A cross-border deal is agreed. Funds are to be held in escrow pending regulatory clearance. Then the compliance team discovers that one party has a connection to an entity on the UK financial sanctions list (the consolidated list of persons and entities subject to financial restrictions under UK law). The escrow account freezes in all but name. Can the payment leg proceed? Can the escrow arrangement itself be maintained? These questions are not theoretical. They arise in trade finance, M&A, and commodities transactions every week.
Payment and escrow structuring under OFSI rules is governed by the Sanctions and Anti-Money Laundering Act 2018 ("SAMLA") and the relevant thematic UK sanctions regulations. The Office of Financial Sanctions Implementation ("OFSI") administers the regime and can impose a civil monetary penalty for any breach. The prohibitions are strict-liability in character: a party that makes funds available to a designated person without a licence breaches the rules even if it had no reason to know the payee was designated.
This briefing sets out who administers OFSI's payment and sanctions rules, what the core prohibitions mean for payment and escrow arrangements, how the ownership-and-control test operates in a transactional context, where OFSI's approach diverges from OFAC and the EU, and what practical steps a business should take before funds move.
Who administers payment and escrow structuring under OFSI?
OFSI, a unit of His Majesty's Treasury, is the sole UK authority for financial sanctions implementation and enforcement. It administers all prohibitions on making funds or economic resources available to designated persons, and it grants licences permitting otherwise-prohibited payments. OFSI's remit is distinct from that of the Export Control Joint Unit ("ECJU"), which handles export licensing; a payment that triggers an OFSI prohibition cannot be resolved by an export licence, and vice versa.
For payment and escrow structuring specifically, OFSI's authority rests on SAMLA and the regulations enacted under it. Those regulations cover the UK's autonomous sanctions programmes – including programmes that partially mirror EU designations pre-Brexit but that have since diverged – as well as UK implementation of United Nations Security Council asset-freeze measures. Because the UK no longer forms part of the EU legal order, EU Council regulations have no direct force in the UK. A payment lawfully executed under an EU authorisation may still require a separate OFSI licence; the two regimes must be cleared independently.
The position above covers the standard single-jurisdiction case. Your facts – the counterparty's incorporation, the governing law of the escrow agreement, the correspondent banks in the payment chain – can shift the analysis considerably. For an initial assessment of your transaction's exposure, contact Calder & Vance at info@caldervance.com.
What does OFSI prohibit in relation to payment and escrow structuring?
The core prohibition is making funds or economic resources directly or indirectly available to, or for the benefit of, a designated person. In a transactional context this reaches further than many clients initially assume. An escrow arrangement that holds funds for a party later found to be designated may already constitute prohibited dealing, even before the funds are released.
Three specific patterns recur in cross-border payment and escrow work:
- Direct payment: sending funds by wire, letter of credit, or inter-bank transfer to an account held by or for a designated person. This is the paradigm case. It is prohibited regardless of the commercial purpose.
- Indirect availability: routing funds through an intermediary – an agent, a holding company, an escrow agent – where a designated person is the ultimate beneficiary or has a legally enforceable interest in the funds. The word "indirectly" in the statutory prohibition is not decorative. OFSI reads it broadly, and so do we in our due-diligence assessments.
- Economic resources: OFSI's regime extends beyond cash and financial instruments to "economic resources" – assets of any kind that could be exchanged for funds or used to obtain funds, goods, or services. An escrow holding a property title or a receivables-backed instrument falls within this definition.
There is no materiality threshold for liability. A small payment to a designated party is as much a breach as a large one. The strict-liability character of the prohibition is one reason why pre-payment screening – not post-execution review – is the only reliable protection.
How does the ownership-and-control test affect escrow parties?
Ownership and control (the UK test for whether a non-listed entity is caught through a listed person's influence) is critical for escrow structuring because it can extend the prohibition to entities that do not themselves appear on any list. OFSI's test asks whether a designated person owns or controls another person. The regime does not fix a single numerical threshold; control is assessed on all the facts, including the ability to direct, block, or benefit from decisions.
This is a point of material divergence from OFAC. Under OFAC's 50 percent rule (the rule treating entities owned 50 percent or more by blocked persons as themselves blocked), the test is mechanical: aggregate ownership at or above 50 percent triggers automatic attribution. The analysis does not require OFAC to make a case-specific determination. Under OFSI, ownership below a controlling level can still be relevant where there is evidence of de facto control – for example, a designated individual who holds a minority stake but governs day-to-day payments through a side agreement.
In practice, this means an escrow counterparty that passes an OFAC screening check may still require separate OFSI scrutiny. The EU ownership test is also distinct: the EU regime applies a 50 percent ownership trigger derived from EU Council guidance, but layered with a separate control limb. A business operating across all three regimes must run parallel analyses; the strictest applicable prohibition governs.
