A mid-market private equity fund signs a letter of intent to acquire a manufacturing group with subsidiaries in four jurisdictions. Legal and financial diligence proceed in parallel. Sanctions screening is scheduled for the final week before signing. Then a beneficial owner surfaces – two layers up the target's ownership chain – whose name appears on a designation list under one of the major regimes. The deal does not collapse, but it reprices, re-structures, and takes three months longer than planned. Could earlier diligence have changed that outcome? Almost always, yes.
Sanctions due diligence in M&A across a cross-border footprint requires a structured, multi-regime screening exercise that begins well before exclusivity and runs through to closing. The governing authorities – OFAC in the United States, OFSI in the United Kingdom, the Council regulations in the European Union, and their equivalents in Switzerland, Canada, Australia, and the Gulf – apply different ownership and control tests, different prohibitions, and different consequences for a buyer who completes a deal with a sanctioned counterparty or asset. No single checklist satisfies all of them.
This guide sets out the practical stages of a cross-border sanctions diligence exercise, identifies the points where the major regimes diverge, and explains when specialist counsel adds the most value to a transaction team.
Why sanctions diligence in M&A is not the same as routine counterparty screening
Acquiring an entity is categorically different from entering a supply contract with it. A buyer does not merely transact with a sanctioned person; under most major regimes, it risks becoming the owner of a blocked or restricted asset – and in some circumstances it may itself become the vehicle through which a sanctioned person holds value. The distinction matters because the remedies available after closing are far more limited than those available before it.
Routine counterparty screening asks whether a party appears on a list. M&A sanctions diligence asks a different and harder set of questions. Does any current or prospective owner of the target hold a designation? Does the target hold assets in, or generate revenue from, sectors subject to sectoral or thematic controls? Are any subsidiaries, joint-venture partners, or significant customers themselves restricted? Does the transaction trigger reporting obligations in any relevant jurisdiction?
In our cross-border practice, we see deals where the target passes initial name-screening but carries material sanctions exposure through its commercial relationships – a long-term off-take agreement with a party subject to sectoral restrictions, for instance, or a subsidiary whose banking arrangements rely on a correspondent that has since been designated. These are not screening misses. They are structural risks that only a deal-specific diligence scope can surface.
The cross-border dimension compounds the problem. A target group headquartered in one jurisdiction will typically have assets, customers, or financial relationships that touch several others. The applicable prohibitions differ. A transaction that is permissible under one regime may be prohibited, or require a licence, under another. The stricter prohibition governs the party subject to it – so a US-nexus investor buying into a European target faces both OFAC and the EU Council regulations, and the more restrictive of the two controls the deal.
Step 1: Scope the exercise before you screen
The first step in a cross-border M&A sanctions diligence exercise is to define the scope – identifying which regimes apply, which entities must be screened, and what information is needed to screen them properly. Scoping errors at this stage are the most common source of diligence failures.
Regime scope turns on nexus. OFAC jurisdiction attaches to US persons, to transactions involving US dollars or US financial institutions, and to goods or technology of US origin – regardless of where the parties are incorporated. OFSI jurisdiction follows UK persons and UK-incorporated entities, and extends to conduct in the United Kingdom. The EU Council regulations apply to EU persons, EU-incorporated entities, and activity within the Union. A transaction with no obvious US or UK party may still carry OFAC or OFSI exposure because of dollar clearing, a US-origin component in the target's product, or a UK-incorporated holding vehicle in the acquisition structure.
Entity scope in M&A goes beyond the immediate target. The diligence perimeter must cover:
- the target entity and each subsidiary, branch, and related vehicle;
- all current beneficial owners above a threshold consistent with the applicable ownership tests (discussed below);
- key management personnel, particularly those with signatory authority or governance roles;
- material customers and suppliers where the target's revenue is concentrated;
- banking counterparties, especially where a foreign correspondent relationship is involved;
- joint-venture partners and any party that exercises control over the target regardless of ownership percentage.
Information gathering at this stage is a practical challenge. Acquisition targets – particularly private companies in emerging markets – do not always maintain readily accessible ownership registers. We regularly advise deal teams to build the ownership information request into the initial due-diligence questionnaire, flagging it as a compliance prerequisite rather than a legal formality. Resistance at that stage is itself a risk indicator.
Step 2: Apply the correct ownership and control test for each regime
The major regimes apply different tests to determine whether a non-listed entity is caught through a listed person in its ownership chain, and applying the wrong test to a cross-border target is a frequent source of error in M&A diligence.
