A manufacturing group completes an acquisition. The target's share purchase agreement contains a standard sanctions representations and warranties (contractual promises by each party that it is not listed, not owned or controlled by a listed person, and that the transaction does not breach any sanctions regime) that both sides sign without a supporting diligence file. Six months later, OFSI notifies the acquirer that a minority shareholder in the target's parent structure appeared on the UK Consolidated List of financial sanctions targets at the point of completion. The acquirer is now holding an asset that may involve a designated person. The warranty it gave – and the one it received – are both in question.
Sanctions representations and warranties are only as reliable as the diligence behind them. Under OFSI's regime, governed by the Sanctions and Anti-Money Laundering Act ("SAMLA") and the relevant thematic regulations, a business that completes a transaction while a designated person holds an interest in the counterparty may commit a dealing offence regardless of what any contractual warranty says. The warranty protects the innocent party commercially; it does not displace the criminal and civil liability that the statutory regime imposes.
This case comment examines how that matter developed, where the warranty drafting fell short, how the OFSI position was resolved, and what cross-border transaction teams should take from it.
The Situation: What the Transaction Looked Like at Signing
The acquirer had conducted a desktop review of the target at group level. It had checked the target company and its immediate parent against the UK Consolidated List, the EU Consolidated List, and the OFAC SDN List (the list of Specially Designated Nationals and blocked persons). It had not traced the ownership chain above the immediate parent. A disclosed minority shareholder – holding below the 50 percent ownership threshold (the level at which OFSI's ownership and control test, and OFAC's 50 percent rule, treat the entity as itself designated) – was, on closer inspection, the subject of a UK financial-sanctions designation that had been in force for several months before signing.
The share purchase agreement included representations from the seller that, to the best of its knowledge, no party to the transaction was a designated person, owned or controlled by a designated person, or otherwise in breach of any applicable sanctions regime. It included a corresponding warranty from the acquirer in mirror terms. Both representations were knowledge-qualified. Neither party had conducted a full ownership-chain trace.
That knowledge qualification would later matter – but not in the way either party expected.
The Legal Question: Does a Warranty Override the Statutory Prohibition?
The answer under OFSI's regime is no. A contractual warranty or representation operates between the parties. It does not affect the application of the statutory dealing prohibition or the licensing requirement. SAMLA and the relevant thematic regulations impose obligations directly on persons within the United Kingdom or carrying out relevant activities under UK law. Those obligations are not modified by private contract.
The practical consequence is that even where a party has the benefit of a warranty – even where the counterparty has arguably breached that warranty by providing it without adequate diligence – the party in possession of the asset may still need to engage with OFSI to regularise its position. In our experience, this point surprises transaction teams that treat the warranty as a risk transfer mechanism. It transfers commercial risk between the parties. It does not transfer regulatory liability to OFSI.
The acquirer in this matter faced a distinct question: was the minority shareholder's interest in the parent structure sufficient to engage the ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person's interest or influence)? OFSI's ownership and control test looks at both direct and indirect ownership and at control – including the ability to exert significant influence over management decisions. The shareholder held below the level at which automatic attribution applies, but the control limb required a separate assessment.
How the OFSI Position Compares with the OFAC and EU Tests
Understanding this matter fully requires a brief cross-regime comparison, because the acquirer had counterparties in more than one jurisdiction and the transaction documents were governed by English law but touched US and EU-connected assets.
Under OFAC's rules, the 50 percent rule is largely mechanical. If one or more blocked persons own an entity in the aggregate at 50 percent or more, directly or indirectly, the entity is treated as blocked whether or not it is listed. Below that threshold, the entity is not automatically blocked – though OFAC reserves the right to designate it separately. Control, in the sense used by OFSI and the EU, does not extend the OFAC rule in the same way.
The EU position, under the relevant Council regulations, is closer to OFSI's. The EU test looks at ownership and at control – including indirect or de facto control. The EU General Court has considered the control concept in annulment proceedings and has confirmed that control does not require majority ownership. A minority stake combined with structural rights – veto rights, board appointment powers, information rights – can satisfy the control test.
OFSI's guidance aligns with the EU in treating control as a separate and potentially broader ground. Where a designated person can direct or significantly influence the decisions of an entity, OFSI may treat that entity as caught, even without majority ownership. In this matter, the analysis of the minority shareholder's rights under the parent's shareholders' agreement was therefore critical. It was that analysis – not the ownership percentage – that determined whether the acquirer had in fact completed a transaction involving a designated person.
What Went Wrong in the Warranty Drafting and Diligence?
Four weaknesses compounded each other in this matter.
First, the diligence scope stopped at the first-level parent. A full beneficial ownership trace (mapping every person who ultimately owns or controls the target, layered through any intermediate structure) was not commissioned. Screening the named entity is a starting point, not a complete ownership-chain review.
Second, the warranties were knowledge-qualified without the parties first defining what knowledge meant. Did it mean actual knowledge of the designated person's existence on the list? Did it extend to constructive knowledge – what a reasonable party conducting proportionate diligence would have found? In our experience, that ambiguity becomes a dispute as soon as OFSI appears in the picture.
