A private equity fund based in London holds a minority stake in a distribution business. Midway through its hold period, the fund's management company discovers that a co-investor has been designated by OFAC. The co-investor holds a combined interest that, when aggregated with related parties, meets the blocking threshold. The distribution business is now itself treated as blocked. Every interest in it – including the fund's minority stake – becomes property subject to OFAC's prohibitions. Divesting that stake is not simply a matter of finding a buyer. It requires understanding exactly what the law permits, what it prohibits, and whether a specific licence is needed before any transfer can proceed.
Divesting a sanctioned interest under OFAC rules means transferring blocked property from a US person – or from any person within OFAC's jurisdiction – without engaging in a prohibited dealing. Because blocked property cannot be transferred, exported, withdrawn, or otherwise dealt with unless OFAC has authorised the transfer, a divestiture of this kind almost always requires either a general licence that specifically covers the transaction or a specific licence obtained in advance. The governing authority is OFAC, acting under the powers granted by the International Emergency Economic Powers Act and related statutes. As of January 2026, OFAC's licensing practice for divestiture transactions remains active and transactable, but timelines and conditions vary significantly by programme.
This briefing covers who administers the rule, what the prohibitions mean in practice, how the divestiture procedure works, how the US position compares with the OFSI and EU positions, what the most common risk flags are, and when to involve counsel. It is written for the general counsel, compliance officer, or transaction adviser who has identified a sanctioned interest and needs to understand the full picture before deciding next steps.
Who administers divesting a sanctioned interest under OFAC?
The Office of Foreign Assets Control – a bureau of the US Department of the Treasury – administers the divestiture rules as part of its broader mandate to administer and enforce US economic and trade sanctions. OFAC derives its authority from a chain of statutes that runs through IEEPA and, for certain older programmes, the Trading with the Enemy Act. When OFAC designates a person or entity, that designation triggers a set of prohibitions that apply to US persons wherever they are located, and to non-US persons in defined circumstances involving the US financial system or US-origin goods.
For divestiture purposes, the critical institutional role is OFAC's licensing function. OFAC issues both general licences (standing authorisations that permit a defined category of transactions without a separate application) and specific licences (case-by-case authorisations). The Office of Global Targeting handles designations. The Compliance and Enforcement division handles penalty proceedings. When a client holds a blocked interest and wants to divest, it is OFAC's licensing function that must be engaged – in writing, formally, and with a detailed factual record.
OFAC's authority extends extraterritorially in ways that surprise non-US firms. A non-US fund holding a blocked interest may face no direct OFAC prohibition if it has no US nexus. But the moment it processes a USD clearing transaction, uses a US correspondent bank, involves a US person in the management or transfer, or routes the deal through a US platform, OFAC jurisdiction attaches. In our experience, non-US clients routinely underestimate this reach – and then discover it at the worst possible moment.
What does OFAC prohibit in relation to divesting a sanctioned interest?
The core prohibition is the dealing prohibition: US persons – and others within OFAC's jurisdiction – may not deal in any property or interest in property in which a blocked person has an interest. A divestiture is a dealing. It transfers property. Unless an authorisation applies, it is prohibited.
The 50 percent rule (OFAC's rule treating entities owned 50 percent or more, in the aggregate, by one or more blocked persons as themselves blocked) is the most common mechanism by which a non-listed company becomes the subject of these prohibitions. A business that has never itself been designated can still carry fully blocked status if the ownership arithmetic reaches the threshold. That status runs to every interest in the business, including a minority stake held by an entirely clean investor.
Beyond the ownership threshold, OFAC also treats entities that a blocked person controls – even below the 50 percent ownership line – as potentially blocked in certain programmes. The control analysis is fact-specific and looks at board representation, contractual veto rights, and operational management. This matters for divestiture because a stake that sits below the threshold may still be blocked if control is exercised by a designated party.