What is the OFSI licensing route for a restricted payment or escrow?
Where a proposed payment or escrow arrangement is prima facie prohibited, the lawful route is to apply to OFSI for a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction). OFSI publishes a list of licensing grounds – broadly: legal fees, humanitarian purposes, pre-existing obligations, and similar categories – and an application outside those grounds faces a steep evidential burden.
Key operational points for transactional teams:
- Apply before the payment moves. Funds transferred in reliance on an anticipated licence, before the licence is actually granted, constitute a breach. OFSI does not issue retrospective licences as a matter of course.
- The application is fact-specific. Boilerplate submissions perform poorly. The application should set out the exact transaction structure, the identity and ownership chain of each party, the value and currency of the payment, and the legal basis for the licence ground relied upon.
- A licence does not sanitise the escrow agent's position. A licence granted to the payer permits the payer to transfer funds. It does not automatically authorise the escrow agent, the receiving bank, or any correspondent in the payment chain. Separate OFSI confirmation, or a licence addressed to each party in the chain, may be required.
- Licences are time-limited and conditional. An OFSI licence will specify conditions – reporting obligations, use restrictions, counterparty limits. Breaching a condition is as serious as breaching the underlying prohibition.
If a transaction has already been flagged or a payment has been sent without a licence, early legal review preserves options that narrow sharply with time. OFSI's enforcement posture has hardened in recent years, and the reporting obligation – discussed below – runs from the moment of knowledge, not from the date of any internal investigation conclusion.
To discuss a licence application or a delisting route for a counterparty that has triggered an escrow hold, write to Calder & Vance at info@caldervance.com.
What are the reporting and record-keeping obligations for payment and escrow transactions?
OFSI imposes two categories of obligation beyond the core payment prohibition: a duty to report knowledge or suspicion that a person is designated, and a duty to preserve records of any assets held for or on behalf of a designated person.
The reporting duty falls on persons who, in the course of a business carried on by them, know or have reasonable cause to suspect that a person is a designated person or has committed a breach of financial-sanctions regulations. The obligation is not confined to regulated firms. A trading company, a property manager, or a freight agent that receives a payment on behalf of an undisclosed third party can be within scope. The trigger is knowledge or reasonable suspicion, not certainty; a compliance team that has flagged a potential match and deferred action pending further review is already within the window.
OFSI's guidance indicates that reports should be made as soon as reasonably practicable. Delays – even where the ultimate conclusion is that no designation applies – can be viewed adversely in any subsequent enforcement review. In our experience, the firms that manage OFSI interactions most effectively are those that have pre-built escalation paths: a named decision-maker, a pre-agreed template for OFSI correspondence, and a records-hold procedure that activates automatically on a compliance flag.
Record-keeping obligations require that sufficient documentation be maintained to demonstrate compliance. Whilst OFSI's guidance does not prescribe a fixed retention period in the same terms as some other regimes, good practice – and the evidentiary needs of any enforcement defence – point strongly to retaining all transaction documents, screening records, ownership-chain analyses, and licence correspondence for at least five years, in line with the general standard adopted across financial-sanctions regimes and with FATF-aligned AML record-keeping requirements.
How is payment and escrow structuring enforced under OFSI?
OFSI's civil enforcement powers allow it to impose a monetary penalty on any person who has breached a financial-sanctions prohibition, whether or not they knew of the breach. The strict-liability basis means that a well-intentioned escrow arrangement, structured without adequate screening, can attract a penalty. For serious cases involving knowledge or deliberate disregard, OFSI may also refer the matter to the Crown Prosecution Service for criminal proceedings.
OFSI publishes its enforcement decisions, including the methodology it applies to penalty calculations. The published guidance identifies aggravating factors – including concealment, continuation of a breach after knowledge, and non-cooperation – and mitigating factors, the most significant of which is voluntary self-disclosure ("VSD": a proactive report to OFSI before the regulator becomes aware of the breach through other means). A timely and complete VSD can materially reduce a civil penalty. It does not, however, preclude enforcement entirely; OFSI retains discretion.
Two cross-border enforcement considerations are particularly relevant to escrow transactions:
- Concurrent jurisdiction: a payment chain that involves a US correspondent bank, or dollar-clearing, brings OFAC into the picture regardless of where the underlying contract was signed. A breach of OFSI's rules does not automatically constitute an OFAC violation, but the same set of facts may engage both regimes. US primary-sanctions exposure under IEEPA, and secondary-sanctions risk for non-US parties, must be assessed separately.
- Correspondent-bank de-risking: in our experience, many cross-border payment failures in sanctions-sensitive transactions are not caused by a formal OFSI prohibition but by a correspondent bank's de-risking (a financial institution exiting a relationship to avoid sanctions exposure) decision. The bank may decline to process a payment that is technically lawful, either because its own policies are more conservative than OFSI's rules or because it has OFAC-related concerns about the dollar leg. Structuring the transaction to address the correspondent's concerns – and obtaining an OFSI licence as evidence of lawful intent – is often the practical solution.
