A private equity fund based in London closes an acquisition. Post-closing diligence surfaces a minority stake the target holds in a subsidiary operating under the control of a person who has since appeared on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons). The fund's legal team has a single urgent question: what must it do with that stake, and how fast does it need to move?
Divesting a sanctioned interest under OFAC rules means transferring or otherwise disposing of an ownership position that is itself blocked, or that connects the holder to a blocked counterparty, in a manner the Office of Foreign Assets Control permits. The governing authority is OFAC, operating under IEEPA and the relevant programme regulations. The disposition must not itself constitute a prohibited transaction — meaning the divestment route, the buyer, and the proceeds all require analysis before any step is taken.
This briefing explains who administers the process, what the key prohibitions bite on, how the divestment mechanics work in practice, where the cross-border dimensions of OFAC enforcement can catch a non-US actor, and when to involve specialist counsel. As of January 2026, OFAC's published guidance on divestment remains programme-specific; the principles below reflect the general framework as currently in force — verify the current position before relying on anything stated here.
Who administers OFAC divestment requirements and on what legal basis?
OFAC, an office within the US Department of the Treasury, administers all US economic sanctions programmes and is the authority a holder must engage when seeking to divest a sanctioned interest. Its legal basis is principally IEEPA — the International Emergency Economic Powers Act — supplemented by the Trading With the Enemy Act in certain older programmes, and by the programme-specific executive orders that declare the national emergency underpinning each sanctions regime. OFAC issues binding regulations, guidance, and licence determinations; it also imposes civil penalties for violations and refers criminal matters to the Department of Justice.
When a divestment is needed, OFAC is the starting point — and usually the endpoint — of the authorisation process. The relevant instrument is a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) or, in some programmes, a general licence (a standing authorisation that permits a defined category of transactions without a separate application). Not every divestment requires a specific licence; some programmes contain general licences that expressly authorise the wind-down or divestment of pre-existing positions within a defined window. Identifying which general licences apply — and whether any have already expired — is step one of the analysis.
In our experience, clients frequently assume that a divestment is automatically permissible because the intention is to exit the position. That assumption is wrong. The act of transferring blocked property, including to a third party with no sanctions connections, is itself a dealing in blocked property unless OFAC has authorised it. The intention to exit does not supply the authorisation.
What does OFAC prohibit — and what does it require — in a divestment situation?
OFAC's core prohibition in a divestment situation operates on two levels: the interest itself, and the acts of dealing with it. Where the 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked) captures the interest, that interest is blocked property from the moment the threshold is met or exceeded. Blocked property must be held in a segregated, interest-bearing account and reported to OFAC within a short statutory window — verify the current reporting deadline for the applicable programme before relying on any figure.
Three categories of act are prohibited without authorisation:
- Transferring the interest — whether by sale, gift, assignment, or any other disposition — to any person, including a non-blocked person.
- Receiving value in connection with the interest, including dividends, distributions, or proceeds of a purported sale, unless the payment is itself authorised.
- Taking any action that has the effect of evading the blocking — for example, moving the interest into a structure designed to obscure the sanctioned connection.
At the same time, OFAC's rules impose a positive obligation to block and report. Failing to block — that is, allowing the interest to remain unidentified and unreported — is itself a violation, separate from any subsequent dealing. In our cross-border practice, we regularly advise clients who discover a sanctioned interest during post-acquisition diligence: the sequence matters. Block, report, and then seek authorisation to divest — not the reverse.
The position above covers the standard case. Your facts — the programme, the ownership percentage, the jurisdiction of the interest, and any applicable general licence window — change the analysis materially.
For a confidential first review of a potential blocking obligation, contact Calder & Vance at info@caldervance.com.
How does the divestment process work in practice?
A divestment under OFAC follows a sequence of discrete steps, each of which carries its own compliance obligation. The sequence below reflects the general OFAC framework; programme-specific rules may alter the order or the deadline at each stage.
- Identify and quantify the interest. Map the ownership chain using the 50 percent rule. Aggregation is critical: two or more blocked persons each holding a minority position may together reach the threshold. Map direct holdings and all intermediate layers.
