A UK-incorporated trading company agrees to hold funds in escrow pending delivery of goods sourced from a third country. The escrow agent is a UK-regulated payment firm. Midway through due diligence, the compliance team identifies that one of the seller's shareholders appears on the UK Consolidated List. Does holding those funds breach financial sanctions (prohibitions on dealing with funds or economic resources linked to designated persons)? Can the escrow structure proceed at all, even with a licence? These questions are not academic. Under the Sanctions and Anti-Money Laundering Act and the thematic regulations administered by the Office of Financial Sanctions Implementation (OFSI – the UK Treasury body responsible for financial-sanctions licensing and enforcement), the answers determine whether a signed commercial arrangement survives or collapses.
As of January 2026, any payment or escrow arrangement that involves funds or economic resources owned, held, or controlled by a UK-designated person requires either that no dealing occurs, or that OFSI issues a specific licence before the transaction proceeds. OFSI's licensing process is the primary route to lawful access. The ownership and control test – which extends prohibitions beyond directly listed parties to entities and arrangements they own or control – means that surface-level screening is rarely enough.
This guide explains how to structure payments and escrow arrangements in compliance with OFSI's requirements, where the tests diverge from OFAC and EU rules, and when the risk profile demands external compliance counsel.
What is OFSI's legal basis for regulating payments and escrow?
OFSI administers UK financial-sanctions law under SAMLA and the thematic statutory instruments made under it. Its authority covers funds and economic resources – a category broad enough to capture not only direct bank transfers but also escrow accounts, letters of credit, deferred payment structures, and any arrangement where value is held pending a condition. The firm does not need to be the primary obligor; intermediary payment agents, correspondent banks, and escrow trustees are each independently caught.
The prohibitions attach to three categories of person: UK-designated individuals and entities on the UK Consolidated List; entities owned or controlled (the UK test for extending prohibitions beyond the directly listed party) by a designated person; and, in certain thematic regimes, persons acting on behalf of a designated person. Unlike OFAC's mechanical 50 percent aggregation test, OFSI's ownership and control analysis includes a control limb – meaning that a non-listed entity can be caught where a designated person exercises dominant influence over it, even without a majority shareholding.
Practically, this means that before any payment instruction is processed or escrow funds are released, the compliance team must resolve two distinct questions: whether any party in the payment chain is designated, and whether any non-listed party in the chain is owned or controlled by a designated person. Both questions require evidence, not assumption.
Step 1: Screening the payment and ownership chain
Effective screening begins with identifying every natural person and entity that will send, receive, or benefit from funds – and then tracing their ownership and control structures against the UK Consolidated List, the OFAC SDN List (OFAC's list of Specially Designated Nationals and blocked persons), and the EU Consolidated List in parallel. In our experience, payment-chain screening that stops at the immediate counterparty misses the most common exposure point: a second- or third-layer owner who appears on one regime's list but not another.
For escrow specifically, the structural question matters. Who holds legal title to the escrowed funds during the holding period? If legal title sits with an escrow agent that is itself a UK-regulated firm, the firm bears independent OFSI obligations regardless of the instructing party's own screening. Has the escrow agent's compliance team reviewed the beneficial ownership chain – or has it relied solely on the representation of the instructing bank?
The practical screening sequence runs as follows. First, compile a complete list of principals: buyer, seller, guarantor, any party with a contingent interest in release. Second, identify their beneficial owners to the level sufficient to displace the control-limb risk (typically two or three layers depending on group complexity). Third, run each name against all three primary lists – UK, OFAC, EU – and against any applicable thematic list where the goods or counterparty origin triggers a sector-specific regime. Fourth, document the results and the date of the check. Sanctions lists are updated without notice; a clean check today is not a guarantee tomorrow.
Step 2: Applying the ownership and control test under OFSI
OFSI's ownership and control test is the analytical step that most commonly catches businesses by surprise. Once a designee is identified in the ownership chain, the question is whether the non-listed entity is caught by the prohibition – and the answer requires examining both the ownership percentage and the factual indicators of control.