The prohibitions cover not only the act of transfer but ancillary transactions. Paying a broker's fee from blocked proceeds, routing a transfer through a US correspondent account, or making a representation to a buyer that the transaction is unencumbered can each constitute a separate dealing. Due diligence disclosures, signing mechanics, and escrow arrangements all need to be reviewed against the prohibitions before execution. What is the practical implication? A divestiture that is structured without considering these ancillary touchpoints can generate multiple violations from a single transaction.
How does the OFAC divestiture procedure work?
The starting point for any OFAC divestiture is to determine whether an applicable general licence covers the transaction. Some general licences authorise the winding down of contracts with newly designated persons within a defined window – often expressed in days from the designation date. Others authorise specific categories of divestiture in connection with defined programmes. If a general licence applies and its terms are met precisely, the transfer can proceed without a separate application – but the conditions must be satisfied in full, and the transaction should be documented carefully in case of a later compliance review.
Where no general licence applies, a specific licence application is required. The application is submitted to OFAC through its official licensing portal or, in complex matters, by paper submission. A well-prepared application contains a full factual narrative, a description of the proposed transaction structure, identification of all parties and their sanctions status, a legal analysis, evidence of the blocked interest, and a statement of the public interest or policy grounds that support the licence. Incomplete applications are returned or result in prolonged review.
OFAC does not publish binding processing timelines for specific-licence applications. In our practice, straightforward divestiture licences in active enforcement programmes have been processed within weeks; contested or complex matters can take considerably longer. Applicants who have submitted an application should not treat the filing as a green light to proceed – the licence must be issued and reviewed before the transaction closes.
Once a licence is granted, its conditions govern every step of the divestiture. Licences typically specify the permitted parties, the transaction structure, the timeframe, the treatment of proceeds, and the records that must be retained. Five years is the standard record-keeping period under OFAC's regulations – retain all documents supporting the divestiture, the licence application, and the transaction execution for at least that period. A breach of a licence condition is itself a violation, separate from any underlying prohibited transaction.
How does the OFAC approach compare with OFSI and EU rules?
Businesses managing a divestiture across multiple jurisdictions face divergent tests, divergent procedures, and divergent enforcement postures. The US, UK, and EU positions are not harmonised, and assuming that an OFAC licence solves the problem everywhere is one of the most common errors we see.
Under OFAC, the ownership and control test for blocked status is primarily mechanical: the 50 percent rule aggregates ownership arithmetically, and the analysis is relatively predictable. OFSI – the UK's Office of Financial Sanctions Implementation – applies a broader ownership and control test (the test for whether a non-listed entity is caught through a listed person's ownership or control). The UK test looks not only at ownership percentage but at the ability of a designated person to direct or influence the entity's decisions. A 40 percent stake accompanied by board control may carry blocked status under UK rules even if it falls below the OFAC threshold.
The EU similarly applies an ownership-or-control standard under the relevant Council regulation governing the programme in question. The EU approach distinguishes between ownership above 50 percent (treated as definitively caught) and control below that line (a fact-specific analysis). EU member states do not apply this consistently: national competent authorities in different member states may reach different conclusions on the same facts. For a divestiture that involves EU-established entities or EU-person investors, advice from local counsel in the relevant member state is essential alongside the analysis of the Council regulation itself.
Licences are not mutual. An OFAC specific licence does not authorise the transaction under OFSI or EU rules, and vice versa. A divestiture that requires licences in all three regimes must pursue three separate applications, on different timelines, with different conditions. Coordinating these so that the transaction can close simultaneously is a material piece of project management. We regularly advise clients on sequencing these applications to avoid a situation where one licence lapses before the others are in place.
For an assessment of how the UK divestiture rules compare, see our briefing on divesting a sanctioned interest under OFSI. The Swiss SECO regime is addressed in divesting a sanctioned interest under SECO.
The position above covers the standard case. Your facts – the programme, the ownership chain, the nationalities of the investors, the location of the underlying asset, and the currency of the proceeds – change the analysis materially. If you are managing a multi-regime divestiture and need to map which authorities must be approached and in what order, contact Calder & Vance at info@caldervance.com.
