A mid-market private equity fund, operating across North America and Western Europe, acquired a portfolio company with manufacturing operations in three jurisdictions. Standard pre-close diligence had cleared the transaction. Eighteen months later, a secondary trade-press report flagged that a minority co-investor in one of the portfolio company's local subsidiaries had been added to the SDN List (OFAC's list of Specially Designated Nationals and blocked persons). The fund's in-house counsel opened the file and found a problem that pre-close screening had missed: the co-investor, now designated, held a stake that – when aggregated with a related party's holding – crossed the critical ownership line. The fund was sitting on a blocked interest.
Divesting a sanctioned interest under OFAC requires more than finding a buyer. Under the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked), any transaction involving blocked property requires either a specific OFAC authorisation or a divestiture structured under an applicable general licence. The fund could not simply transfer its stake. It needed a licensed exit path, and time was a factor.
This case comment traces how the matter was structured and resolved – from the initial identification of the exposure through the OFAC engagement and cross-border clearance, to the completed exit. The analysis draws on our work in comparable matters and identifies the decision points that determine whether a divestiture of this kind proceeds cleanly or compounds the original exposure.
The situation: how a post-close designation creates a trapped interest
Post-close designations are among the most disruptive events in cross-border portfolio management, because the compliance obligation attaches at the moment of listing, not at the moment of discovery. When OFAC designates a person, any property in which that person holds a qualifying interest becomes blocked immediately under the governing IEEPA-based regulations. The fund did not create the problem; the designation event created it.
In this matter, the co-investor's stake was held indirectly through a holding structure. The fund's initial screening had checked the direct shareholder register of the local subsidiary and found no listed names. What the screening had not done was aggregate the indirect holdings of parties connected to the co-investor. Once that aggregation was performed – using the ownership-and-control logic that OFAC applies – the combined stake of the co-investor and a related person exceeded 50 percent of the subsidiary. Under the 50 percent rule, the subsidiary was itself treated as blocked. The fund's equity interest in the subsidiary was therefore blocked property.
The practical consequence was significant. The fund could not sell, transfer, pledge, or otherwise deal with the blocked interest without OFAC authorisation. It also faced potential reporting obligations: identified blocked property must be reported to OFAC within a short statutory window and frozen pending authorisation. These two obligations – freeze and report – are the immediate operational priorities when blocked property is discovered.
The UK and EU positions deserve mention here, because the fund also held interests through a UK-regulated entity. Under OFSI's ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person), the analysis includes both ownership and de facto control. A stake below 50 percent can still be caught if the listed person exercises effective control over the entity. The fund's counsel needed to assess both standards simultaneously. That dual assessment – OFAC's mechanical 50 percent threshold alongside OFSI's broader control enquiry – is a pattern we see in nearly every cross-border matter of this kind.
What went wrong: the limits of point-in-time screening
The core failure in this matter was not the initial screen. It was the absence of ongoing monitoring and the absence of an aggregation methodology. Pre-close diligence had checked the names on the direct shareholder register against the SDN List at the time of closing. Both tasks were competently performed for what they were. Neither was sufficient.
Three structural gaps compounded the exposure. First, the diligence had not mapped indirect ownership beyond one layer. The co-investor's stake was held through an intermediate vehicle, which itself appeared on no list. Second, the fund had no process for re-screening material counterparties and co-investors on a periodic basis after close. The co-investor was designated roughly fourteen months post-close. A quarterly re-screen would have caught the designation within three months rather than eighteen. Third, the fund had not modelled aggregation risk: the co-investor and the related person were separately tracked in the screening system, and no rule flagged their combined exposure to the same subsidiary.
In our cross-border practice, this pattern is common. Screening tools identify listed names. They do not, without deliberate configuration, aggregate connected parties or track indirect holdings across multiple tiers. Have you reviewed whether your screening logic catches indirect ownership at the second and third remove? That question is worth asking before a designation event forces the answer.
The myth worth correcting here is one we encounter regularly: "We run all counterparties through screening before we close, so our post-close risk is managed." Pre-close screening is a point-in-time exercise. It confirms the position on a given date. It does not protect against a designation made the following month. A genuine post-close sanctions-risk programme requires continuous monitoring, an aggregation methodology, and a clear internal escalation path when a designation event occurs.
