A private equity sponsor is three weeks from signing on a mid-market acquisition in Southeast Asia. The target's shareholder register shows a complex web of nominees, holding companies, and minority stakes. Someone on the deal team runs the top-level names through a screening tool. Nothing flags. The deal closes. Six months later, OFAC issues a notice: one of the intermediate holding companies is owned, in the aggregate, 50 percent or more by a blocked person. The acquirer now holds a blocked asset. This is not a hypothetical. It is a pattern we see across cross-border M&A transactions with regularity.
Sanctions due diligence in M&A under OFAC rules is the process of identifying whether a target company, its owners, its assets, or its material counterparties are blocked or otherwise restricted under OFAC's economic-sanctions programmes. The governing authority is the US Department of the Treasury's Office of Foreign Assets Control, acting under powers delegated by IEEPA and related statutes. A failure at this stage does not merely delay a deal – it can render the acquisition itself a prohibited transaction, expose the acquirer to significant civil penalties, and transfer blocked-asset liability onto a clean balance sheet.
This briefing covers who administers OFAC's sanctions programmes and what legal authority they exercise; the key prohibitions relevant to M&A buyers; how the ownership-and-control analysis works in practice; where OFAC's approach diverges from OFSI and the EU; common risk flags in cross-border acquisitions; the licensing route when a deal is genuinely caught; and when to involve specialist counsel. As of January 2026, OFAC administers more than thirty active sanctions programmes, and enforcement action against acquirers who inherit blocked exposure remains a live regulatory risk.
Who administers OFAC and what legal authority does it exercise?
OFAC is a division of the US Department of the Treasury and is the primary federal authority administering US economic-sanctions programmes. It derives its authority principally from IEEPA – the International Emergency Economic Powers Act – as well as from the Trading With the Enemy Act and several programme-specific statutes. OFAC's reach is both broad and extraterritorial: US persons wherever located, non-US persons within US jurisdiction, and certain categories of non-US transaction that touch the US financial system are all potentially within scope.
For M&A purposes, this extraterritorial reach is the first thing a cross-border deal team must absorb. A European buyer acquiring a non-US target may have OFAC obligations if the target has US-person employees, US-dollar receivables, US-correspondent-banking relationships, or assets physically located in the United States. In our practice, we regularly advise buyers who assume that OFAC is only a US-domestic concern – until the closing wire is blocked by a correspondent bank applying US-dollar clearing rules.
OFAC maintains several public lists, of which the SDN List (OFAC's list of Specially Designated Nationals and blocked persons) is the most operationally significant for M&A. A listed person's property and interests in property must be blocked; no dealings are permitted without a licence or a specific statutory exemption. OFAC also maintains the Sectoral Sanctions Identifications List and other restricted-party databases that impose transaction-specific restrictions rather than full asset freezes. Both must be checked in any acquisition review.
The position above covers the standard framing. Your target's facts – its ownership structure, the sector in which it operates, its banking relationships, and the jurisdictions through which it trades – can change the analysis entirely.
For a confidential review of your acquisition's exposure under OFAC or any other major regime, contact Calder & Vance at info@caldervance.com.
What does OFAC prohibit? The core rules for M&A buyers
OFAC prohibits US persons – and, in certain circumstances, non-US persons – from engaging in any transaction or dealing in property or interests in property of a blocked person. In the M&A context, acquiring shares or assets of a blocked entity is itself a prohibited transaction. Receiving dividends from, extending credit to, or providing services to a blocked entity are equally prohibited.
Two categories of prohibition are particularly relevant to acquisition diligence.
First, blocking prohibitions apply to SDN-listed persons and to any entity they own or control at the 50 percent or more threshold. A buyer who acquires a non-listed company without knowing that the company is effectively blocked – because a listed person holds a majority stake through a layered holding structure – inherits the blocked status of that asset the moment the acquisition closes.
Second, sectoral restrictions do not freeze assets outright but prohibit defined categories of transaction with specified Russian, Venezuelan, and other entities identified on separate OFAC lists. Financing a target that is subject to sectoral restrictions may itself violate OFAC rules even where the target is not on the SDN List. Buyers of businesses that operate in, or derive significant revenues from, sanctioned sectors must therefore conduct a different and often more granular analysis than a simple SDN-screening exercise.
A third category – secondary-sanctions risk – is not a direct US legal prohibition on a non-US buyer but carries its own commercial consequences. Non-US firms that engage in significant transactions with certain designated persons or in certain sectors may themselves become subject to US sanctions or restricted from accessing the US financial system. For a non-US acquirer whose business depends on dollar-clearing or on US supplier relationships, this risk can be as commercially disabling as a direct prohibition.
How does the 50 percent rule work in an M&A ownership analysis?
The 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked) is the single most consequential analytical tool in acquisition due diligence, and the one that screening tools most frequently fail to apply correctly. The rule operates by aggregation: if two listed persons each hold 30 percent of a target, the target is treated as blocked even though neither person individually meets the threshold. The percentage is measured across all blocked persons in aggregate, whether they hold directly or through intermediate structures.
