A UK-based commodities trader is finalising a long-term supply agreement with a European counterparty. Mid-negotiation, the counterparty's legal team inserts a sanctions clause. The UK team pauses: does this clause operate correctly under OFSI (the Office of Financial Sanctions Implementation, the UK Treasury authority responsible for financial-sanctions enforcement)? Does it cover all the persons and transactions the UK regime catches? And if it conflicts with the EU position, which version governs? These are not drafting footnotes. They are the difference between a contract that holds and one that exposes both parties to unplanned liability.
As of August 2026, sanctions clauses in commercial contracts governed by English law must be calibrated to OFSI's scope: the UK's financial-sanctions prohibitions under the Sanctions and Anti-Money Laundering Act ("SAMLA") and the relevant thematic regulations. A clause that mirrors only a counterparty's home-jurisdiction language may leave genuine OFSI exposure unaddressed, or may import prohibitions wider than UK law requires. Getting the drafting right is a compliance obligation, not a negotiating luxury.
This briefing sets out the governing authority, the obligations that bite, how OFSI's ownership and control test shapes the clause, where the UK position diverges from OFAC and the EU, and the risk flags practitioners see most often.
What authority governs sanctions clauses in contracts under OFSI?
OFSI administers UK financial sanctions under SAMLA and the thematic regulations made under it, including the relevant country and thematic sanctions statutory instruments. These instruments create the substantive prohibitions – making funds or economic resources available to designated persons, and dealing with those persons' assets. OFSI also publishes enforcement guidance and a monetary-penalties methodology that firms must treat as authoritative.
When a contract is governed by English law, OFSI's regime applies directly to both parties if either is a UK person or the transaction otherwise has a UK nexus. "UK person" means a British national wherever located, a company incorporated in the United Kingdom, or any person in the United Kingdom at the time of the transaction. That territorial reach is broader than many firms realise. A UK-incorporated subsidiary of a foreign group can carry OFSI obligations into a contract negotiated entirely abroad.
The legal basis for any sanctions clause in a UK-law contract is therefore the primary and secondary legislation under SAMLA, interpreted through OFSI's published guidance. No section number need appear in the clause itself – in our experience, clauses that attempt to cross-reference specific statutory provisions create more ambiguity than they resolve when the underlying regulations are amended.
What do OFSI's prohibitions require a well-drafted clause to address?
A clause calibrated to OFSI must capture the core prohibitions: making funds or economic resources available, directly or indirectly, to or for the benefit of a designated person; dealing with the funds or economic resources of a designated person; and, in certain regimes, circumventing these prohibitions. "Economic resources" extends beyond money – it covers assets that could be exchanged for funds, goods, or services, a definition wide enough to catch contractual rights, intellectual property licences, and in-kind deliveries.
The phrase "directly or indirectly" in the prohibitions is the operative width of the clause. Benefit to a designated person through an intermediary is caught, even where the direct counterparty is not itself designated. A contract that restricts only direct dealings with named persons on the UK Consolidated List leaves the indirect route open and unexpressed. That gap matters: OFSI's enforcement posture treats indirect benefit as seriously as direct payment.
A well-structured sanctions clause will therefore address at least four things. First, it will define "sanctions" by reference to OFSI and the relevant thematic regulations under SAMLA, not merely by reference to a generic "applicable sanctions authorities" formulation imported from another jurisdiction. Second, it will extend to persons who are owned or controlled by designated persons – not only those who appear by name on the UK Consolidated List. Third, it will include a representation, a continuing warranty, and a termination right triggered by a designated-person finding. Fourth, it will address what happens to payment obligations if a counterparty becomes designated mid-performance.
How does the ownership and control test shape the clause?
Under the UK regime, an entity that is owned or controlled by a designated person is itself subject to the same restrictions as if designated, without needing to appear on any list. OFSI's ownership test is broadly aligned with the EU concept: ownership generally means holding more than 50 percent of the shares or voting rights. Control, however, is a distinct and wider limb: an entity may be controlled by a designated person through board composition, veto rights, or the practical ability to direct the entity's activities, even where the designated person holds no ownership stake at all.