The legal question: what authorisation does a divestiture require?
Once the exposure was mapped, the central legal question was whether a divestiture of the blocked interest could proceed under an available general licence or whether a specific OFAC authorisation – a case-by-case permission – was required.
OFAC has issued general licences (standing authorisations that permit a defined category of transactions without a separate application) covering certain divestiture-related transactions in the context of specific programme regulations. The applicability of any such licence depends on the specific programme under which the co-investor was designated, the structure of the transaction, and whether the proposed buyer itself is a US person or a non-US person acting in a manner that could cause US-person liability.
In this matter, the applicable programme's general licences did not straightforwardly cover the fund's contemplated exit mechanism. The fund had identified a trade buyer, but the proposed transaction involved an intermediate escrow arrangement and deferred consideration, both of which required analysis under the blocking prohibition. The intermediate steps – holding consideration in escrow, releasing staged payments – each constituted a dealing in blocked property unless separately authorised.
The conclusion was that a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) was required. OFAC's specific-licence process involves a formal application, a statement of the policy basis for the authorisation, and supporting documentation. OFAC does not operate on a guaranteed timeline, and applicants should plan for a period measured in months rather than weeks. That timeline has material implications for deal structuring: a buyer who cannot wait may walk, and the seller's ability to hold and manage the blocked asset in the interim must itself be considered under the applicable regime.
The position under the EU dual-use and sanctions regimes – relevant because the subsidiary operated dual-use manufacturing equipment – added a parallel licensing track. This is addressed further below.
How the matter was resolved: the OFAC engagement and the exit structure
Our role began when in-house counsel had already identified the designation event but had not yet mapped the full scope of the blocked property or assessed the licensing requirement. The first task was a clean factual record: a legal memorandum documenting the ownership chain, the aggregation analysis, the date on which the property became blocked, and the steps taken from that date forward. This record serves a dual function – it supports the specific-licence application and it provides the evidential basis for any penalty-mitigation argument if OFAC were to enquire into the intervening period between the designation and discovery.
The specific-licence application was structured around the policy basis most clearly supported by OFAC's published framework: facilitating the exit of a US-regulated entity from a position involving blocked property, with the licensed transaction resulting in a clean separation of US-person interests from the designated network. The application included the fund's compliance history, a representation that the proposed buyer had no connection to the designated party, and a commitment to the terms of the licensed transaction being completed within a defined window.
Concurrent with the OFAC engagement, we worked with local counsel in the relevant jurisdictions to assess the EU and UK positions. The OFSI analysis confirmed that the subsidiary did not cross the control threshold under the UK's broader ownership-and-control test – the co-investor's indirect stake fell short of the control threshold once the fund's own governance rights were properly characterised. The EU position under the applicable Council regulation was consistent with that assessment. Both parallel tracks were resolved before OFAC issued its authorisation, which meant that once the US licence was in hand, the transaction could complete without further regulatory clearance in the other jurisdictions.
The licensed transaction structured the exit in two stages: a transfer of the fund's interest to the approved buyer at closing, followed by an escrow release mechanism under which the deferred consideration was paid through a licensed channel. OFAC's authorisation expressly covered both stages. The transaction closed, and the fund's blocked-property reporting obligations were discharged by filing a completion notice with OFAC. We regularly advise on post-closing compliance steps of this kind, which are frequently overlooked but are themselves an obligation under the applicable regulations.
Cross-border dimension: why OFAC is rarely the only question
Every divestiture of a sanctioned interest that involves non-US assets, non-US entities, or non-US counterparties raises parallel obligations under at least one other regime. In this matter, three separate jurisdictions were relevant: the United States (OFAC), the United Kingdom (OFSI), and the EU member state in which the subsidiary operated.
The US extraterritorial position is the starting point. OFAC's rules apply to US persons globally and to transactions that cause US persons to violate the prohibitions – a concept that captures payments routed through the US financial system and, in some programmes, conduct by non-US persons that facilitates blocked transactions. A non-US fund using a US dollar correspondent account or a US-incorporated general partner is a US person for these purposes, and its obligations under OFAC follow the asset, not the location of the manager.
