A multinational's legal team is reviewing a cross-border acquisition agreement. The target operates in multiple markets. The counterparty's ownership structure is layered, and the transaction involves US-dollar settlement. Somewhere in the agreement sits a sanctions representations and warranties clause – and nobody is certain whether it does what they think it does. That uncertainty carries real consequences.
Sanctions representations and warranties under OFAC are contractual statements by one or both parties confirming compliance with the US sanctions regime – that neither party is a blocked person, that no proceeds will benefit a sanctioned jurisdiction, and that the transaction itself does not violate US law. Getting them right requires understanding both the OFAC rules and how comparable provisions differ across the UK, EU, and Swiss regimes. This guide explains the structure, the risks, and the drafting decisions that matter most.
This guide walks through the purpose of sanctions reps and warranties, how to draft them correctly under OFAC, where they interact with OFSI and the EU, and the risk flags that experienced compliance counsel look for before signing.
Step 1: Understand what sanctions representations and warranties do – and what they cannot
Sanctions representations and warranties serve a dual purpose: they allocate legal risk between contracting parties and they operate as a due-diligence trigger mechanism. Under the OFAC sanctions regime, a party that makes a false representation about its sanctions status does not simply face a contractual claim. It may also expose itself to regulatory liability if the false statement facilitated a transaction that violated US law.
What a rep and warranty cannot do is substitute for actual diligence. In our practice, we regularly encounter agreements where the clause is long and detailed but the counterparty's ownership structure was never mapped beyond the first corporate layer. The clause creates contractual comfort; it does not create legal protection if a party failed to look. OFAC's enforcement posture treats the knowledge standard and the strict-liability standard distinctly, and a well-drafted clause must reflect that distinction.
The clause is also not a safe harbour. If a transaction is executed in breach of the US sanctions regime, the existence of a well-drafted rep and warranty does not insulate either party from OFAC's enforcement reach. It may, however, affect how a voluntary self-disclosure (a VSD – a disclosure to OFAC of an apparent violation before it is discovered by the regulator) is received, and it may be relevant to how the parties apportion liability between themselves.
As of January 2026, OFAC operates across a substantial number of country, thematic, and entity-based programmes. Each programme carries its own prohibited-transaction scope. A rep and warranty drafted by reference to "OFAC" generically is almost always underdrafted.
Step 2: Identify the governing authority and the applicable programmes
OFAC administers US economic sanctions under authority derived from statutes including IEEPA and TWEA. The specific prohibitions that a sanctions representation must track depend on the programmes in play – and those programmes are determined by the counterparty's nationality, the route of the transaction, the currency, and the sector involved.
For any cross-border transaction, the first analytical step is identifying which OFAC programmes are potentially in scope. A transaction involving goods with US-origin content, US-person involvement, or US-dollar settlement may engage OFAC jurisdiction even if neither party is physically located in the United States. This is the extraterritorial dimension that makes OFAC reps and warranties different in kind from their domestic equivalents.
The second step is identifying who is on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) and whether the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked) extends to any entity in the ownership or transaction chain. The ownership analysis must be conducted at the date of the representation and – in live agreements with ongoing obligations – refreshed periodically.
Third, the party giving the representation must assess whether any general licence (a standing authorisation that permits a defined category of transactions without a separate application) applies to any element of the transaction. A general licence does not suspend the obligation to represent; it changes what the representation must say about why the transaction is authorised.
The position above covers the standard analysis. Your specific counterparty, the goods or services involved, the jurisdiction of performance, and the currency of payment all change the assessment. For a transaction-specific review, contact Calder & Vance at info@caldervance.com.
Step 3: Draft the representations – seven elements that experienced compliance counsel require
A sanctions representation under OFAC should address seven core elements. Omitting any of them creates a gap that may leave the recipient of the representation without a contractual claim precisely when they need one most.
- Status representation. Neither party, nor any person owning or controlling it, is a blocked person or on the SDN List. This representation must extend to indirect ownership and, where the 50 percent rule is in play, must explicitly address aggregate holdings.
- Jurisdiction representation. The party is not organised, located, or operating from a comprehensively sanctioned jurisdiction. Generic references to "sanctioned countries" are insufficient; the clause should reference the relevant OFAC programme list or the SDN List as maintained from time to time.
- Proceeds representation. No proceeds of the transaction will be transferred to, or for the benefit of, a blocked person or a comprehensively sanctioned jurisdiction. This must capture indirect benefit, not only direct payment.