In a recent matter, a financial-services business held escrow funds that were flagged mid-transaction when a beneficial owner was found to have a sanctioned-person connection. We assessed the ownership chain against both the OFSI control test and the OFAC 50 percent rule, identified that the UK prohibition applied but the US prohibition did not on the specific ownership structure, and prepared and submitted a specific-licence application to OFSI. The matter was resolved without enforcement action. The outcome reflected the specific facts; we make no representation that a similar structure will produce the same result.
Where does OFSI's approach diverge from OFAC and the EU – and why does it matter for escrow structuring?
Divergence between OFSI, OFAC, and the EU is not merely theoretical; it determines which transactions can proceed, at what cost, and under which licences. Three divergences bear directly on payment and escrow structuring.
Ownership and control test: As noted above, OFAC applies a mechanical 50 percent ownership trigger. OFSI and the EU apply a broader ownership-and-control analysis. The practical effect is that an entity with, say, a 40 percent stake held by a designated person may be blocked under OFSI (where there is additional evidence of control) but not automatically blocked under OFAC. The escrow structure must be assessed under all applicable regimes; the strictest prohibition governs the transaction.
Licensing grounds: OFSI's licensing grounds are set by UK secondary legislation and OFSI's published guidance. They do not precisely replicate OFAC's general-licence structure or the EU's licensing categories. A transaction that qualifies for a US general licence (a standing authorisation that permits a defined category of transactions without a separate application) may still require a specific application to OFSI. Cross-border transactions that have already obtained OFAC authorisation are regularly paused at the OFSI stage when the parties assume UK clearance follows automatically. It does not.
The EU Blocking Regulation consideration: Businesses with EU-law nexus must additionally consider the EU Blocking Regulation (formally, Council Regulation (EC) 2271/96 as updated), which prohibits EU persons from complying with certain US extraterritorial sanctions measures. Where a transaction involves both OFAC extraterritorial exposure and EU-established parties, compliance counsel must map the tension between the Blocking Regulation and the OFAC obligation carefully. OFSI is not party to the Blocking Regulation post-Brexit, but UK-incorporated subsidiaries of EU groups may face conflicting obligations from their group-level compliance policy and their UK-law obligations simultaneously.
Have you reviewed your payment and escrow structure across all three regimes, or only against the regime of the governing law? If the answer is the latter, the analysis may be incomplete.
Risk flags, common mistakes, and when to involve counsel
In our cross-border practice we see the same structural errors recur in payment and escrow transactions that run into OFSI difficulties. Identifying them early reduces both the probability of a breach and the severity of any enforcement consequence.
Myth: a clean screening result means the payment is safe. This is the single most common and damaging misunderstanding. A screening tool that checks the direct counterparty's name against a consolidated list does not capture indirect beneficial ownership, control relationships, or associated-party exposure. OFSI's prohibition on indirect availability is precisely aimed at the gap between a clean front-party check and the actual ownership chain. Effective compliance requires tracing the beneficial ownership of each party in the transaction to a natural person or a confirmed undesignated entity.
Additional risk flags to address before funds move:
- Escrow agreements where the beneficiary's identity is not disclosed to the escrow agent at the time of signing.
- Payment chains involving jurisdictions with limited corporate-transparency regimes, where ownership verification relies on self-certification.
- Correspondent banks in the payment chain that have their own sanctions policies materially stricter than OFSI's rules (a de-risking risk that operates independently of whether a formal prohibition applies).
- Multi-currency escrow arrangements where the dollar leg activates OFAC jurisdiction even though the underlying contract is governed by English law and the parties are UK-incorporated.
- Transactions involving sectors – energy, metals, technology – where OFSI has issued sectoral designations or asset-freezes that apply regardless of the direct counterparty's status.
When should counsel be instructed? Our view is that early involvement – at the term-sheet or heads-of-terms stage, before the escrow agreement is drafted – is far more cost-effective than a retrospective licence application or an enforcement defence. The escrow structure, the identity disclosure obligations, the conditions for release of funds, and the position of the escrow agent under OFSI's regime can all be addressed in the drafting before they become live problems. We regularly advise transaction teams on the precise points at which an OFSI analysis should be triggered and what that analysis must cover.
Related practices
- Correspondent banking and de-risking under OFAC – guidance on managing OFAC exposure in correspondent and dollar-clearing transactions.
- Payment and escrow structuring under Singapore's sanctions regime – comparative analysis of Singapore's MAS-administered rules alongside OFSI.
- Sanctions representations and warranties under the BIS/EAR – how US export-control obligations interact with transactional documentation.