The UK and EU regimes apply their own blocking prohibitions to UK and EU persons, respectively. As noted above, the ownership-and-control test differs: OFSI and the EU Council regulations extend the prohibition to entities controlled by a listed person, even where the listed person's ownership stake falls below 50 percent. A transaction that passes the OFAC ownership analysis may still engage OFSI obligations. The two analyses must run in parallel, not sequentially. In our experience, the teams that get this wrong are those that treat OFAC clearance as the end of the analysis.
Secondary-sanctions risk is also relevant where the designated person is subject to a US secondary-sanctions programme. Secondary sanctions do not require a US person nexus: they impose consequences on non-US persons who deal with designated parties in defined circumstances. A non-US buyer for the fund's interest must assess its own secondary-sanctions exposure, and that assessment affects the pool of available buyers and the structure of the transaction.
For businesses with operations or funding connections in Singapore, Japan, or the UAE, the relevant national regimes may also require a review. Those regimes each align substantially with UN Security Council-based designations and may impose parallel obligations where the designated party is on the UN Consolidated List. Verify the current position in each jurisdiction before relying on OFAC clearance alone.
Risk flags and when to involve counsel
The risk flags that signal an immediate need for external sanctions counsel in a divestiture context are distinct from the broader set of compliance indicators that a well-run programme monitors routinely. In a divestiture or post-close context, these are the situations that require immediate attention.
- A designation event affecting any direct or indirect co-investor, counterparty, or upstream owner in a portfolio or target structure.
- A pre-close screen that has not aggregated indirect holdings across connected parties at two or more tiers.
- A contemplated exit transaction that involves deferred consideration, escrow, or staged payments where blocked property is involved.
- Any transaction routed through US correspondent banking infrastructure that involves a counterparty or asset connected to a designated programme.
- A divestiture involving dual-use assets or controlled-technology transfers, where export-control licensing runs in parallel with OFAC clearance.
- A post-close period in which blocking obligations may have been unknowingly breached – which requires a privilege-protected scope assessment before any voluntary disclosure decision.
The question of timing is not rhetorical. A voluntary self-disclosure (VSD – a voluntary report of an apparent violation to the regulator) filed before OFAC initiates an investigation carries significant mitigation weight under OFAC's enforcement guidelines. The window between discovery and an informed disclosure decision is where counsel can make the greatest practical difference. If a transaction has already been flagged, or a filing has been refused, an early review can preserve options that narrow with time.
The position above covers the standard case. Your facts – the structure of the holding, the programme under which the designation was made, the identity and location of the proposed buyer, and the degree of any parallel UK or EU engagement – change the analysis materially.
For a confidential assessment of your exposure under OFAC or a parallel regime, contact Calder & Vance at info@caldervance.com.
Lessons for similar businesses
Three operational lessons follow from this matter. They apply to any cross-border business with minority co-investors, portfolio companies, or joint-venture partners that could be subject to designation under a major sanctions programme.
The first is the aggregation obligation. A screening programme that checks names against the SDN List without also modelling the aggregate ownership of connected parties will miss the exposure that matters most under the 50 percent rule. Aggregation logic must be built into the screening methodology, not treated as a manual exception for unusual cases.
The second is the monitoring cadence. Post-close monitoring – re-screening material counterparties, co-investors, and upstream owners on a regular schedule – is the only reliable defence against the post-close designation event. The cadence should be proportionate to the risk profile of the relationship: a co-investor with operations in a high-risk jurisdiction warrants more frequent review than a passive financial investor in a low-exposure market.
The third is the licensing-readiness posture. Businesses that hold interests in complex ownership structures should understand in advance which OFAC programmes are most likely to produce a designation event affecting their counterparties, and which general licences are available under those programmes for a divestiture. That analysis is faster and cheaper before a crisis than after one.
We have acted for funds, corporates, and financial institutions in matters that share the structure described here. The facts differ; the sequence – identification, legal mapping, licence application, parallel jurisdictional clearance, transaction execution, post-closing reporting – does not. Our practice in cross-border transactions and diligence is built around that sequence.
Related practices
- Correspondent banking and de-risking (OFAC) – sanctions screening and de-risking advisory for correspondent banking relationships.
- Joint-venture sanctions structuring: an EU matter – structuring JV interests to manage EU sanctions exposure.
- M&A sanctions diligence: an EU matter – sanctions diligence in cross-border M&A under the EU Council regulations.