- Block and segregate. Once a blocking obligation is confirmed, the interest — and any associated proceeds — must be placed in a blocked account. The account must be interest-bearing where the blocked property is cash or a cash-equivalent.
- Report to OFAC. A report of the blocked property must be filed within the reporting window specified by the applicable programme regulations. Missing this window is itself a separate violation.
- Identify the authorisation pathway. Review all applicable general licences for the programme. If a general licence covers the divestment, document the basis for reliance and retain that documentation for the required record-keeping period. If no general licence applies, a specific licence application to OFAC is required before any transfer is made.
- Prepare and submit a specific licence application. A specific licence application must set out the transaction structure, the parties, the proposed buyer, the basis for the request, and the safeguards in place to ensure that blocked property does not flow back to a blocked person. OFAC reviews applications and may request supplemental information; the timeline is not fixed and varies significantly by programme and complexity.
- Execute the licensed divestment. Once a licence issues, the divestment must be completed strictly within its terms. Departing from the licensed structure — for example, changing the buyer or adjusting the consideration — may render the licence void and the transaction a violation.
- Retain records. All records relating to a blocked-property report and a licensed divestment must be retained for five years from the date of the transaction or the date the blocking obligation arose, whichever is later.
What constitutes a permissible buyer is a point practitioners often underestimate. Selling a sanctioned interest to a person who is themselves connected to the original blocked party — even at one remove — does not break the chain. OFAC's analysis looks through the transaction to the ultimate beneficiary. The proposed buyer's ownership structure must itself be screened before a specific licence application is filed.
How does OFAC's divestment regime interact with the UK, EU, and other regimes?
A business operating across jurisdictions rarely faces OFAC alone. For a company incorporated in or operating from the United Kingdom, the European Union, or another major jurisdiction, divestment of a sanctioned interest may simultaneously engage OFSI, the relevant EU Council regulations, and — in some programmes — the UN Security Council Consolidated List. The three regimes do not move in lockstep, and divergence between them is a material operational risk.
Under OFSI, the UK's Office of Financial Sanctions Implementation, the test for whether an interest is blocked uses both an ownership and control test (the UK and EU test for whether a non-listed entity is caught through a listed person). Unlike OFAC's mechanical 50 percent ownership threshold, the UK and EU tests additionally ask whether the designated person controls the entity — through board composition, decision-making authority, or other means — even where their ownership stake sits below the threshold. A divestment that appears clean under the OFAC 50 percent analysis may still be caught under OFSI's control test. Where both regimes apply, the stricter prohibition governs the position until each regime has specifically authorised the transaction.
The EU position mirrors the UK control test in this respect. An entity in which a designated person holds a minority stake but exercises decisive influence may be treated as effectively controlled, and dealing in that entity's interests — including divestment — may require authorisation under the relevant Council regulation. EU authorisations are issued at the member-state level by the competent national authority, not by a central EU body, which introduces timing and consistency issues when the business has operations in more than one EU member state.
For businesses with a Singapore, UAE, or Japanese nexus, the applicable country regime will also require attention. Singapore's MAS sanctions and the UAE's sanctions compliance framework both impose autonomous prohibitions that may not map precisely onto OFAC's programme definitions. In our practice, we regularly advise on situations where an OFAC-licensed divestment still requires separate authorisation from one or more of these authorities before execution can proceed.
If a transaction has already been flagged, or a licence application has been refused in one jurisdiction, an early multi-regime review can preserve options that narrow with time. Contact Calder & Vance at info@caldervance.com to discuss a cross-regime divestment situation.
What are the principal risk flags when divesting a sanctioned interest?
Divestment situations concentrate several categories of sanctions risk that practitioners encounter repeatedly. Recognising them early reduces both the probability of a violation and the cost of remediation.
Proceeds risk. Even a fully authorised divestment generates proceeds. If those proceeds flow — even briefly — through an account that a blocked person can access, a separate dealing violation may arise. The proceeds pathway must be mapped before the licence is executed, not after the sale closes.
