial assessment.
Where do OFAC and OFSI diverge most sharply on wind-down mechanics?
The practical divergences between OFAC and OFSI in a wind-down context cluster around four issues: the treatment of pre-existing contracts, the licensing test, the reporting obligation, and the interaction with the EU regime for businesses with European operations.
Pre-existing contracts. Both regimes recognise that some existing obligations may need to be completed rather than immediately aborted. But the mechanisms differ. Under OFAC, reliance on a general licence – where one exists – can be immediate; under OFSI, a specific licence application is the typical route, and trading on the assumption that a licence will be granted is itself a risk. The two regimes' wind-down windows are not co-ordinated; a period authorised under an OFAC general licence may expire before an OFSI licence is issued.
The licensing test. OFAC's specific-licence process involves a policy judgment about whether the transaction is consistent with US foreign-policy objectives. OFSI's process is more structured: does the application fit a statutory licensing ground? These are not the same question and they do not always produce the same answer. A business that obtains an OFAC wind-down licence should not assume that OFSI will reach the same conclusion.
Reporting obligations. Both regimes impose mandatory reporting when a business holds or encounters funds belonging to a designated person. The scope, trigger, and deadline of these reporting obligations are not identical. Under the UK regime, a relevant firm – a business carrying on certain activities – has a specific statutory reporting obligation. Verify the current deadlines and applicable categories before relying on this; the rules differ between designated-person categories and firm types.
The EU overlay. For a business with operations in an EU member state, or a transaction denominated in euros routed through an EU correspondent, the EU Council regulation may simultaneously prohibit the wind-down transaction. The EU ownership and control test broadly mirrors the UK test, but the licensing authority is the relevant member-state competent authority, not OFSI. A wind-down authorised by OFSI in the UK does not automatically authorise the transaction in France, Germany, or the Netherlands. The stricter prohibition governs: where three regimes apply and one prohibits, the transaction is prohibited.
Risk flags that businesses miss in a wind-down
A wind-down that begins as a compliance exercise can itself generate violations. The following risk flags appear regularly in cross-border matters we handle.
Payment routing. A wind-down payment authorised under an OFAC general licence still violates OFAC rules if it passes through a blocked financial institution. Check the correspondent chain, not just the counterparty.
New value vs completion. Both OFAC and OFSI distinguish between completing an existing obligation and providing new value. Delivering goods that were shipped before the designation under an existing contract is treated differently from issuing a new invoice. Drawing this line is a factual and legal exercise; the distinction is not always clear in practice, and the wrong characterisation exposes the transaction to challenge.
Intermediate entities. A wind-down involving a counterparty whose parent or subsidiary is separately designated creates the risk that completing obligations with one entity provides economic benefit to another. Map the corporate group before finalising the wind-down structure.
Secondary-sanctions risk. A US dollar-denominated wind-down payment, processed through the US financial system, exposes the transaction to OFAC jurisdiction even where the underlying parties are not US persons. A business that is not a US person and does not hold US assets is not insulated from secondary-sanctions exposure if it processes the payment in US dollars. This extraterritorial dimension is one of the features of the OFAC regime that most consistently surprises non-US businesses.
Record-keeping. Both regimes require the retention of documentation. Under OFAC, records related to sanctions compliance must be kept for a period prescribed under the applicable programme; many programmes require records to be held for five years. Keep licence applications, correspondence, payment instructions, and the due-diligence chain that supports the wind-down decision.
The myth of the technical breach. A common misconception is that a wind-down conducted in good faith, following legal advice, will be treated as a technical breach attracting no meaningful penalty. Both OFAC and OFSI have civil penalty powers that do not require wilful conduct; strict-liability elements exist in both regimes. Good faith and voluntary disclosure are mitigating factors, not defences.
How to sequence a wind-down across OFAC and OFSI
The practical sequencing of a cross-regime wind-down follows a recognisable pattern, though the specific steps depend heavily on the applicable programmes, the counterparty's position in the ownership chain, and the nature of the outstanding obligations.
The first step is mapping. Before any operational decision, map the designation – who is listed, under which regime, and whether any intermediate entity is caught by the 50 percent ownership rule or the wider control test. This is not a screening check. It is a legal analysis of the ownership chain, the programme in question, and the applicable prohibitions.
The second step is checking for general licences. For OFAC, review the programme regulations for any wind-down general licence. Note its scope, its duration, and its conditions. Do not assume one exists; the programmes differ materially.
The third step is assessing the OFSI and EU position. If your business has UK or EU connections, or if the transaction routes through UK or EU infrastructure, the same wind-down activity may require separate licences from OFSI and the relevant EU competent authority. These are parallel processes; they run simultaneously, not sequentially.
The fourth step is the specific-licence application. Where no general licence covers the position, prepare and submit the application before the relevant deadline. Under OFAC, this means a clear factual narrative, the policy basis for the request, and supporting documentation. Under OFSI, the application must identify the applicable licensing ground and demonstrate that the transaction fits within it.
The fifth step is blocking and reporting. While the licence is pending – or where no licence is available – block any pending payments, refuse or suspend any outstanding delivery obligations, and file the required reports with the applicable authority. Do not wait for a demand; the reporting obligation arises on discovery, not on investigation.
In a recent matter, a commodity trading firm discovered mid-shipment that the beneficial owner of its buyer had been designated. We mapped the ownership chain across three holding entities, confirmed that the buyer crossed the 50 percent threshold under OFAC and the control test under OFSI, assessed the applicable general-licence position for the commodity programme, and submitted a parallel specific-licence application and OFSI licence application. The shipment was held pending authorisation. The matter resolved without enforcement action.
Related practices
- Correspondent banking and de-risking under OFAC – assessing and managing US sanctions exposure in correspondent relationships
- Winding down sanctioned exposure: OFSI vs EU – comparative analysis of UK and EU wind-down authorisation routes