On the ownership side, a non-listed entity is treated as subject to the prohibition where a designated person holds, directly or indirectly, more than 50 percent of the shares or voting rights, or the right to appoint or remove a majority of its board. This is broadly consistent with the OFAC 50 percent rule. The control side goes further: it asks whether the designated person can, in practice, ensure that the entity acts in accordance with their wishes. Indicators include board composition, consent rights, contractual veto provisions, and economic dependency.
For payment and escrow structuring, this means that a clean corporate register is necessary but not sufficient. We regularly advise clients to review shareholder agreements, loan covenants, and side letters alongside ownership charts. A minority shareholder with a veto over distribution decisions may satisfy the control test even if their equity holding falls below 50 percent.
Where the control question is ambiguous, the prudent approach is to treat the entity as caught and seek either legal advice or, where the facts support it, a specific licence from OFSI before funds move. Proceeding on an optimistic reading of an ambiguous control structure is one of the most common causes of inadvertent breach.
Step 3: Identifying whether a licence is required – and which type
Where screening confirms that a designated party or an owned-or-controlled entity is involved in the payment or escrow arrangement, no funds may move without OFSI's authorisation. OFSI issues two types of authorisation. A general licence (a standing authorisation permitting a defined category of transaction without a separate application) covers specific pre-defined scenarios – typically humanitarian payments, legal fees, and certain insolvency-related releases – and their scope is instrument-specific. A specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is required for anything outside a general licence's scope.
For commercial escrow and payment arrangements, a general licence will rarely cover the position. The instructing party will almost always need to make a specific licence application. OFSI assesses applications against the grounds set out in the relevant thematic regulations. Common grounds include: transactions necessary for the purposes of a legal or arbitral proceeding; payments required to satisfy a pre-existing contractual obligation; and transactions in the ordinary course of business where the designated person's interest is indirect and incidental.
The position above covers the standard case. Your facts – the counterparty, the nature of the escrowed funds, the trigger for release, the thematic regime in play – change the analysis materially. For a preliminary view on licence eligibility, contact Calder & Vance at info@caldervance.com.
Step 4: Preparing and submitting a specific licence application to OFSI
A specific licence application to OFSI requires a clear factual narrative, a description of the transaction structure, identification of the designated person and the basis on which they are caught, and a statement of the licensing ground relied upon. In our experience, applications that fail to address the control or ownership analysis directly – or that describe the escrow mechanics in terms too commercial to engage with the legal test – receive requests for further information that delay the process by weeks.
OFSI does not publish a guaranteed processing time, but practitioners advising on OFSI matters note that straightforward applications where the licensing ground is clear can receive a response within a matter of weeks, while contested or complex matters may take considerably longer. Applicants should plan their transaction timelines accordingly and, where possible, submit applications before exchange of contracts rather than after.
The application must also address what will happen to the escrowed funds in the interval between submission and decision. If funds are already held in an escrow account and the designated-person nexus only becomes apparent after they have been deposited, the escrow agent has an independent obligation to freeze and, where required by the applicable thematic regulations, to report to OFSI. The reporting obligation is not discretionary. Failure to report known or suspected dealings with designated persons is itself a criminal offence under SAMLA.
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 assessment.
How does OFSI's regime compare with OFAC and EU rules on payment structuring?
The cross-regime comparison is essential for any business operating across UK, US, and EU jurisdictions simultaneously. Three points of divergence are most significant for payment and escrow work.
First, the ownership test. OFAC's rule is mechanical: 50 percent aggregate ownership by blocked persons is the trigger, and control in the factual sense is not the primary test. OFSI and the EU both add a control limb, creating a wider catch. A structure that clears the OFAC threshold analysis may still be caught under OFSI or the relevant EU Council Regulation if a designated person exercises dominant influence over the entity.
Second, licensing grounds. OFAC licensing is administered on a broad "consistent with US foreign policy and national security" standard. OFSI licensing grounds are instrument-specific: they vary by thematic regime, and a ground available under one set of UK regulations may not exist under another. EU licensing similarly depends on the specific Council Regulation in issue. A licence from one regime does not authorise the transaction under another – all three may need to be addressed in parallel.