- Compliance representation. The party has implemented and maintains a sanctions compliance programme adequate to identify and prevent violations of the applicable OFAC programmes. Avoid representations that describe the programme as "comprehensive" unless it genuinely meets that standard – OFAC guidance on the five elements of an effective programme is publicly available, and a false adequacy representation could aggravate an enforcement outcome.
- No violation representation. To the party's knowledge, no aspect of the transaction as structured violates or would violate any applicable OFAC programme. The knowledge qualifier is important: strict-liability offences exist under OFAC, but the contractual representation between parties typically turns on knowledge.
- No investigation representation. The party is not subject to, nor is it aware of being subject to, any OFAC investigation, enforcement proceeding, or voluntary self-disclosure in relation to a matter that would affect the transaction.
- Ongoing obligation. The representation is repeated at each drawdown, closing, or settlement date, and the party undertakes to notify immediately if any representation becomes untrue. This repeat mechanism is critical for long-dated agreements and facilities.
In our experience, the sixth element – the no-investigation representation – is the one most frequently omitted from commercial agreements. It is also the element that, when true, provides the most meaningful comfort to the receiving party.
Step 4: Cross-regime alignment – where OFSI, EU, and Swiss rules create divergence
An OFAC-focused sanctions representation rarely stands alone. Most cross-border agreements between sophisticated counterparties also need to address the UK, EU, or Swiss regimes – and those regimes diverge from OFAC in ways that affect how reps and warranties must be structured.
Under OFSI, the UK regime uses an ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person). This is broader and more fact-sensitive than OFAC's mechanical 50 percent rule. A company that falls below the 50 percent ownership threshold under OFAC can still be caught under OFSI if a designated person exercises effective control – through contractual rights, board composition, or veto powers. A sanctions representation drafted only to the OFAC standard will miss this exposure in a UK-law agreement.
The EU regime operates similarly, with the ownership-and-control test applied under the relevant Council regulations. EU General Court jurisprudence has refined the control concept in a series of annulment proceedings, and the current position is that control can be established by a combination of factors that falls short of majority ownership.
Switzerland's SECO-administered regime follows a comparable approach, with its own list and its own interpretation of control. For a transaction structured with Swiss-law elements or involving a Swiss-incorporated entity, the SECO position must be checked independently.
For a transaction with both US and UK or EU nexus, the practical approach is a layered representation: one clause addressing the OFAC standard explicitly, and a separate clause addressing the OFSI and EU standard by reference to the ownership-and-control test. Attempting to merge them into a single formulation typically results in language that satisfies neither standard cleanly.
Does your agreement need to work under three regimes simultaneously? If so, a single generic clause is almost certainly not adequate. We regularly advise transaction teams where the existing clause addressed only one regime and the resulting gap was identified only at a late stage in the deal process.
If a transaction has already been flagged by a counterparty's compliance team, or a filing has been refused, an early legal review can preserve options that narrow quickly with time. Contact us at info@caldervance.com.
Step 5: Conduct the underlying diligence – what the representation must be based on
A rep and warranty is only as strong as the diligence that underpins it. OFAC's enforcement approach makes clear that a party cannot represent satisfactory compliance without having conducted a genuine assessment. Relying on counterparty self-certification alone is not sufficient.
The diligence required to support a sanctions representation typically involves three distinct workstreams. First, name screening: all parties, beneficial owners, intermediaries, and key counterparties must be screened against the SDN List and any other relevant OFAC consolidated list. Screening must be conducted at the time of the representation and – for ongoing agreements – on a defined periodic basis.
Second, ownership-chain mapping: the 50 percent rule requires tracing beneficial ownership to the level at which blocked persons' holdings can be aggregated. In complex corporate structures, this may require analysis of multiple tiers of intermediate holding companies, trust arrangements, and nominee relationships. Screening tools that address only the first layer of ownership will not satisfy this requirement.
Third, transaction-structure review: the goods or services being transferred, the route of payment, the currency, and any US-person involvement must each be assessed against the applicable OFAC programme. A transaction that appears unproblematic at the counterparty level may still be prohibited if, for example, the goods contain US-origin content that triggers BIS / EAR jurisdiction alongside the OFAC analysis, or if the payment route passes through a US correspondent bank.
In a recent matter, a financial services firm was about to close a trade-finance facility for a client in a jurisdiction with a complex sanctions profile. The client had provided a detailed sanctions representation. On review, the underlying ownership structure had not been mapped beyond the second tier. At the third tier, an entity appeared that required further analysis under the OFAC 50 percent rule. We mapped the ownership chain, conducted the aggregation analysis, and the facility proceeded on a revised structure. No enforcement issue arose.