Under OFAC, the test is mechanical. An entity is treated as blocked when one or more blocked persons own it 50 percent or more in the aggregate, whether directly or through layers of intermediate companies. Control, in the sense of management influence or voting power, is relevant to OFAC's analysis in some contexts, but the ownership trigger is the primary and most widely applied rule. Aggregation matters: two blocked persons each holding twenty-six percent of the same target exceed the threshold together.
Under OFSI and the EU Council regulations, ownership and control (the combined test that asks both whether a listed person holds a majority stake and whether, independently of that, a listed person can direct the entity's actions) applies. The control limb extends the reach of the prohibition to entities where a listed person holds a minority stake but exercises board dominance, veto rights over material decisions, or contractual control over cash flows. In a leveraged buyout with complex governance arrangements, this test can catch structures that the OFAC 50 percent rule would not.
The practical consequence for a cross-border deal is that a target may be clean under one regime and restricted under another. A target with a minority listed shareholder who holds board appointment rights is not blocked under OFAC but may be restricted under OFSI or the EU rules. The stricter prohibition governs the party subject to it. A UK-nexus investor cannot proceed on the basis that OFAC would permit the transaction if OFSI would not.
Sector-based controls add a further layer. Many regimes operate thematic or sectoral restrictions that do not require a listed person anywhere in the ownership chain – they attach to the target's activities or the sector in which it operates. An acquisition of a target in an energy, defence, or financial-services sector may engage these restrictions even where no individual owner is designated. Sectoral analysis is therefore a distinct strand of the diligence exercise, separate from ownership screening.
Step 3: Identify and assess red-flag indicators
List screening produces a binary result – match or no match. Red-flag analysis asks a more textured question: does the totality of the available information suggest sanctions exposure that screening alone would not reveal? This step is where experienced sanctions counsel adds the most analytical value in a transaction.
The following indicators, in our experience, most frequently signal exposure requiring deeper investigation:
- Opaque ownership structures – nominee shareholders, bearer-share vehicles, or multi-layer holding companies in jurisdictions with limited corporate transparency, particularly where the economic purpose of the structure is not evident.
- Revenue concentration in markets subject to thematic restrictions, even where no specific counterparty is listed.
- Banking relationships with financial institutions that have themselves been the subject of enforcement action or that operate in high-risk correspondent-banking corridors.
- Export or import activity involving items classified under dual-use controls, where end-use documentation is incomplete or inconsistent.
- Management or board connections to state entities in jurisdictions where state-linked persons are subject to designation, particularly in sectors covered by sectoral programmes.
- A pattern of related-party transactions with entities whose ultimate ownership cannot be established from publicly available sources.
- Prior regulatory correspondence or internal compliance records indicating that the target has previously flagged a sanctions concern without resolving it.
None of these indicators is automatically disqualifying. Each requires a fact-specific assessment against the applicable regime's tests. What they share is the characteristic that they demand investigation beyond a list check – and that they are routinely missed when diligence scope is defined narrowly or when the sanctions workstream is treated as a mechanical screening exercise rather than a legal analysis.
Step 4: Address identified exposure before signing
Where diligence surfaces a potential sanctions issue, the deal team faces a range of options whose viability depends on the nature of the exposure, the regime in play, and the timing of the transaction. Acting early – before exclusivity locks in the structure – preserves the widest range of options.
The principal routes available to a buyer who identifies sanctions exposure pre-signing include the following:
Restructuring the acquisition to exclude the affected asset or entity. Where a subsidiary or a specific asset pool carries the exposure, a carve-out before closing may eliminate the prohibited element. This approach requires careful analysis to confirm that the carve-out is genuine under the applicable regime and does not simply relocate the problem.
Seeking a licence or authorisation. Most major regimes provide a licensing mechanism that permits an otherwise prohibited transaction where a competent authority is satisfied that the policy grounds are met. OFAC operates a specific-licence process; OFSI maintains its own licensing regime; the EU Council regulations provide for authorisation at Member State level. Licence processing times vary by regime and by the nature of the transaction, and a buyer should take advice on whether the timeline is compatible with deal mechanics before filing.
Requiring a condition precedent to closing. Where a seller controls the relevant ownership position, a condition requiring that position to be unwound before closing shifts the risk to the seller and gives the buyer a clean position at completion. The enforceability of such conditions, and the timeframe required to satisfy them, requires jurisdiction-specific advice.
Declining the transaction. Where exposure is structural and the available remedies are insufficient, the compliant response is not to proceed. This outcome, though commercially unwelcome, is sometimes the only one consistent with the applicable prohibitions.
If a transaction has already been flagged, or a structure has been documented in a way that creates compliance concerns, an early review can preserve options that narrow significantly with time. For a confidential review of a potential issue in a live deal, contact Calder & Vance at info@caldervance.com.