What are the most common risk flags in an OFAC-regulated divestiture?
The risk flags that generate enforcement exposure in OFAC divestiture situations tend to cluster around three areas: misidentification of the blocked interest, premature execution, and inadequate documentation.
Misidentification occurs when a firm screens only direct owners and misses the aggregation mechanics of the 50 percent rule. Two designated persons each holding 26 percent of the same target reach the threshold in combination, even if neither alone does. Screening tools that flag individual holdings without aggregating across related designated parties will miss exactly this pattern. In our experience, this is the most frequent technical failure in portfolio reviews that precede a divestiture.
A related but distinct problem is the misidentification of the interest that is blocked. A fund's LP interest in a vehicle that holds a blocked portfolio company is not the same as a direct interest in the company itself. The analysis of what exactly is blocked – and therefore what must be licensed for transfer – requires a careful tracing of the ownership and interest chain, not just a surface-level designation check.
Premature execution is the second major risk. Firms under commercial pressure sometimes proceed on the assumption that a general licence covers their transaction, or that a pending specific-licence application constitutes authorisation. Neither is correct. A general licence must be read precisely: if any element of the transaction falls outside its terms, the whole transaction may be prohibited. A pending application confers no rights. Executing a transfer before a licence is issued and reviewed creates liability that is not cured by the subsequent grant of the licence.
Documentation failures compound both preceding risks. OFAC's penalty calculus takes into account the quality of a firm's compliance programme and the completeness of its records. Firms that cannot demonstrate, after the fact, that they performed the ownership analysis, identified the blocking trigger, considered general licence coverage, and either relied on a general licence (with documentary evidence of that reliance) or applied for and received a specific licence face a much less favourable enforcement outcome than firms with a clear paper trail. Record-keeping is not a formality; it is the evidence base for any subsequent enforcement defence.
How is divesting a sanctioned interest enforced under OFAC?
OFAC enforces violations of the blocking prohibitions through civil and criminal mechanisms. Civil enforcement is OFAC's primary tool. The agency issues a Finding of Violation, a Cautionary Letter, or a penalty notice. Civil penalties for wilful or reckless violations can be substantial – based on the greater of a statutory maximum per transaction or the value of the transaction itself. Penalties for non-wilful violations can still be significant, particularly where the value of the transaction is large.
OFAC's enforcement guidelines treat a number of factors as aggravating or mitigating. Among the mitigating factors are the existence of an effective compliance programme at the time of the apparent violation, voluntary self-disclosure (a VSD – a proactive report to OFAC identifying the apparent violation before OFAC becomes aware of it), and remediation steps taken after discovery. Among the aggravating factors are wilfulness, concealment, and a pattern of violations.
A VSD to OFAC can, under the guidelines, reduce a civil penalty base significantly. But the decision to submit a VSD is not automatic. It requires an assessment of whether the violation is clear, whether OFAC is likely to discover it through other means, and whether the disclosures in the VSD could create additional exposure or trigger parallel proceedings. We have acted for clients at the VSD decision point in divestiture-related enforcement contexts, and the analysis is consistently more nuanced than the basic "disclose and get a discount" summary suggests.
Criminal enforcement – pursued by the Department of Justice rather than OFAC – is reserved for wilful violations and is uncommon in the divestiture context absent evidence of deliberate evasion. However, the interaction between OFAC civil proceedings and DOJ criminal investigations is a live risk for any firm that has knowingly transferred blocked property without 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 assessment.
When does the OFAC myth that "minority stakes are always exempt" cause problems?
One of the most persistent misconceptions we encounter from clients approaching a divestiture is the belief that a minority stake – say, 15 or 20 percent – cannot possibly be blocked because the client is not in control and has no relationship with the designated co-investor. This myth causes real harm.