Aggregation errors. The 50 percent rule aggregates holdings across all blocked persons in the same ownership chain. A business that screens only the direct sellers — and not indirect shareholders of the seller — will miss the aggregation problem. In a recent matter, a financial-services client discovered post-closing that two separately screened shareholders, neither of whom individually triggered the threshold, together held just over 50 percent of the target. We advised on the blocking obligation, the reporting sequence, and the specific licence application. The matter required material restructuring of the intended exit.
Programme-specific general-licence windows. Some OFAC programmes include general licences with defined time windows for divestment — for example, a wind-down period following a new designation. Those windows can be narrow. Assuming that a window remains open without verifying its current status is a common and costly mistake. Check the current text of each relevant general licence; do not rely on summaries.
Buyer due diligence gaps. OFAC expects the licence applicant to demonstrate that the proposed buyer is not connected to the blocked person. Weak buyer diligence undermines the application and, if the sale proceeds without adequate diligence, may provide no protection against a subsequent enforcement action.
Record-keeping failures. The five-year record-keeping obligation applies from the date of the transaction. Firms that rely on deal-room archives — without ensuring that the blocking report, the licence application, and the executed licence are specifically preserved and retrievable — routinely fail this requirement on examination.
How is divesting a sanctioned interest enforced by OFAC?
OFAC enforces divestment-related violations through its civil penalties process under IEEPA and the relevant programme regulations. A violation arises either from a dealing in blocked property without authorisation, or from a failure to block and report. Both categories carry significant civil exposure. The penalty base for a wilful violation is substantially higher than for a non-wilful one, and OFAC takes into account a range of factors — including whether the firm identified the issue voluntarily and the quality of its pre-existing compliance programme — when calculating the final penalty.
Voluntary self-disclosure (a VSD — the act of reporting an apparent violation to OFAC before the agency identifies it) is a well-established feature of OFAC enforcement. A timely, complete VSD — accompanied by a thorough root-cause analysis and a credible remediation plan — has historically resulted in a substantially reduced penalty or, in some cases, a no-action letter. The decision whether to submit a VSD requires careful legal analysis: a poorly drafted VSD that is incomplete or inaccurate can itself cause problems. Counsel should be involved before any VSD is submitted.
Criminal referral to the Department of Justice is reserved for wilful violations. In a divestment context, the most serious criminal risk arises where a firm structures the disposal in a way intended to defeat the blocking obligation — for example, by disguising the transfer as a different type of transaction or by moving proceeds through a layered structure. That conduct is evasion, not compliance. Calder & Vance does not advise on circumventing or evading sanctions.
A secondary enforcement risk comes from OFSI and the relevant EU competent authorities, which maintain their own penalty processes. An OFAC enforcement action does not discharge UK or EU liability, and a settlement agreed with OFAC is not automatically accepted as mitigating in parallel proceedings. Firms facing multi-regime exposure should co-ordinate the disclosure and remediation strategy across all relevant authorities from the outset.
A common misconception — and what the law actually requires
A persistent myth in this area is that divestment is a remedial act that automatically cures a blocking obligation. The logic runs: if the business exits the interest, the problem is resolved. This is not how OFAC's rules operate.
Divestment without prior authorisation is itself a prohibited dealing. Exiting a blocked position through an unauthorised transaction creates a second violation on top of the original blocking failure. The cure is not the exit; the cure is the licensed exit. OFAC's rules require the holder to maintain the blocked status of the property — with proper segregation and reporting — while the authorisation process runs to completion. That may take months. The property cannot be sold, transferred, or otherwise dealt with during that period except under a licence.
We regularly advise clients who have already taken steps — informally agreed a buyer, paid a nominal consideration, or executed an assignment agreement — before identifying the blocking issue. The post-execution position is significantly more difficult to resolve than the pre-execution one. Prospective analysis, before any step is taken, is always the lower-cost path.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions exposure for financial institutions handling cross-border payments
- Divesting a sanctioned interest: the OFSI and EU dimensions – how the UK and EU ownership-and-control tests interact with an OFAC divestment
- Divesting a sanctioned interest: licensing strategy and application preparation – structuring and filing an OFAC specific licence application for a divestment