A mid-sized European trading company finalises the terms of a commodity sale to a buyer in a third market. The contract specifies payment through a letter of credit held in escrow by a US correspondent bank. Three days before settlement, the compliance team flags a potential hit on an OFAC list against one of the buyer's intermediate holding companies. The escrow agent freezes the release. The trading company's legal team faces a question it did not plan for: is this transaction prohibited, partially blocked, or permissible with modifications?
Payment and escrow structuring under OFAC requires a systematic assessment of whether any party – or any property passing through the transaction – is blocked, restricted, or subject to a reporting obligation under IEEPA or the relevant thematic OFAC regulations. The 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked, regardless of whether they appear on any list) means that the screening obligation extends well beyond named counterparties to their ownership chains. A transaction that clears a name-match screen may still be prohibited if the underlying funds or the escrow agent touches blocked property.
As of January 2026, OFAC administers more than thirty active sanctions programmes, each with distinct scope and coverage. This guide sets out how to assess payment and escrow structures against those programmes, where the major cross-border regimes diverge, and how to design a transaction that reduces residual exposure before funds move.
What authority governs payment and escrow structuring under OFAC?
OFAC derives its authority primarily from IEEPA and TWEA, supplemented by programme-specific Executive Orders and implementing regulations. The result is a set of prohibitions that apply to US persons and, in many programmes, to non-US persons when their transactions touch US jurisdiction – through a US correspondent bank, a US dollar clearing leg, or US-person involvement at any point in the chain.
For payment and escrow structures, the key concepts are: (1) the prohibition on dealing in blocked property; (2) the prohibition on providing services to designated parties; and (3) the obligation to block funds upon encountering prohibited parties or prohibited property and to report that blocking to OFAC within a short statutory window. The escrow agent, the correspondent bank, the issuer of a letter of credit, and the beneficiary can each attract distinct obligations depending on their jurisdictional nexus. A US-based escrow agent holds property on behalf of all parties; it is directly subject to OFAC's jurisdiction. A non-US escrow agent with a USD clearing leg faces the same exposure the moment the dollar leg touches a US institution.
OFAC's reach is extraterritorial in a meaningful sense. Secondary-sanctions risk – the risk that non-US parties dealing with certain designated persons or targeted sectors can themselves face designation or be cut off from the US financial system – adds a further layer for non-US businesses that might otherwise assume OFAC does not apply to them. In our experience, this extraterritorial dimension is systematically underestimated by European and Asian counterparties until they discover it mid-transaction.
The position above covers the standard case. Your facts – the counterparty's ownership chain, the currency of the escrow, the jurisdiction of the escrow agent, and the programme at issue – change the analysis significantly. For a preliminary assessment, contact Calder & Vance at info@caldervance.com.
How should you screen a payment and escrow structure before funds move?
Screening a payment or escrow structure is not a single name-match query: it is a multi-layer ownership and transactional analysis that must be completed before any funds are committed, any escrow instructions issued, or any letter of credit opened. The following steps reflect the sequence our compliance counsel applies in practice.
Step 1 – Identify every transactional party. List all parties who will hold, control, transfer, or benefit from the funds: the payer, the payee, the escrow agent, the issuing bank, any correspondent bank, and any intermediary. For letters of credit, add the confirming bank and any nominated bank.
Step 2 – Screen each party against the consolidated OFAC lists. This includes the SDN List (OFAC's list of Specially Designated Nationals and blocked persons), the Sectoral Sanctions Identifications List, and any programme-specific list relevant to the transaction's sector and geography. Screening must cover all aliases, transliterations, and known alternative names.
Step 3 – Apply the 50 percent rule to each party's ownership chain. A company is treated as blocked even if it does not appear by name on the SDN List, provided that blocked persons own it 50 percent or more in the aggregate, directly or indirectly through intermediate entities. Aggregation across multiple listed holders is required. This step demands ultimate beneficial ownership data – not just the first layer of corporate structure.
Step 4 – Assess the transaction's jurisdictional nexus. Determine whether any party is a US person, whether the currency is US dollars, and whether any leg of the payment passes through a US correspondent institution. Any one of those factors brings the full weight of OFAC's primary-sanctions prohibitions to bear.
Step 5 – Assess secondary-sanctions exposure. Even if no primary-sanctions trigger is present, identify whether any party operates in a sector subject to secondary-sanctions risk under the relevant OFAC programme. Secondary-sanctions risk does not require a US nexus; it can arise from the nature of the counterparty or the sector of the transaction.