That control limb creates a drafting obligation that many standard-form clauses miss entirely. A clause that restricts dealings with "any person named on a sanctions list" will not catch a counterparty that is controlled through a management agreement or a holding structure where the beneficial ownership threshold is not crossed. We regularly advise clients who have signed contracts with this formulation and discovered mid-performance that a newly designated person exercises de facto control over their counterparty.
The practical drafting implication is clear. The clause must define the relevant persons to include those owned or controlled by designated persons within the meaning of the applicable thematic regulations. It should require the counterparty to give continuing warranties that neither it nor any entity through which it acts is owned or controlled by a designated person in the OFSI sense. And it should require prompt notification if that position changes. Where a transaction has a long performance horizon – a multi-year supply agreement or a project-finance arrangement – a periodic recertification mechanism is worth including.
How does the OFSI position compare with OFAC and the EU?
The cross-border comparison matters because many contracts are performed by counterparties in multiple jurisdictions and are reviewed by several regulators simultaneously. Three significant divergences shape what a multi-jurisdictional clause must cover.
First, the ownership threshold. OFAC applies a 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). The test is mechanical and turns on numerical ownership alone; control as a separate limb does not appear in OFAC's published guidance in the same way as it does under OFSI and the EU. A clause drafted to the OFAC threshold without a separate OFSI control limb will therefore be narrower than UK law requires when a designated person exercises control through means other than ownership.
Second, the licensing regime. Under OFSI, a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is required for most carve-outs from the prohibitions. OFAC issues both specific and general licences (standing authorisations that permit defined categories of transactions without a separate application), and many OFAC-oriented clauses include a general-licence carve-out that has no direct equivalent in the UK regime. Importing that formulation into a UK-law contract creates a gap: the clause permits something OFSI has not authorised.
Third, the notification and reporting obligation. OFSI's regime includes a statutory obligation to report certain information to the Treasury when a firm knows or has reasonable cause to suspect that a person with whom it deals is a designated person or has committed an offence under the financial-sanctions regulations. The EU regime contains analogous obligations, but the precise trigger and reporting channel differ. A clause that addresses only the counterparty-notification right – the right to suspend or terminate – and not the regulatory-reporting obligation leaves the compliance team without a contractual basis to act when the reporting window is running.
In our cross-border practice, the safest approach for a contract with both UK and EU nexus is a clause that addresses each regime separately, or that uses a "highest common denominator" formulation covering both ownership and control at the lower threshold, with a specific-licence carve-out for OFSI authorisations and a separate carve-out for any applicable EU general authorisation.
What are the risk flags in standard-form sanctions clauses?
Standard-form clauses – those drawn from precedent banks or borrowed from counterparties in other jurisdictions – carry predictable gaps. Identifying them before signature is the compliance team's job; rectifying them after a designation event is considerably harder.
The most common risk flag is jurisdiction-mismatch: a clause drafted exclusively to OFAC standards in a contract with a UK-law governing-law clause. The clause will miss the OFSI control limb, will refer to general licences that do not exist in the UK, and will define "sanctions" by reference to US statutory instruments. That clause gives no comfort under OFSI and may create false confidence in the compliance team.
The second flag is the "as of the date of this agreement" representation without a continuing warranty. A counterparty that is not designated on the date of signing may become designated during a multi-year performance period. Without a continuing warranty and a post-signing notification obligation, the non-defaulting party has no contractual entitlement to suspend or terminate when designation occurs. Its only protection is the statutory prohibition – and the question is then whether it can demonstrate to OFSI that it ceased dealing promptly after acquiring knowledge.