The rule chains through ownership layers. If a listed person owns 50 percent or more of Entity A, and Entity A owns 60 percent of Entity B, then Entity B is also treated as blocked – even if Entity B itself has no listed person as a direct shareholder. Diligence that stops at the first layer of the ownership register will miss exactly this pattern. We have advised on acquisitions where the blocked exposure was three holding-company layers removed from the target's shareholder register and had never appeared in any standard screening check.
How deep must the search go? OFAC's guidance does not prescribe a fixed number of layers. The standard is whether a blocked person owns, directly or indirectly in the aggregate, 50 percent or more. In practice, this means the diligence exercise must trace ownership to the ultimate beneficial owners across every intermediary layer where ownership data is available or reasonably obtainable. For complex structures with nominees, trusts, or jurisdictions that do not maintain public beneficial-ownership registers, the analysis requires active investigation – document requests, local-counsel searches, registry filings, and, where risk is elevated, enhanced due-diligence measures.
One important limitation: the 50 percent rule under OFAC is an ownership test, not a control test. An SDN who exercises operational control over a company but owns less than 50 percent does not automatically cause that company to be blocked under this specific rule. This is a significant divergence from the OFSI and EU approaches – see the next section.
How does OFAC's approach differ from OFSI and the EU?
Under OFSI (the UK's Office of Financial Sanctions Implementation) and the EU sanctions regulations, the relevant test extends beyond ownership to ownership and control – the UK and EU test for whether a non-listed entity is caught through a listed person. This means that a listed person who effectively directs the decisions of a company – even without holding a majority ownership stake – may still bring that company within the scope of the UK or EU prohibitions.
The practical consequence is significant for cross-border M&A. A transaction that passes the OFAC 50 percent ownership screen may still be prohibited under UK or EU rules if a listed person exercises control through contractual rights, board composition, veto rights, or informal influence. Buyers with EU or UK regulatory exposure – or whose targets have EU or UK operations, assets, or counterparties – must run both analyses in parallel.
A second divergence concerns the scope of secondary-sanctions reach. OFAC's extraterritorial secondary-sanctions architecture is more developed than the current UK and EU equivalents. For a non-US buyer, OFAC secondary-sanctions risk must be assessed independently of any direct prohibition analysis; it operates through a different mechanism and can affect the buyer's US market access even where no US-nexus transaction is technically involved.
A third point of divergence is licensing and authorisation. OFAC's specific-licence application process differs in procedure, timeline, and documented standard from the OFSI licensing process and from the national-authority routes in EU member states. Where a transaction requires authorisation in multiple jurisdictions simultaneously, the sequencing of those applications matters and can affect the overall deal timeline. We regularly advise on multi-jurisdictional licence applications where the buyer must coordinate filings across OFAC, OFSI, and one or more EU national authorities.
Does your deal involve targets or assets in the UK or EU? The ownership-and-control question under those regimes may require a different answer from the one your OFAC screening produces.
See also our related briefing on OFAC sanctions diligence in M&A: advanced issues for a deeper treatment of multi-regime coordination and licensing in complex acquisitions.
What are the principal risk flags in cross-border acquisition diligence?
The risk flags that most frequently require escalation in our cross-border acquisition practice cluster around five patterns: opaque ownership structures, high-risk jurisdictional nexus, sectoral exposure, counterparty concentration, and incomplete pre-signing disclosure.
Opaque ownership structures are the most common source of hidden OFAC exposure. These include bearer-share arrangements, nominee shareholding, trust structures where the beneficial owner is not identified, and holding companies in jurisdictions with minimal public-registry obligations. Where the ownership chain cannot be traced to ultimate beneficial owners, diligence is incomplete and the residual risk must be assessed and documented before signing.
Jurisdictional nexus matters at multiple points. A target incorporated in a low-risk jurisdiction but with operations, bank accounts, or major customers in a sanctioned territory presents a different risk profile from its registration alone would suggest. Trade-flow analysis – reviewing the target's actual commercial relationships, not merely its corporate address – is an essential component of a sound OFAC diligence review.
Sectoral exposure is under-examined in standard M&A diligence. A target in the energy, financial-services, or technology sector may be subject to sectoral restrictions under one or more OFAC programmes even where none of its shareholders is SDN-listed. The diligence question is not only who owns the target but what it does and with whom.
Counterparty concentration occurs where a significant proportion of the target's revenues derives from a small number of customers or suppliers who are themselves not screened in the diligence. Inheriting a business whose major customer is a blocked entity is not the same as inheriting a direct blocked asset – but it may render the post-closing commercial model non-viable or itself restricted.
Incomplete pre-signing disclosure by the seller is a contractual-risk issue as much as a regulatory one. Where representations and warranties in the acquisition agreement do not specifically address OFAC status, ownership-chain exposure, and secondary-sanctions risk, the buyer may have limited contractual recourse even where the seller knew of exposure. Diligence findings and acquisition agreement drafting must be coordinated.
If a transaction has already been flagged, or a closing has been deferred pending sanctions review, an early assessment can preserve options that narrow with time.