Third, reporting obligations. OFSI imposes a positive obligation to report knowledge or reasonable cause to suspect a breach, within a short statutory window. OFAC's voluntary self-disclosure regime operates differently: disclosure is encouraged and mitigates penalty, but it is not always legally compelled in the same way for every actor in the payment chain. EU member states' obligations vary. Where a payment firm is subject to all three regimes – because it has US dollar clearing, a UK regulatory permission, and EU customers – it must map each obligation independently and satisfy the strictest standard that applies.
For businesses with correspondent-banking relationships in the United States, the interaction between OFSI and OFAC is particularly acute. A payment cleared through a US correspondent bank triggers OFAC's jurisdiction even if both the UK payer and payee are outside the United States. See our related analysis on correspondent banking and de-risking under OFAC for the full treatment of that exposure.
Risk flags and common structuring mistakes
Payment and escrow structuring failures under OFSI typically follow recognisable patterns. The most common is relying on a single-layer ownership check without examining control indicators or intermediate holding companies. The UK Consolidated List designates individuals and entities; it does not automatically flag their subsidiaries or affiliates. Screening must go to the level where control risk is extinguished.
A second common mistake is treating an escrow arrangement as a neutral holding mechanism that is not itself a "dealing". OFSI's prohibition on making funds available extends to situations where the funds are placed under arrangements – including escrow – that would give a designated person access or benefit upon the occurrence of a condition. Even if the escrow release condition has not been met, placing funds into an arrangement that could on its terms benefit a designee may already constitute a dealing.
A third risk is delayed disclosure. Where a payment firm discovers partway through processing that a counterparty is designated – or that the beneficial ownership analysis reveals a caught entity – the clock starts immediately. Freezing the funds, notifying the compliance officer, and making a timely report to OFSI are sequential steps that must each be completed within the applicable window. Delays at any stage compound the exposure.
One myth worth correcting: many clients assume that because a transaction is fully documented, arm's-length, and commercially priced, it will automatically qualify for a licence. OFSI's licensing analysis does not reward commercial reasonableness in isolation. The statutory ground must be satisfied. Arm's-length pricing is relevant to certain grounds, but it is not itself a gateway. In our practice, we have seen well-documented transactions refused where the licensing ground was not clearly engaged, and more contentious arrangements licensed where the statutory basis was precisely identified and argued.
In a recent matter, a financial institution in the payments sector identified, after receiving an escrow instruction, that a minority shareholder of the instructing entity was the subject of a UK designation in a thematic sanctions regime. The institution had initially cleared the instruction on the basis that the shareholding was below 50 percent. We reviewed the shareholder agreement, identified consent rights that satisfied the control limb, and advised that the dealing was prohibited. We assisted the institution in freezing the funds, preparing the OFSI report, and subsequently applying for a specific licence on the contractual-obligation ground. The matter resolved without enforcement action.
When to involve sanctions compliance counsel
Sanctions compliance counsel adds most value before funds move – not after. The moment a compliance team identifies a potential designated-person nexus in a payment or escrow chain, legal input is warranted. The questions that arise at that stage – does the control test bite? which licensing ground is available? is there a reporting obligation and when does it arise? – each carry legal and regulatory risk if answered incorrectly by non-specialists.
Counsel is also essential where the transaction spans multiple regimes. A UK payment firm processing a cross-border escrow that touches a US correspondent bank and an EU buyer is simultaneously subject to OFSI, OFAC, and EU rules. The divergence between those regimes on ownership tests, licensing grounds, and reporting windows means that a single compliance analysis covering all three is not merely convenient – it is necessary to avoid inadvertent breach under one regime while attempting to comply with another.
For escrow arrangements in particular, the involvement of a regulated escrow agent creates a chain of independent obligations. The agent's compliance function should not assume that the instructing bank has resolved the sanctions position. In our cross-border practice, we regularly map the obligations of each party in the payment chain separately, because the legal exposure of the agent and the instructing party is not coextensive.
For structured guidance on the Swiss SECO regime's treatment of equivalent payment arrangements, see our companion guide on payment and escrow structuring under SECO. For the Singapore MAS regime, see payment and escrow structuring under the Singapore sanctions regime.
Related practices
- Correspondent banking and de-risking under OFAC – managing OFAC exposure in US dollar clearing and correspondent relationships
- Payment and escrow structuring under SECO – Switzerland's regime for payment and escrow compliance