A trading company in Manchester discovers, mid-contract, that a key supplier has been designated under the UK financial sanctions regime. The relationship must end. But the stock in transit, the outstanding invoices, and the open letters of credit do not disappear the moment the designation notice appears. How does the business close out that exposure without committing a fresh sanctions breach – and without sacrificing rights it may legitimately preserve?
Winding down sanctioned exposure under OFSI requires a structured sequence: freeze activity, map the specific assets and obligations caught, obtain the necessary licence or confirm the applicable statutory exception, and execute the wind-down within the permitted scope. OFSI, the Office of Financial Sanctions Implementation, administers financial sanctions in the United Kingdom under the Sanctions and Anti-Money Laundering Act ("SAMLA") and the relevant thematic regulations. The window to act without a licence is narrow; transactions that look like ordinary commercial settlement can constitute a prohibited dealing if they involve a designated person.
This guide walks through each stage of the wind-down process, flags the points where businesses most often go wrong, and explains where OFSI's approach diverges from that of OFAC and the EU – differences that matter for any cross-border supply chain.
Step 1: Identify and freeze – what the law requires on day one
The first obligation when a counterparty is designated is to freeze: no funds or economic resources may be made available to or for the benefit of the designated person, and any funds or economic resources already held must not be dealt with. This is not a grace period and not a notice period. The prohibition applies from the moment the designation takes legal effect.
In our experience, the hardest part of day one is scope. Businesses commonly assume that "funds" means cash. Under SAMLA and the relevant thematic regulations the concept extends to financial assets and economic benefits of every kind. "Economic resources" is broader still – it covers assets of any type, whether tangible or intangible, that can be used to obtain funds, goods, or services. A stock of finished goods held on account for a designated buyer is an economic resource. An undrawn credit line extended to a designated borrower is a financial service.
Practical day-one steps include suspending all payments in or out, placing a hold on any goods not yet delivered, instructing your bank to block relevant accounts or sub-accounts, and notifying internal teams across procurement, treasury, and logistics. Do not wait for a formal legal sign-off before suspending flows; the freeze obligation is immediate.
What counts as "making available"? OFSI takes a broad view. Allowing a designated person to draw on a standing facility, releasing a retention, or permitting a set-off against a debt owed to the designated person can each constitute a prohibited making-available. The question is not whether money moves to the designated person's account; it is whether value reaches them in any form.
Step 2: Map the exposure – assets, obligations, and connected parties
Once flows are frozen, the business must map every element of the exposure before deciding on a route forward. A rushed wind-down that misses a connected entity or a downstream payment leg creates secondary exposure rather than eliminating it.
The mapping exercise should address four dimensions. First, direct contractual relationships: which contracts with the designated person remain open, and what obligations – delivery, payment, warranty, or indemnity – have not yet crystallised? Second, financial flows: which invoices are unpaid in either direction, which letters of credit are open, and which escrow or retention accounts hold relevant funds? Third, goods in transit: where are the goods, who holds title, and does the transport operator or freight forwarder have any payment obligation that could constitute a making-available? Fourth, connected-party risk: does the designated person hold any ownership or control position in another counterparty in your supply chain?
That fourth dimension is where the OFSI ownership-and-control test bites. Unlike OFAC's mechanical 50 percent rule (treating any entity owned 50 percent or more by designated persons as itself blocked), OFSI applies a test that includes both ownership and control. A connected entity that is not itself designated may still be caught if a designated person exercises control over it – through board composition, veto rights, or contractual arrangement – even where the ownership stake is below any arithmetic threshold. Have you checked the counterparty's governance documents, not just its share register?
The mapping output should be a single schedule that every internal team and any external counsel can work from. It records the legal description of each asset or obligation, the estimated value, the applicable prohibition, and the potential licensing route. Without that schedule, a wind-down is managed reactively rather than strategically.
Step 3: Choose the route – licence, exception, or permitted activity
After the freeze and the mapping, the business must identify its legal route for each element of the exposure. There are three possibilities: a statutory exception that permits the activity without a licence; a specific licence from OFSI; or, in limited cases, a determination that the activity is not caught by the prohibition at all.
Statutory exceptions exist in the relevant thematic regulations for certain categories of activity – typically including the receipt of payments due under pre-existing contracts in specified circumstances, and certain professional-services activities. Exceptions are narrow and their scope varies between the different UK sanctions programmes. Never assume that an exception applicable in one programme applies in another.
A specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is the standard route where no exception applies. OFSI may issue a specific licence for purposes set out in the relevant thematic regulations – common licensing grounds include the provision of legal services, the satisfaction of a prior obligation under a contract concluded before the designation, and humanitarian purposes. The grounds are programme-specific. OFSI has published licensing guidance, and applications must demonstrate that the proposed transaction falls within one of the defined licensing grounds; a general commercial interest is not sufficient.
In our cross-border practice, we regularly advise clients to obtain a licence even where a statutory exception appears to apply, in cases where the facts are at the margins. An exception that is later found to be inapplicable leaves the business having conducted an unlicensed prohibited transaction. A licence application, even if it takes time, provides certainty and creates a clear record of good faith.
The third route – a determination that the activity is not caught – applies where the analysis of the prohibition, the facts of the exposure, and the connected-party position establishes that the relevant asset or obligation does not engage the freeze. This conclusion should always be documented formally. Verbal assurances from a compliance team are not a defence.
The position above covers the standard case. Your facts – the counterparty, the goods, the route, the jurisdiction of the assets, the programme in play – change the analysis materially. For a structured assessment of your licensing options under OFSI, contact Calder & Vance at info@caldervance.com.
Step 4: Execute and document the wind-down
Once the legal route is confirmed, execution must stay within the exact scope of the licence or exception. Deviating from the licensed activity – even in a commercially sensible direction – can constitute a fresh breach. OFSI licences specify the permitted parties, the permitted transactions, the currency, the value limit where applicable, and the time frame. Every payment, delivery, or release of funds must map directly onto those terms.
Documentation is not optional. OFSI's enforcement guidance makes clear that the quality of a firm's records is a factor in assessing whether a breach is culpable and in calibrating any monetary penalty. A well-documented wind-down – with a licence copy on file, a payment-by-payment record against the licence terms, and a signed completion certificate – is materially better placed in any subsequent review than a wind-down reconstructed from email threads.
Practical execution steps include the following. Instruct the bank in writing, attaching the licence reference and the specific transaction authorisation, before initiating any payment. Where goods are in transit, document the transfer of title separately from the physical movement. Where an outstanding invoice is being settled, record the pre-designation contractual basis for the payment and retain the original contract. Close each element of the exposure formally – do not leave open balances or unresolved obligations because they appear commercially trivial.
Reporting is a separate obligation. OFSI requires that certain disclosures be made where a business knows or has reasonable cause to suspect that it holds frozen funds or economic resources belonging to a designated person. That obligation runs alongside the wind-down, not after it. If you identified the exposure through your own screening rather than through an OFSI notification, consider whether you are also within the reporting window. Reporting late – or not at all – is treated as an aggravating factor in any enforcement analysis.
Cross-regime divergence: OFSI, OFAC, and the EU
A wind-down that crosses borders engages multiple regimes simultaneously, and the differences between them are not cosmetic. Businesses that manage the OFSI piece correctly but overlook the OFAC or EU dimension can find that they have resolved one exposure while creating another.
On the ownership-and-control test, the three major Western regimes diverge in ways that affect which entities are caught. OFAC applies the mechanical 50 percent rule: aggregate ownership of 50 percent or more by blocked persons makes the entity itself blocked, regardless of control. OFSI and the EU apply broader tests that capture control even without majority ownership. A counterparty that passes OFAC's ownership test might still be caught by OFSI's control analysis – or vice versa. Where the counterparty has shareholders or directors spread across multiple jurisdictions, the mapping exercise must be run separately under each applicable regime.
On licensing grounds and timelines, OFAC and OFSI differ in approach and speed. OFAC licensing can follow specific grounds defined under the relevant executive order or regulations, or broader policy grounds. OFSI's grounds are set by the applicable statutory instrument. Neither regime publishes binding processing timelines, but in our experience the duration of a wind-down licence application varies with the complexity of the programme and the quality of the application. A poorly drafted application, missing supporting evidence, will extend the process. The EU licensing regime operates at the level of Member State competent authorities, adding a layer of national variation that does not exist in the centralised OFSI or OFAC systems.
