A private-equity group based in Europe signs a term sheet to establish a joint venture with a logistics operator in a third market. Pre-signing due diligence focused on the operating entity. No one mapped the ownership chain above it. Three weeks before closing, counsel identifies a blocked shareholder holding just over a quarter of the ultimate parent. The deal does not collapse immediately – but the analysis that follows consumes six weeks, costs the parties a renegotiated valuation, and produces a restructured ownership arrangement that OFAC would not prohibit. The pain was avoidable.
Structuring a joint venture for sanctions risk under OFAC requires systematic pre-formation screening, an ownership analysis tested against the 50 percent rule (the rule treating entities owned 50 percent or more in the aggregate by blocked persons as themselves blocked), and contractual controls that address ongoing exposure through the JV's life. The governing authority is OFAC, acting under IEEPA and associated sanctions programmes. Sanctions obligations attach to US persons, US-dollar clearing, and – through secondary-sanctions provisions – to non-US businesses transacting in sensitive sectors.
This guide covers how to structure a JV for sanctions risk under OFAC, walking the steps from counterparty screening through structural design, contractual protection, and ongoing management. Where the OFAC position diverges from OFSI, the EU regime, or other major regimes, this guide flags the difference.
Step 1 – Screen every counterparty and map ownership before you negotiate
Effective joint-venture sanctions structuring begins with counterparty screening carried out before any binding commitment is made. OFAC's SDN List (the list of Specially Designated Nationals and blocked persons) and the Consolidated Sanctions List are the primary reference points, but a clear result on the named entity is not enough. The 50 percent rule means the analysis must extend up through the full ownership chain.
Aggregation is the practical risk. Two listed persons each holding 24 percent of the same proposed JV partner reach the threshold together even if neither individually does. In our experience, the firms most exposed are those relying on automated screening tools that flag direct hits only. Layered holding structures – a nominee holding company sitting above the operating entity – are precisely where the exposure tends to hide.
The screening exercise should cover every natural person and entity owning, directly or indirectly, ten percent or more of the proposed partner. That threshold is conservative relative to OFAC's formal rule, but it provides a buffer for structures where actual ownership levels are uncertain. It also aligns broadly with beneficial-ownership thresholds used in anti-money-laundering regimes, which means the work is reusable for AML purposes. Gather corporate registry documents, shareholder registers, and UBO declarations for each layer. Where registry information is unavailable or unreliable, that itself is a risk flag requiring escalation.
The position above covers the standard pre-formation screen. Your JV partner's ownership structure – its geography, its sector, the jurisdictions in which it operates – will change both the depth of the exercise and the likelihood of a hit. We regularly advise on exactly this threshold question for cross-border transactions.
To discuss the scope of a pre-formation screen for a proposed JV, contact Calder & Vance at info@caldervance.com.
Step 2 – Apply the 50 percent rule and the control analysis to your proposed structure
Once screening is complete, the next step is applying the ownership test to the proposed JV structure itself. Under OFAC, the question is arithmetic: do blocked persons own, individually or in the aggregate, 50 percent or more of the proposed entity? If yes, the entity is treated as blocked regardless of whether it appears on a list. The test is mechanical. Intent and management arrangements are irrelevant to it.
The structural design of the JV should be tested against this rule at the formation stage, not after it. The percentage ownership that US-person JV partners, or the JV entity itself, will hold must be determined with this threshold in mind. Where a proposed co-investor is itself a complex structure, the effective blocked-person ownership must be calculated by reference to the chain, not merely the first-level percentage.
OFAC's position diverges importantly from the UK and EU approach here. Under OFSI (the Office of Financial Sanctions Implementation) and the EU Council regulations, an entity can be caught not only through ownership at or above the relevant threshold but also through control. Control is a functional test: it looks at board composition, veto rights, contractual dominance, and operational influence. A blocked person holding 40 percent of a JV entity but with the ability to direct its decisions may still trigger EU and UK prohibitions. For a JV with UK or EU-person participants – or whose activities touch EU or UK financial institutions – the control analysis must be run in parallel. Our guide to JV sanctions structuring under OFSI addresses that position in detail.
The Swiss SECO regime also applies a control-based analysis for certain entities. For JVs with a Swiss nexus, that is addressed in our guide to JV sanctions structuring under SECO.
What contractual protections should the JV agreement contain?
The JV agreement is the primary contractual mechanism through which sanctions risk is allocated between the parties after formation. It should address at least five categories of provision: representations and warranties, ongoing disclosure obligations, operational restrictions, compliance management, and exit rights.
Representations and warranties at signing should require each party to confirm that it is not a blocked person, that no blocked person owns or controls it at or above the applicable thresholds, and that it has no knowledge of a pending designation. Those representations should be repeated at each drawdown or capital contribution. This is not boilerplate. A warranty that proves false at the time it is made gives the non-defaulting party a route to rescind or claim; in our experience, the absence of precise warranty language in JV agreements is the single most common gap we identify on review.
Ongoing disclosure obligations should require a party to notify its co-investors within a defined short window if it becomes aware of any change in its ownership or control structure that could affect the sanctions position. The window should be tight – days, not weeks. That compressed timeline gives the other parties time to respond and, if necessary, to invoke remedies before a transaction prohibition crystallises.
Operational restrictions should specify which transactions the JV entity itself may and may not conduct. If the JV operates in a sector or geography that attracts secondary-sanctions risk, those restrictions must be explicit: the JV should be prohibited from transacting in the sensitive sector or with counterparties in the relevant jurisdiction without prior sanctions counsel review.