The 50 percent rule does not exempt minority stakes held by clean investors. It looks at the aggregate ownership of blocked persons in the entity, not at the relationship between the clean investor and the designated party. If blocked persons own 55 percent of the target in aggregate, every interest in the target is blocked – including the 15 percent held by an entirely unrelated, undesignated fund. That fund cannot transfer its interest without authorisation, cannot receive a distribution from the entity, and cannot vote its shares or take any action that constitutes a dealing in the blocked property without the risk of a violation.
The practical consequence is that a clean minority investor can find itself locked into an investment it cannot exit without OFAC's permission. The licensing route is available, and OFAC has granted licences for exactly this type of divestiture. But the process takes time, requires legal advice, and involves a disclosure of facts and transaction structure that not all investors anticipate when they first identify the issue. Identifying the problem early is the single most important factor in preserving a workable exit path.
Does this mean every fund with a diversified portfolio should be running sanctions checks on co-investors as well as portfolio companies? In our view, the answer is yes – particularly where the fund invests in markets or sectors with elevated sanctions exposure. The point at which a co-investor is designated is rarely a convenient moment in the fund's lifecycle.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions diligence for banks managing correspondent relationships and withdrawal decisions
- Divesting a sanctioned interest under OFSI – how the UK ownership-and-control test applies to a divestiture and where it diverges from the OFAC position
Frequently asked questions: divesting a sanctioned interest under OFAC
Who administers divesting a sanctioned interest under OFAC?
OFAC – the Office of Foreign Assets Control, a bureau of the US Treasury – administers the rules. Its licensing function issues general and specific licences authorising otherwise-prohibited transfers of blocked property. Enforcement of violations sits with OFAC's Compliance and Enforcement division, with criminal referrals handled by the Department of Justice for wilful violations. Non-US businesses are subject to OFAC's authority when they have a US nexus: US-dollar transactions, US-person involvement, or US-origin property.
What does OFAC prohibit in relation to divesting a sanctioned interest?
OFAC prohibits any dealing in blocked property without authorisation. A divestiture – the transfer of a blocked interest – is a dealing. Unless a general licence specifically covers the transaction or OFAC has issued a specific licence, the transfer is prohibited. Ancillary transactions, including broker payments from blocked proceeds and routing through a US correspondent account, are independently caught. The prohibition applies whether the seller is the blocked person or a clean minority investor holding a stake in a blocked entity.
How is divesting a sanctioned interest enforced under OFAC?
OFAC enforces primarily through civil penalties, which can be based on the statutory maximum per violation or the value of the underlying transaction, whichever is greater. Mitigating factors under OFAC's enforcement guidelines include an effective compliance programme, voluntary self-disclosure, and post-discovery remediation. Aggravating factors include wilfulness and concealment. Criminal enforcement by the Department of Justice applies to wilful violations. A voluntary self-disclosure is one of the most significant tools available to a firm that has identified an apparent violation – but the decision to submit one requires careful legal analysis.
About the author
J. M. Aldridge advises multinationals and financial institutions on US sanctions and export controls, with a focus on OFAC licensing, secondary-sanctions risk, and BIS classification. Calder & Vance – International Sanctions & Export Control Counsel.
About Calder & Vance
Calder & Vance is an independent international sanctions and export-control boutique. We advise multinationals, financial institutions, exporters, and individuals on the major regimes – OFAC and BIS in the United States, OFSI and ECJU in the United Kingdom, the EU Council regulations and the EU General Court, the United Nations Consolidated List, and the regimes of Switzerland, Canada, Australia, the UAE, Singapore, and Japan. Our work is limited to lawful compliance, licensing, delisting, enforcement defence, and due diligence. To discuss a matter, contact info@caldervance.com.
Disclaimer: This material is general information, not legal advice, and is not a substitute for advice on your specific facts. Sanctions and export-control rules change frequently and differ by regime; verify the current position before relying on anything stated here. Calder & Vance does not advise on circumventing or evading sanctions. For advice on your situation, contact info@caldervance.com.