How does a cross-border diligence exercise differ from a single-regime analysis?
A cross-border sanctions diligence exercise differs from a single-regime analysis in three material respects: the number of applicable tests, the potential for conflicting regulatory outcomes, and the risk that a clearance under one regime is relied upon as a proxy for clearance under all others.
The first difference is operational. A single-regime exercise applies one ownership test, one list, and one enforcement posture. A cross-border exercise applies several – and they are not harmonised. The OFAC 50 percent rule, the OFSI and EU ownership-and-control test, and the Swiss, Canadian, and Australian equivalents each have their own mechanics. A compliance team or external adviser without specialist knowledge of each regime will not apply them correctly to the same fact pattern.
The second difference is analytical. Regimes can conflict. Where a transaction is permissible under OFAC but restricted under the EU rules, or where a general authorisation under one regime has no equivalent under another, the practical options are limited. We regularly advise deal teams facing exactly this divergence – and the answer is not to proceed on the basis of the most permissive regime but to identify which regime's rules govern each party's conduct and what is required to satisfy all of them simultaneously.
The third difference is one of sequencing. A buyer who obtains OFAC comfort first and then applies the EU or UK analysis sometimes discovers that the EU or UK position requires a different structural approach – one that is incompatible with the OFAC-cleared structure. Running the regimes in parallel, not sequentially, avoids this problem. In our experience, this parallel approach also shortens the overall diligence timeline, because the structural questions for all regimes are identified and resolved at the same stage.
For a buyer with operations in multiple jurisdictions – or an acquisition target with subsidiaries across several – this is not a theoretical concern. It is a deal-management discipline that belongs at the top of the workstream, not at the end of it.
Record-keeping, reporting, and post-closing obligations
Completing a transaction does not close the sanctions compliance file. Most major regimes impose post-closing obligations that can extend for a significant period after completion, and a buyer who does not build these into its integration plan faces exposure that was avoidable.
Record-keeping requirements attach under the major regimes to transactions involving restricted parties or restricted assets, even where a licence authorises the transaction. The applicable period varies by regime; under the EAR in the United States, for instance, a five-year record-keeping period applies to export transactions. Buyers acquiring an entity with an export-control dimension should confirm what records the target holds and that those records can be maintained in the acquirer's systems post-closing.
Reporting obligations may arise where a transaction involves blocked property that has been unblocked by licence, where a party has identified an apparent violation pre-closing that has not yet been the subject of a voluntary self-disclosure, or where the buyer discovers post-closing that the target held an undisclosed sanctions exposure. The window for voluntary action under the major regimes is time-limited; delay reduces both the practical options and, in most regimes, the mitigating weight attached to self-disclosure.
Ongoing screening of the acquired entity's counterparty base is also a post-closing requirement under most financial-institution compliance programmes and is increasingly expected by regulators as a matter of good practice for corporates. Where the acquired business operates in sectors with elevated sanctions exposure – financial services, commodities, defence-adjacent manufacturing – integration of the target's screening function into the buyer's programme should be a day-one closing deliverable, not a post-integration priority.
A common misconception: name-screening alone satisfies the diligence obligation
A persistent view in deal teams – particularly those running tightly timed processes – is that running target names through a commercial screening database satisfies the sanctions diligence requirement. It does not.
List screening is necessary but not sufficient. It identifies designated persons by name, alias, and identifier. It does not apply the ownership test to the layers above the target. It does not assess sectoral exposure. It does not evaluate whether the target's commercial relationships carry secondary-sanctions risk. And it does not analyse whether the transaction structure itself triggers a prohibition independently of any listed person.
Regulators under the major regimes take the position that the depth of diligence required is proportionate to the risk profile of the transaction. A low-value, low-complexity acquisition in a well-regulated jurisdiction may require relatively limited investigation beyond list screening. A cross-border acquisition with a complex ownership chain, significant exposure in a high-risk sector, or a buyer with a US or UK nexus requires a structured, multi-layered analysis. The standard is not what a screening tool can produce; it is what a reasonable compliance programme would require given the facts.
The position above covers the standard case. Your facts – the target's jurisdiction, its ownership structure, its commercial relationships, and the regimes that apply to you as a buyer – change the analysis. For an assessment of your exposure under the applicable regimes, contact Calder & Vance at info@caldervance.com.
Related practices
- Correspondent banking and de-risking – OFAC-focused advice on financial institution exposure and counterparty screening in cross-border payment flows.
- Sanctions due diligence in M&A – EU guide – detailed analysis of the EU Council regulation ownership-and-control test applied to acquisition structures.
- Sanctions due diligence in M&A – Japan guide – practical guide to Japan's applicable country regime requirements for cross-border transactions.