Step 6 – Consider the escrow structure itself. An escrow structure can create a distinct OFAC exposure: if blocked funds are deposited in escrow, the escrow agent may be holding blocked property. The agent's obligation to block and report arises at that moment. The design of the release conditions, the identity of the agent, and the jurisdiction of the account all affect where this obligation sits.
Step 7 – Document the analysis. OFAC's record-keeping expectations require that the analysis is preserved. If a match is identified and a transaction is blocked, the blocking report must be filed within a short statutory window; if a transaction is rejected (not blocked), a rejection report must follow. Both reports are subject to their own requirements. Documentation of a negative result – a deliberate decision that no block is required – is equally important for enforcement defence.
What escrow structuring choices affect OFAC exposure?
The design of an escrow arrangement can raise or lower OFAC risk, and those structural choices should be made before the transaction documents are signed. Three variables matter most: the identity and jurisdiction of the escrow agent, the currency and clearing pathway of the escrowed funds, and the release-condition mechanics.
Escrow agent selection. A US-person escrow agent or a US-domiciled institution is directly subject to OFAC's primary-sanctions obligations. That is not always a disadvantage: a professionally regulated US escrow agent will have its own OFAC compliance programme, which can provide procedural discipline. The risk arises when the parties do not disclose the full ownership analysis to the agent, who then faces a blocking obligation that the parties had not anticipated.
Currency and clearing pathway. USD-denominated escrow will always pass through a US correspondent at some point. That creates a US nexus for all parties. If the jurisdictional analysis reveals that a US nexus is a risk driver, structuring the escrow in a non-USD currency and using a non-US clearing pathway can reduce the primary-sanctions exposure. It does not eliminate secondary-sanctions risk, and it does not cure a transaction that is prohibited on its substantive terms – but it removes one of the jurisdictional hooks that would otherwise draw a foreign transaction inside OFAC's reach.
Release conditions. Escrow release conditions should be designed to allow the agent to perform a fresh screen at the point of release, not only at inception. Ownership chains change. A counterparty that was clean at contract signature may have been designated by the time of release. Release conditions that require a current OFAC certification from the receiving party give the agent a contractual basis to pause release pending investigation. In our experience, this provision is omitted from most commercial escrow agreements and is among the first things we add.
A micro-scenario illustrates the point. In a recent matter, a financial-sector business structured a multi-tranche escrow for a cross-border acquisition. The target's parent company had no SDN listing. By the time the second tranche was due for release, a new OFAC designation had captured a minority investor at the parent level who, when aggregated with a second listed holder, crossed the 50 percent threshold. Our team identified the designation, advised on the blocking obligation, and prepared the statutory report. The release was restructured on terms that preserved the transaction's commercial intent without touching blocked property.
How do OFSI and EU sanctions diverge from OFAC on payment structuring?
Every payment structure with a cross-border dimension sits at the intersection of more than one sanctions regime, and the regimes do not move in lockstep. Understanding where OFAC, OFSI, and the EU diverge is essential for any business operating outside a single jurisdiction.
The ownership and control test. OFAC's 50 percent rule is mechanical: ownership of 50 percent or more by blocked persons triggers blocking, full stop. 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) that is broader. Under both regimes, an entity owned below the 50 percent line may still be caught if a designated person controls it – through board representation, veto rights, contractual mechanisms, or in fact. This means a structure that passes OFAC's ownership screen may still be caught by OFSI or by the relevant EU Council regulation. For a cross-border escrow involving UK or EU-connected parties, both tests must be run independently.
Licensing architecture. If a payment or escrow structure requires a licence because a party or property is blocked, the licensing routes differ. OFAC issues specific licences (case-by-case authorisations to conduct an otherwise prohibited transaction) and general licences (standing authorisations permitting a defined category of transactions without a separate application). OFSI issues both a specific licence and, under SAMLA, a general licence, but the categories of available licences differ from OFAC's. The EU licensing regime is decentralised: the relevant competent authority in each member state issues licences. A multi-jurisdiction escrow structure involving blocked parties may need concurrent licences from OFAC, OFSI, and one or more EU competent authorities. The applications are separate; the timelines do not run in parallel.
