A UK distribution business is mid-close on a three-year supply agreement with a European counterparty. Due-diligence screening raised no flags. Weeks after signature, one of the counterparty's major shareholders appears on the Consolidated List of Financial Sanctions Targets (the UK's master list of designated persons maintained under the Sanctions and Anti-Money Laundering Act, "SAMLA"). The distributer's legal team asks: is there a clause in this contract that protects us? The answer depends entirely on what was drafted – or was not.
Sanctions clauses in contracts under OFSI are the legal mechanism by which a party allocates the risk that a counterparty becomes subject to UK financial sanctions after signing. A well-drafted clause suspends or terminates performance obligations, triggers notification duties, and preserves the innocent party's right to payment without exposing it to a breach-of-sanctions violation. OFSI – the Office of Financial Sanctions Implementation, the body within HM Treasury that administers and enforces UK financial sanctions – expects businesses to have controls in place, and a contractual clause is a core part of any documented compliance programme.
As of mid-2026, UK financial sanctions are among the most actively enforced in the world, with OFSI's publicly announced monetary penalties and reporting obligations sitting alongside SAMLA's strict-liability criminal offences. This guide walks through each step of building a sanctions clause that works in a cross-border B2B contract, identifies the points where OFSI's approach diverges from OFAC and the EU, and explains when to bring in specialist counsel.
Step 1: Understand what OFSI's regime actually prohibits in a contractual relationship
Before drafting a single clause, you must be precise about what OFSI prohibits. UK financial sanctions under the relevant thematic regulations made under SAMLA prohibit dealing with the funds or economic resources of a designated person, making funds or economic resources available to or for the benefit of a designated person, and – in some regimes – circumventing those prohibitions. A contract that obliges a party to pay a designated person, or to deliver economic resources to an entity owned or controlled by a designated person, is caught regardless of whether the party knew of the designation at the time of contracting.
The ownership and control test under UK law is broader than the US 50 percent rule. OFSI and the EU assess not only majority ownership but also whether a designated person can exercise dominant influence or control by other means. An entity need not be majority-owned to be caught. This matters contractually: a payment obligation that looked clean on signing can become prohibited if a designated person later acquires an indirect controlling stake in your counterparty below the 50 percent threshold that would trigger the US rule.
Why does this matter for clause design? A clause that relies solely on the absence of the counterparty from a sanctions list is structurally inadequate under OFSI's regime. The clause must address ownership, control, and the dynamic risk that designations occur mid-contract. In our experience, contracts written to US practice frequently miss the control dimension entirely.
Step 2: Identify the core components of a compliant sanctions clause
A well-constructed OFSI-compliant sanctions clause has five identifiable components, each serving a distinct legal function. A clause that omits any of these is a gap in the risk-allocation structure.
The first component is a representations and warranties block. Each party represents, on signing and on each payment date, that it is not a designated person, that it is not owned or controlled by a designated person, and that no proceeds of the transaction will benefit a designated person. The warranty must cover the party's beneficial owners and – in transactions with layered corporate structures – the ownership chain to a defined depth. Stating that warranty as of signing only is insufficient; a date-down mechanism is essential for multi-payment or long-term contracts.
The second is a sanctions event definition. The clause must define what triggers it. A robust definition captures: designation of either party or a material beneficial owner; designation of a bank through which payment is routed; and the introduction of a new sanctions programme that prohibits the transaction. That last limb is frequently omitted and leaves a party exposed when a new designation order takes effect after signing.
Third, a suspension mechanic. On a sanctions event, the affected party's payment obligations suspend automatically – without the need for notice or election. Automatic suspension avoids the risk that a time-limited notice requirement expires while the party is still investigating the position. Suspension should not be indefinite; it should be capped at a defined period (agreed by the parties) to allow for licensing applications or restructuring.
Fourth, a termination right. If the sanctions event persists beyond the suspension period, or if a specific licence cannot be obtained, the non-affected party should have a clean right to terminate without penalty and without triggering a damages claim. The clause should state expressly that termination in these circumstances is not a breach.
Fifth, a notification obligation. Each party must notify the other promptly upon becoming aware of a sanctions event. This mirrors OFSI's own reporting framework and ensures that the contractual mechanisms activate before the window for licensing or restructuring closes.
Step 3: Address the OFSI reporting duty and its contractual interface
OFSI imposes a mandatory reporting obligation on certain categories of person who know or have reasonable cause to suspect that a person is a designated person and holds funds subject to financial sanctions. The obligation applies in the financial services sector and is backed by criminal sanctions for non-compliance. A well-drafted sanctions clause connects that regulatory duty to the contractual notification obligation, so that the party's internal escalation process and the counterparty notification are co-ordinated rather than running at cross-purposes.