On extraterritorial reach, OFAC's secondary-sanctions architecture creates exposure for non-US businesses that OFSI and the EU do not replicate in the same way. A wind-down that involves a US-dollar payment, a US correspondent bank, or a US-person counterparty is subject to US jurisdiction regardless of where the primary sanctions obligation arises. OFSI sanctions bind UK persons and entities wherever located, and also persons conducting business in the United Kingdom – but secondary-sanctions consequences sit with OFAC. A business managing a cross-border wind-down must run both analyses in parallel.
For businesses operating across the Swiss, Canadian, or Australian regimes, similar divergences appear in the licensing grounds, the ownership tests, and the reporting windows. The principle is consistent: the stricter prohibition governs, but the licensing and reporting path differs by regime. Do not assume that a licence from one authority covers the same activity under another.
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 review of your position.
Common pitfalls: where wind-downs go wrong
Wind-downs fail for a handful of recurring reasons. Understanding them is as important as understanding the procedure.
The most common mistake is settling pre-designation debts without a licence, on the assumption that a debt incurred before the designation is automatically permissible to pay after it. That assumption is wrong. The prohibition on making funds available to a designated person applies regardless of when the underlying obligation arose. Settling a pre-designation invoice without a licence – or without confirming that a statutory exception applies – is a prohibited transaction. This is the single most frequent basis for OFSI enforcement interest in commercial wind-downs, in our experience.
A second common error is failing to catch connected entities. A supplier whose majority shareholder is designated is not itself designated under UK law unless it meets the ownership-and-control test. But a supplier that is controlled by a designated person through a management agreement or a board-appointment right may well be caught. Businesses that run only a list-screening check – and do not conduct the underlying ownership and control analysis – miss this exposure systematically.
Third, businesses sometimes treat a wind-down licence as a transaction licence. A licence to wind down a relationship may not authorise every step needed to achieve that wind-down. Read the licence terms precisely and, where in doubt, seek an extension or clarification from OFSI before acting at the margins of the authorisation.
Fourth, the reporting obligation is frequently overlooked. A business that discovers it has been holding frozen funds – even inadvertently, and even for a short period – may be under a statutory obligation to report that fact to OFSI. Failure to report is a separate breach from any dealing prohibition. The two obligations run in parallel.
Fifth, there is a myth worth addressing directly: that a wind-down conducted in good faith and without commercial gain will attract no OFSI enforcement interest. OFSI's published enforcement posture is risk-based and does weight intent and good faith. But good faith is not a technical defence to a breach; it is a mitigating factor in penalty calculation. A business that breaches a prohibition – even inadvertently – and has no documented wind-down record is in a materially weaker position than one that can show a structured, licensed, well-evidenced process.
We regularly advise clients who come to us after a wind-down has already gone wrong – where a payment has been made without a licence, or where a report was not filed on time. Early engagement, a structured voluntary disclosure where appropriate, and clear documentation of the remedial steps taken are consistently the most effective ways to manage the enforcement risk.
When to involve counsel – and what counsel does
Counsel should be involved at the mapping stage, not the execution stage. By the time a business is ready to submit a licence application or execute a settlement, the legally significant decisions have already been made: which route was chosen, which connected entities were assessed, and what was documented along the way. Engaging a sanctions lawyer after those decisions have been made limits what can be achieved.
In a recent matter, a financial institution in the UK identified, during a portfolio review, that it held credit facilities extended to a corporate group in which a newly designated person held a significant control position. The designation had not triggered an automatic screen alert because the designated person was not a direct borrower. We were engaged to map the ownership and control chain, confirm which facilities were caught by the freeze, assess whether any statutory exception applied to the pre-designation drawdowns, and prepare a specific licence application for the structured wind-down of the remaining exposure. The matter was managed to a point of confirmed closure with a documented licence record and no enforcement referral.
The practical scope of counsel's role in a wind-down includes: confirming the legal route for each element of the exposure; drafting the licence application and supporting evidence; liaising with OFSI on queries during the review; advising on the reporting obligation and its timing; and reviewing the final documentation before the business confirms the wind-down as complete. For cross-border positions, that scope extends to coordinating with advisers in the relevant jurisdictions on the OFAC, EU, or other applicable regime.
Related practices
- Correspondent banking and de-risking under OFAC – guidance on managing financial-institution exposure to US sanctions in cross-border relationships
- Winding down sanctioned exposure under SECO – the Swiss procedure for closing out a designated counterparty relationship
- Winding down sanctioned exposure in Singapore – the applicable country regime for managing wind-down obligations in Singapore