Stricter prohibition governs. Where two or more regimes apply and their prohibitions conflict, the stricter prohibition governs the conduct of the party subject to it. A UK-connected escrow agent cannot take comfort from an OFAC general licence if OFSI has not issued an equivalent permission. Nor can an EU counterparty rely on an OFAC specific licence to conduct activity that the relevant EU Council regulation separately prohibits. Structuring a compliant cross-border escrow means satisfying each applicable regime independently.
For a detailed treatment of OFSI's approach to payment structuring, see our guide on payment and escrow structuring under OFSI. For Swiss SECO requirements, see the SECO payment and escrow structuring guide.
If a transaction has already been flagged, or a release has been frozen by an escrow agent citing a potential OFAC concern, the analysis needs to move quickly. Early review preserves options that narrow with time. Contact Calder & Vance at info@caldervance.com.
What are the most common risk flags in OFAC payment and escrow work?
In our cross-border practice, a recognisable set of risk patterns recurs across payment and escrow matters. Identifying them early allows a business to address them in transaction design rather than in enforcement defence.
Layered ownership concealing a blocked person. The 50 percent rule operates through chains of intermediate entities. A blocked person owning 60 percent of a holding company, which owns 80 percent of the target counterparty, produces an entity that is itself blocked – even though the counterparty's name appears nowhere on any OFAC list. Screening that stops at the direct counterparty level will miss this pattern entirely. The question is not whether a name matches; the question is who, in the aggregate, owns the entity you are dealing with.
USD transactions through US correspondent banks. Many non-US businesses believe their transactions are outside OFAC's reach because they are not themselves US persons. The correspondent-banking system closes that gap. A USD payment instruction will at some point clear through a US institution, which is a US person subject to full OFAC primary-sanctions obligations. The correspondent will screen the instruction. If a prohibited party or prohibited property appears in the chain, the correspondent will block or reject the payment – and the non-US originator will face a disrupted transaction and, potentially, an investigation. We regularly advise European and Asian exporters who discover this point only after a correspondent refuses a transfer.
Stale ownership data. Counterparty ownership chains change. Designations are issued on short notice. A clean ownership analysis at contract signing may be inaccurate by the time of payment. Escrow structures with extended settlement periods are particularly exposed. A compliance programme that performs a single upfront screen and then relies on it throughout the transaction lifecycle fails at precisely this point.
Incomplete identification of the transaction parties. Letters of credit, trade-finance instruments, and correspondent-banking chains involve parties that are not always visible to the original contracting parties: confirming banks, nominated banks, freight forwarders, logistics providers. Each of these parties can create an OFAC exposure if they are connected to a blocked person or blocked property. The screening obligation does not stop at the named counterparty.
Misclassification of a transaction as below OFAC's scope. A common myth in our practice is the belief that small-value transactions or transactions with no apparent US nexus fall below OFAC's threshold of interest. OFAC's prohibitions do not have a de minimis exemption. Any transaction that touches a US person, US jurisdiction, or US dollar clearing is within scope, regardless of value. Do not assume that a transaction is too small to attract scrutiny.
When should you involve sanctions compliance counsel?
Sanctions compliance counsel should be involved at the transaction-design stage, not after a payment has been blocked or an escrow agent has raised a concern. The practical decision points are clear.
Involve counsel when any of the following is true: the counterparty's ultimate beneficial ownership is unclear or involves a jurisdiction with elevated OFAC programme exposure; the escrow agent is a US institution or the funds are denominated in USD; the transaction sector is subject to secondary-sanctions risk under an active OFAC programme; the ownership chain of any party triggers a potential 50 percent rule analysis; or a party's name generates a possible match on any OFAC screening tool.
Involve counsel immediately when: an escrow agent or correspondent bank has blocked or rejected a payment; an OFAC blocking report has been filed or is required; an OFAC administrative subpoena or request for information has been received; or a potential licence application is being considered to unblock a frozen transaction. In each of these situations, the window for effective action is short.
The cost of early counsel engagement is bounded and predictable. The cost of enforcement proceedings – civil penalties, blocked funds held indefinitely, reputational consequences, and the legal fees of a contested penalty defence – is not. We have acted for businesses at both ends of that spectrum, and the difference in outcome between early engagement and late engagement is material.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions analysis for correspondent relationships and respondent bank due diligence
- Payment and escrow structuring under OFSI – UK financial sanctions requirements for cross-border payment and escrow structures
- Payment and escrow structuring under SECO – Swiss sanctions requirements and their interaction with OFAC and EU regimes