In a cross-border transaction, the interaction can be complex. A UK-registered party that makes a payment through a US correspondent bank may trigger OFAC's own reporting and blocking requirements simultaneously. OFAC requires that blocked property be reported to OFAC within 10 business days of the blocking event, with an annual update thereafter. OFSI's reporting window operates on a different timeline and is triggered by a different knowledge standard. A contractual suspension-and-notification clause cannot satisfy both regimes on identical drafting; the clause should acknowledge that the parties will comply with all applicable regulatory reporting requirements and that the contractual timeline does not limit or replace those duties.
The practical implication: the notification period in the contractual clause should be short enough to preserve the regulatory window, but the clause should not attempt to set the regulatory deadline. Set the contractual obligation to notify "as soon as reasonably practicable, and in any event within [X] business days of the party becoming aware", and include a carve-out acknowledging applicable regulatory reporting duties. This is where EU-law drafting often goes wrong: the EU freezing obligations have their own notification requirements to the relevant competent authority, and a clause drafted to OFSI standards may not replicate the EU requirement without adjustment.
How does OFSI's ownership and control test compare to OFAC and EU positions?
The ownership and control analysis is where UK, US, and EU regimes diverge most sharply – and where a clause that is adequate for one regime can expose a party under another.
Under OFAC, the 50 percent rule applies an aggregate ownership threshold: any entity owned 50 percent or more in the aggregate by one or more designated persons is itself treated as blocked, regardless of whether it is separately listed. The test is mechanical and is applied to ownership only. Control, in the governance sense, does not independently capture an entity under the standard US rule. This makes the US position, in one sense, more predictable: run the ownership chain to identify direct and aggregated holdings of 50 percent or more, and you have your answer on the blocking question.
OFSI's position, derived from SAMLA and the relevant thematic regulations, applies a broader ownership and control standard. An entity can be caught if a designated person holds a majority interest, but also if a designated person is able to exercise, or actually exercises, overall control or dominant influence over that entity. The assessment is fact-specific. A minority shareholder who holds special veto rights over key business decisions, or who exercises control through a shareholders' agreement, may bring an entity within scope even without a majority stake. This means that counterparty due diligence for UK-law contracts must go beyond a percentage search.
The EU position under the relevant Council regulations sits closer to the UK model. EU competent authorities assess both ownership and control, and the EU has published guidance aligning its position with OFSI's on certain points. However, EU competent authorities in different member states have applied the control test with varying degrees of strictness, and a transaction that a French authority regards as outside scope may be treated differently by an authority in another jurisdiction. For a cross-border contract governed by English law but with EU-based parties, a single clause must accommodate both tests. The safer approach is to draft to the more stringent of the two applicable standards, whichever produces the wider prohibition.
What does this mean in practice for a clause? The counterparty warranty should cover: no designation, no ownership at 50 percent or more (for US-law transactions), no ownership or control by a designated person on the UK or EU test, and no indirect exposure through a shareholder agreement or other instrument of control. The clause should define "designated person" to cover any list maintained by OFSI, OFAC, the EU, and the UN Consolidated List, unless the parties have a justified commercial reason to narrow the scope.
The position above covers the standard cross-border case. Your facts – the governing law, the payment currencies, the banks involved, and the jurisdictions of both parties – change the analysis materially.
For a review of how the ownership and control tests apply to your specific counterparty structure, contact Calder & Vance at info@caldervance.com.
Step 4: Build in a licensing pathway and a force majeure interface
A sanctions clause that provides only for suspension and termination misses a commercially important option: the OFSI specific licence. OFSI has power under SAMLA and the relevant thematic regulations to grant licences authorising transactions that would otherwise be prohibited. A specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) can, in appropriate circumstances, permit a payment to a frozen account, a release of goods, or the continuation of a contract under defined conditions. The availability of a licence depends on the applicable licensing ground – OFSI publishes a schedule of grounds for each thematic regime – and on the strength of the application.
A well-drafted sanctions clause should contain a cooperation obligation: both parties agree, upon a sanctions event, to co-operate in making or supporting an application for any available specific licence. The clause should set a timeline for that cooperation effort – typically the same period as the payment suspension – and should identify which party bears the cost and procedural burden of the application. A licence application is not a guarantee of authorisation, but the effort to obtain one can be material to OFSI's assessment of a party's good faith in an enforcement context.