Exit rights are the enforcement mechanism. If a party becomes blocked or if the 50 percent rule is triggered through a change in its ownership, the JV agreement should give the remaining parties a right – and potentially an obligation – to compulsorily transfer that party's interest or to unwind the JV structure. The design of these clauses interacts with the underlying investment law of the jurisdiction in which the JV is incorporated; local counsel in the relevant jurisdiction should review them.
How does secondary-sanctions risk change the analysis for non-US businesses?
Secondary sanctions are restrictions that OFAC administers not against US persons directly but against non-US businesses that engage in defined categories of transaction with parties or in sectors targeted by a particular sanctions programme. They operate extraterritorially: a European, Asian, or Middle Eastern business with no US nexus beyond US-dollar clearing can face designation risk or correspondent-banking cutoff if it engages in transactions that secondary-sanctions provisions target.
For a JV with non-US participants, this means the structuring analysis cannot stop at "none of us are US persons." The questions that actually matter are: does the JV entity use US correspondent banking? Does it contract with US-person service providers? Are the goods or technology involved US-origin or US-controlled? Does the JV operate in a sector – energy, financial services, metals, or others – specifically targeted by secondary-sanctions provisions in active US programmes?
Where the answer to any of these questions is yes, the effective reach of OFAC extends to non-US participants. A JV that would be fully lawful under the domestic law of its jurisdiction of incorporation may still expose its members to significant risk if they maintain US financial relationships. The practical question for a GC is not only "is this prohibited?" but also "what does US-dollar dependence cost us in reputational and correspondent-banking terms if a secondary-sanctions issue emerges?"
Our team at Calder & Vance advises non-US multinationals on exactly this secondary-sanctions calculus. The intersection with correspondent-banking de-risking (the withdrawal by financial institutions from relationships perceived as high-risk) is significant: our service page on correspondent banking and de-risking under OFAC addresses that dimension directly. If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time.
Contact Calder & Vance at info@caldervance.com for a confidential review of secondary-sanctions exposure in a proposed JV structure.
What are the risk flags that require counsel before you proceed?
Certain fact patterns materially increase the probability that a JV structure will attract OFAC review, require a specific licence application, or produce a prohibited transaction. Recognising these flags early – before signing – is the most cost-effective form of sanctions risk management.
The first flag is opacity in the counterparty's ownership chain. Where corporate registry records are unavailable, where nominee structures are evident, or where a proposed partner resists disclosure of its beneficial ownership, the 50 percent risk cannot be cleared. Proceeding on incomplete information is not a defence to a later enforcement action.
The second flag is sector exposure. JVs in energy, financial services, defence, or technology sectors connected to jurisdictions subject to comprehensive or sectoral US sanctions programmes carry elevated risk. The key question is whether the JV's business plan would cause it to engage in categories of transaction targeted by secondary-sanctions provisions.
The third flag is a change in ownership or control after formation. A co-investor that was clean at signing may become blocked through a subsequent designation of its parent. The JV agreement must address this; the default position under OFAC is that a blocked person's interest in the JV entity is itself blocked property at the moment of designation, and transactions relating to it require a licence.
The fourth flag is a proposed JV in a jurisdiction subject to a comprehensive US sanctions programme, or with a party that has existing commercial relationships in such a jurisdiction. Even if the JV entity itself does not operate in that jurisdiction, the nexus can create prohibited transactions downstream.
The fifth flag is US-controlled technology or software forming part of the JV's contributed assets or operating platform. Where items controlled under the Export Administration Regulations – the EAR – are contributed to or deployed by the JV, additional BIS authorisation requirements may apply in parallel with OFAC. Have you confirmed the classification of contributed technology and whether an export-licence exception covers its transfer to the proposed JV entity?
How should the JV entity manage ongoing OFAC compliance?
Ongoing compliance management within the JV is not a post-closing formality. It is a structural requirement from the moment the entity begins operating. A newly formed JV entity is a US person if it is incorporated or organised in the United States, or if a US-person participant controls it. In either case, OFAC's prohibitions apply to the entity directly. Even where the entity is non-US, the US-person participants remain subject to OFAC; transactions between the US-person participant and the JV entity must be tested against applicable prohibitions.
The JV's compliance programme should include, at minimum: a sanctions-screening policy covering all counterparties, customers, and transaction parties; a reporting protocol for hits and suspected violations; a procedure for escalating potential issues to the board and to external counsel; a VSD (voluntary self-disclosure to OFAC) decision framework; and a training schedule for JV management. Where the JV operates across multiple jurisdictions, the programme must be layered to reflect each regime's requirements.
Record-keeping is a compliance requirement with teeth. OFAC expects businesses to retain records relevant to sanctions compliance and to investigations. In our cross-border practice, we often find that JV entities have adequate screening tools but no systematic document-retention policy – a gap that creates acute problems if OFAC makes an inquiry.
A common myth is that a JV's OFAC obligations rest entirely with the US-person participant, not with the entity itself. That is incorrect. The entity has its own obligations where it has a US nexus. More practically, a JV entity that processes US-dollar transactions through US correspondent banks will find those banks imposing their own screening and compliance requirements. Failing to meet the correspondent bank's standards can trigger account closure independent of any formal OFAC action.
Related practices
- Correspondent banking and de-risking under OFAC – managing US-dollar access and correspondent-bank relationship risk in cross-border transactions
- JV sanctions structuring under OFSI – how the UK ownership and control test applies to joint-venture structures and where it diverges from OFAC
- JV sanctions structuring under SECO – Switzerland's sanctions regime applied to JV formation and ongoing management