To discuss the exposure on a specific acquisition, write to us at info@caldervance.com.
What is the licensing route when a deal is caught by OFAC?
Where a proposed acquisition is caught by an OFAC prohibition, the primary route to proceeding lawfully is a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) from OFAC. A general licence (a standing authorisation that permits a defined category of transactions without a separate application) may also be available for certain limited categories of transaction – for example, ordinary-course payments to preserve the value of a blocked asset pending divestment – but general licences rarely authorise a new acquisition outright.
A specific-licence application requires the applicant to set out the transaction, the parties, the sanctions nexus, the public-policy argument for the authorisation, and any proposed conditions or safeguards. OFAC has significant discretion in granting, conditioning, or denying specific licences. The processing time varies by programme and by the complexity of the application; for complex cross-border acquisitions, applicants should not assume a short timeline. In our experience, a well-prepared application that clearly articulates the public benefit and the compliance safeguards stands a materially better chance of receiving a favourable determination than one that is filed without strategic preparation.
There is no right of appeal in the conventional sense if OFAC declines a specific-licence application; the applicant may seek reconsideration or, in limited circumstances, pursue judicial review. The practical lesson is that the application should be prepared to the highest evidentiary standard from the outset, with specialist counsel involved before filing.
An alternative to seeking a licence is to restructure the transaction to eliminate the OFAC nexus – for example, by carving out the blocked entity or assets from the perimeter of the acquisition. Whether this is commercially viable depends on the facts of the deal. Where divestiture or carve-out is the chosen route, OFAC guidance on transactions to divest or wind down blocked assets may itself require a separate authorisation, and that process should be considered in the overall timeline.
A common misconception: "our screening tool cleared it"
The most persistent misconception in M&A sanctions diligence is that a "clear" result from a commercial screening tool is a clean bill of health. It is not. Commercial screening tools compare names against public OFAC lists. They do not trace ownership chains beyond the first layer. They do not aggregate fractional holdings across multiple listed persons. They do not identify sectoral-restriction exposure where the listed entity is not the target itself. And they do not assess secondary-sanctions risk.
A screening check is a necessary starting point, not an endpoint. In our practice, we regularly see transactions where the screening tool returned no matches, but a structured ownership analysis revealed that the target was owned, in the aggregate, 50 percent or more by a blocked person when holdings at multiple ownership levels were correctly combined. The tool missed the exposure because it was not designed to perform that analysis.
The relevant standard is not "did anything flag" but "have we taken all reasonable steps to identify whether any blocked person owns or controls the target." That is a legal and analytical question, not a database-search question. The distinction matters for enforcement purposes: a buyer who relied solely on a screening-tool clearance, without performing a structured ownership analysis, is unlikely to receive full credit for cooperation or remediation in any subsequent OFAC enforcement review.
In a recent matter, a financial-services business seeking to acquire a minority stake in a payments company instructed us to review the completeness of its diligence. We traced the full ownership chain, identified a previously undetected aggregation issue at the third ownership layer, and advised the client on the available options before signing. The transaction was restructured on terms that eliminated the OFAC nexus without requiring a licence application. The matter resolved without any regulatory engagement.
When should you involve specialist counsel?
Specialist sanctions counsel should be involved at the earliest point in the M&A process at which the target's ownership structure, sector, or jurisdictional footprint suggests any potential OFAC exposure. Waiting until diligence has closed, or until a red flag has already been escalated internally, compresses the time available to design a solution and increases the risk that signing or closing creates a prohibited transaction before advice is received.
There are four situations in which we would specifically recommend early involvement. First, where the target operates in, derives revenues from, or has significant counterparties in a jurisdiction subject to comprehensive OFAC sanctions. Second, where the ownership chain includes nominees, trusts, or intermediate holding companies in opacity-risk jurisdictions. Third, where the deal structure includes equity consideration, earnout arrangements, or deferred payment that could themselves constitute dealings with a blocked person if the underlying ownership analysis produces a different result post-signing. Fourth, where the buyer or the target has exposure to the UK, EU, or another major sanctions regime in addition to OFAC, and a multi-regime analysis is required to clear the transaction.
We assess eligibility, prepare and submit licence applications, and manage regulator queries on behalf of acquirers seeking to proceed with OFAC-caught transactions. Where the preferred route is a structural solution, we work alongside the deal team to design and document the carve-out or divestiture. Where a voluntary self-disclosure is required, we scope the apparent violation, prepare the VSD (voluntary self-disclosure to a regulator), and manage the enforcement engagement.
See also our service page on correspondent banking, de-risking, and OFAC for related guidance on how financial institutions manage sanctions exposure in cross-border payment and trade-finance transactions.
For maritime and trade-sector acquisitions with multi-regime exposure, our briefing on maritime shipping sanctions under the Australian regime addresses the intersection of OFAC and other major regimes in the trade and logistics sector.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions exposure in cross-border payment and trade-finance relationships
- OFAC sanctions diligence in M&A: advanced issues – multi-regime coordination, complex ownership structures, and licensing for acquisitions