Step 6: Tailor the warranties – conditions subsequent and ongoing obligations
A representation speaks as at a point in time. A warranty in most commercial-law systems carries an ongoing or forward-looking commitment. Matching the right mechanism to the right obligation is a drafting decision with legal consequences that differ by governing law.
For long-dated agreements, financing arrangements, and joint ventures, the static representation at signing is insufficient. The agreement needs a covenant structure: an ongoing obligation not to become a blocked person, not to cause the transaction to become prohibited, and to notify immediately on becoming aware of any matter that would trigger a representation breach. This notification covenant is the operational link between the contractual protections and the parties' ability to act before a breach becomes an enforcement event.
The agreement should also specify what happens on a sanctions trigger event: termination rights, mandatory prepayment, or a defined cure period during which the affected party can obtain a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) from OFAC. A cure period is appropriate only where a licence is realistically available; building a cure right around a category of transaction for which OFAC does not grant licences creates a false expectation.
Termination provisions must also be drafted carefully. A contractual right to terminate on a sanctions trigger needs to coexist with OFAC's rules on what a US person may do with a blocked counterparty. Mechanical termination without considering the OFAC implications of the termination transaction itself is a documented source of inadvertent violations.
Step 7: Risk flags – when to involve counsel before the agreement is signed
Several patterns in cross-border agreements reliably signal that a generic sanctions clause is not adequate and that specialist compliance counsel should review the drafting before execution.
- Layered or opaque ownership. If the counterparty's ultimate beneficial ownership cannot be confirmed to the satisfaction of the 50 percent rule without additional documents, the representation should not be given – and the underlying diligence should be resolved first.
- US-dollar settlement or US correspondent banking involvement. USD settlement engages US jurisdiction regardless of the nationality of the transacting parties. Any agreement with USD settlement must address OFAC explicitly, even in agreements governed by non-US law.
- Dual-use goods or technology with US-origin content. Where the goods or services also trigger BIS / EAR jurisdiction, the sanctions representation and the export-control representation should be drafted in alignment. A gap between the two can produce a situation where the sanctions rep is technically accurate but the overall transaction is still prohibited under the EAR.
- Multiple governing-law regimes. Where a transaction is subject to both US and UK or EU law, or where one party is subject to OFSI and the other primarily to OFAC, the clause structure must address both regimes. A single-regime clause in a multi-regime agreement is a recurring source of dispute.
- Long-dated agreements in volatile sectors. Energy, commodities, and financial services agreements with multi-year tenors are particularly exposed to mid-agreement designation events. The ongoing obligation and notification covenant are not optional in these sectors.
- Secondary-sanctions risk. Where a counterparty's activities – not the transaction itself – may create secondary-sanctions exposure for a US person or a non-US person with US-person nexus, that risk must be specifically addressed. Secondary-sanctions risk does not always show up in a standard SDN screening run.
The common thread across all of these risk flags is the same: a sanctions rep and warranty is a legal instrument, not a boilerplate clause. It requires tailored drafting based on an actual understanding of the underlying facts and the applicable OFAC programme.
Addressing the myth: "Our counterparty is not on any list, so the sanctions clause is a formality"
This is the most consequential misconception we encounter. The SDN List captures designated persons. It does not capture every prohibited transaction. An entity may be entirely absent from every OFAC list and still be owned or controlled by a listed person at a tier the screening did not reach. The transaction may involve prohibited goods or a prohibited route, regardless of the parties' listed status.
OFAC's prohibited-transaction rules extend well beyond dealing with listed parties. Comprehensively sanctioned-programme prohibitions apply to transactions with entire jurisdictions, specific sectors, and certain categories of activity, regardless of whether the counterparty itself appears on a list. A compliance programme that operates only as a name-screening function, and a sanctions clause that addresses only listed-party status, will miss a substantial portion of the actual OFAC exposure in a complex cross-border agreement.
In our cross-border practice, we have seen financing agreements, joint-venture documents, and supply contracts where the rep and warranty was treated as a standard clause – one to be reviewed by the junior associate, not the sanctions specialist. That approach is understandable for routine domestic transactions. It is not appropriate for any agreement with US-law nexus, US-dollar elements, or a counterparty with operations in a jurisdiction covered by an OFAC programme.
Related practices
- Correspondent banking and de-risking under OFAC – US sanctions exposure in correspondent banking relationships and de-risking decisions
- Sanctions representations and warranties under OFSI – UK-regime parallel guide covering the OFSI ownership-and-control standard
- Sanctions representations and warranties under SECO – Swiss-regime guide for transactions with a Swiss-law or Swiss-party element