Third, the representations did not include a forward-looking undertaking. Neither party committed to notify the other if, after signing and before completion, any person in the ownership chain became the subject of a sanctions designation. Between exchange and completion in a multi-month transaction, the sanctions environment can change. A pre-completion notification obligation – together with a right to rescind or apply for a specific licence if a designation arises – is standard in well-drafted transaction documents.
Fourth, there was no sanctions condition precedent (a closing condition requiring each party to confirm, at the point of completion, that the warranties remain accurate). The representations were given once at signing. By completion, the picture had changed – the designation had been in force for some months – but the closing mechanism contained no requirement to re-confirm.
Would better drafting have prevented the designation? No. It would, however, have identified the issue before completion and allowed the parties to make an informed decision about whether to proceed, to seek an OFSI specific licence (a case-by-case authorisation permitting an otherwise prohibited transaction or dealing), or to restructure.
How Was the OFSI Issue Resolved?
Once the designation was identified post-completion, the acquirer's first obligation was to consider whether it held or controlled funds or economic resources in which a designated person had an interest – and if so, whether that constituted a dealing offence under the applicable sanctions regulations.
The control analysis concluded that the minority shareholder's rights, while material, did not reach the level required to treat the parent – and therefore the target – as owned or controlled by a designated person for OFSI purposes. The rights were relevant, but they fell short of the threshold that OFSI's guidance describes as significant influence over decisions. That conclusion reduced the statutory exposure but did not eliminate it entirely; the minority shareholder still held an economic interest, and OFSI's approach to mixed-ownership structures requires careful mapping.
The acquirer made a voluntary disclosure to OFSI, setting out the position in full: the timeline of the acquisition, the scope of the diligence conducted, the point at which the designation was identified, and the control analysis. OFSI acknowledged receipt. The matter proceeded through OFSI's review process. No licence was ultimately required on the facts, because the control test was not met, but the disclosure and the transparency it demonstrated were materially important to the outcome.
In parallel, the acquirer pursued its warranty claim against the seller on the basis that the seller had given a representation it could not properly support. That commercial dispute was resolved between the parties. The terms are confidential. The regulatory position, however, was addressed independently – the warranty claim and the OFSI engagement ran on separate tracks, as they must.
The position above covers the standard analytical pathway. Your facts – the structure of the target, the nature of the shareholder's rights, the governing regulations, and the jurisdiction of the designated person – change the analysis at every step.
If a transaction has already completed and a sanctions question has subsequently arisen, early engagement with specialist counsel can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com.
Risk Flags: When Should Transaction Teams Pause?
Several signals should prompt a team to escalate to sanctions counsel before proceeding.
- Any disclosed shareholder, director, or beneficial owner with a connection to a jurisdiction subject to a comprehensive or thematic sanctions programme.
- A target with a complex or opaque ownership structure – nominees, foundations, discretionary trusts, or chains of holding companies in multiple jurisdictions.
- Disclosed shareholder rights that are disproportionate to the ownership stake – veto rights, consent rights over material decisions, or board appointment powers held by a minority investor.
- A long period between exchange and completion, during which the designation risk may change.
- A transaction that touches assets, counterparties, or financing in more than one sanctions jurisdiction – US, UK, EU, and others – where the ownership-and-control tests diverge.
- Warranty language that is knowledge-qualified without a defined diligence standard.
What is the cost of pausing? In our experience, a targeted ownership-chain screen and a legal assessment of any identified risk takes a defined and manageable period of time. The cost of proceeding without that assessment – and finding a designated-person interest after completion – is categorically higher, in regulatory exposure, management time, and commercial disruption.
The Myth That Warranties Replace Diligence
A persistent misunderstanding in M&A and trade-finance teams is that a well-drafted sanctions warranty is a substitute for pre-transaction diligence. The argument runs: if the seller gives the warranty and it turns out to be wrong, the buyer has a claim. The buyer is protected.
This is incorrect in two important respects. First, as this matter shows, the regulatory position does not follow the contractual one. OFSI's obligation runs to the person in possession of the asset, not to the party that gave the warranty. A claim against the seller is a commercial remedy. It does not resolve the regulatory question. Second, warranty claims take time, involve litigation risk, and presuppose a solvent counterparty. Where the seller is the entity connected to a designated person, the practical recovery may be limited.
The lesson is not that warranties are useless – they are an important risk allocation tool, and well-drafted sanctions warranties include important protections. The lesson is that they work alongside diligence, not instead of it. Compliance counsel advising cross-border transaction teams consistently makes this distinction. We regularly advise clients who have received a warranty claim from the other side of a transaction and need to understand the regulatory dimension separately.
Related practices
- Correspondent banking and de-risking under OFAC – managing OFAC exposure in correspondent and correspondent-adjacent relationships
- Supply chain mapping under the BIS/EAR – tracing export-control risk through complex supply structures
- Supply chain mapping under OFAC – identifying SDN exposure in layered counterparty chains