The interface with force majeure clauses also requires attention. Standard force majeure clauses in English-law contracts frequently list "government action" or "change in law" as a qualifying event. A sanctions designation or a new statutory instrument under SAMLA could qualify. However, relying on force majeure to suspend a payment obligation that is also prohibited by statute creates a layered position: the suspension may be legally compelled before any contractual election is made. A contract that has both a sanctions clause and a force majeure clause should expressly state which governs in the event of overlap, and should confirm that the sanctions clause takes precedence for sanctions events. Leaving the two clauses to operate independently produces ambiguity about the notice requirements, the reinstatement conditions, and the termination triggers.
Step 5: Identify the risk flags that tell you the clause needs specialist review
Not every contract requires full bespoke drafting of every element described above. But certain features of a transaction elevate the risk to a level at which a standard clause – or no clause at all – is inadequate.
Risk flag one: the counterparty has beneficial owners in a jurisdiction that is subject to a UK thematic sanctions regime. Even if the counterparty itself screens clean, the ownership-and-control analysis must go further. This is especially acute for counterparties in trading-intensive jurisdictions where designated persons frequently hold economic interests through layered corporate structures.
Risk flag two: the contract involves correspondent banking or payment routing through a bank that may itself be a designated person or that has correspondent relationships in a high-risk jurisdiction. The payment chain is part of the sanctions exposure. A clause that addresses your direct counterparty but not the payment route is incomplete.
Risk flag three: the contract has a term of more than 12 months. Longer contracts carry higher exposure to mid-term designation events, to changes in the applicable sanctions regime, and to the introduction of new statutory instruments under SAMLA that could prohibit transactions not caught at signing. A clause appropriate for a short-term purchase order is structurally insufficient for a five-year services agreement.
Risk flag four: the contract is governed by a law other than English law but involves a UK-nexus payment or a UK-incorporated party. English courts have applied UK financial sanctions as mandatory rules regardless of the governing law of the contract. A party that assumes its governing-law clause insulates it from OFSI's reach may be mistaken. We regularly advise on precisely this issue in cross-border transactions where the parties have chosen a third-country governing law without considering the mandatory-rule effect of SAMLA.
Risk flag five: the counterparty is a financial institution operating in a sector subject to separate licence conditions or sector-specific OFSI guidance. Financial institutions, energy-sector participants, and certain professional-services firms operate under sector-specific licensing ground schedules. A clause that does not account for those sector-specific licensing pathways may leave the financial institution counterparty unable to use an available authorisation.
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 initial assessment.
What a sanctions clause cannot do – and the myth that a good clause eliminates OFSI risk
A persistent misconception among in-house teams is that a well-drafted sanctions clause operates as a safe harbour: that if the clause is triggered and the party suspends performance, OFSI will have no grounds for enforcement. That is not correct.
A sanctions clause allocates risk and liability between contracting parties. It does not affect OFSI's jurisdiction or its enforcement powers against either party. OFSI assesses whether a financial-sanctions prohibition has been breached. The existence of a contractual suspension mechanism is relevant to a party's state of mind – and therefore to OFSI's assessment of culpability and penalty – but it does not prevent a breach from occurring if the underlying transaction was prohibited at the time of execution.
Consider the following: a party makes a payment on day one of the contract. The counterparty's beneficial owner is designated on day two. The payment, made the day before designation, is not a breach. But a payment made on day three – after designation, even if before the contractual notice period has expired – may well be. The contractual notice clock is irrelevant to the regulatory question of when the prohibition took effect. This is one of the most frequently misunderstood points in cross-border transactional practice. We have acted for businesses that believed their sanctions clause had operated correctly, only to find that a payment made within the contractual notice window had been made after the statutory designation took effect.
The correct understanding is this: a sanctions clause is an essential risk-management and contractual-allocation tool. It is not a substitute for ongoing screening, for counterparty monitoring, or for the kind of compliance programme that OFSI's enforcement guidance describes as a mitigating factor in penalty determinations. A party that has a clause but no monitoring programme is at higher risk than a party that has both.
Related practices
- Sanctions compliance audit and testing – practical assessment and redesign of your compliance programme to OFSI and multi-regime standards.
- Sanctions clauses in contracts under OFSI: advanced drafting – detailed drafting guidance for complex or high-value contractual structures.
- Sanctions clauses in contracts under the UN regime – how UN Consolidated List obligations interact with contractual sanctions provisions.