The third flag is inadequate definition of "funds" and "economic resources". Contracts that restrict only monetary payments may not address the full scope of economic benefit – deferred payment rights, contractual set-off arrangements, option rights, or royalties. OFSI's definitions are broad; a clause that is narrower than the statutory prohibition leaves the firm exposed to the wider statutory rule even if the contractual clause would technically be satisfied.
A fourth flag appears specifically in M&A and joint-venture agreements: a material adverse change or closing condition that references sanctions but does not define "sanctions" to include OFSI designations. A target company may become the subject of OFSI concern in the period between signing and closing. If the MAC clause does not clearly cover that event, the acquiring party may be obliged to close a transaction that OFSI prohibits.
The position above covers the most common structural weaknesses. Your specific contract – the governing law, the counterparty, the goods or services, the performance route, and the regimes in play – will shift the analysis. If you need a review before signature, contact Calder & Vance at info@caldervance.com.
What procedural steps should a UK business follow when reviewing a sanctions clause?
Reviewing a sanctions clause under OFSI is a structured exercise, not a checkbox. The sequence below reflects the order in which the analysis should be conducted for any contract with a UK nexus.
The first step is to confirm the governing law and the UK nexus. A contract governed by English law and involving a UK person triggers OFSI obligations regardless of where performance occurs. Identify every party that is a UK person in the statutory sense.
The second step is to map the relevant regimes. If the counterparty is in a jurisdiction with its own sanctions programme, identify which regimes apply in addition to OFSI. A counterparty in the EU will bring EU Council regulations into scope. A US counterparty or a contract with a US nexus will bring OFAC. The clause must address each live regime explicitly or through a tested formulation that captures all of them.
The third step is to test the clause against OFSI's four operative elements: the correct definition of designated persons (including owned or controlled entities), the representation as of signing, the continuing warranty, and the termination-and-suspension mechanics. Check whether the reporting obligation under the relevant thematic regulations is addressed separately in the contract's compliance schedule or equivalent.
The fourth step is to assess the performance risk. For long-dated contracts, consider whether a periodic recertification mechanism or a mid-term screening right is appropriate. For contracts involving commodity delivery or logistics, consider whether a sub-contractor or freight-forwarder clause is needed to extend the obligation down the supply chain.
The fifth step is to align with the firm's screening programme. A clause that creates a contractual right to terminate is of limited practical value if the firm's screening tool will not generate a timely alert when a counterparty is designated. The contract and the compliance programme must operate in step.
If a transaction has already been flagged, or a potential designated-person issue has surfaced after signing, an early assessment can preserve options that narrow with time. Contact us at info@caldervance.com to discuss.
When does a sanctions clause require a specific OFSI licence, and what does that mean for the contract?
A sanctions clause will typically include a carve-out for transactions that have been licensed by OFSI – but the drafting of that carve-out determines whether the carve-out actually works. An OFSI specific licence authorises a defined transaction with a defined counterparty for a defined purpose. It does not authorise the broader relationship. A clause that permits "any transaction authorised by OFSI" without further qualification may be read more broadly than the licence itself permits.
In our practice, we recommend that any licence-based carve-out in a sanctions clause be drafted to mirror the scope of the licence precisely: the licensed person, the licensed transaction, the licensed purpose, and the licence period. If the licence expires or is revoked, the carve-out should fall away automatically. A clause that does not include automatic termination of the carve-out on licence expiry creates a gap between the contract and the regulatory permission.
The reverse situation also arises. A counterparty may argue that a transaction is permitted under a general authorisation in the EU regulations or an OFAC general licence and ask the UK party to include a corresponding carve-out in the UK-law contract. That request requires careful analysis: the UK regime may not contain an equivalent permission, and including such a carve-out may give the counterparty contractual rights that OFSI has never authorised. We have acted for clients who received exactly this request and needed to explain to the counterparty why the UK-law clause could not simply track the US or EU formulation.
Related practices
- Sanctions compliance audit and testing (Australia) – assessing and stress-testing sanctions compliance programmes against the applicable country regime obligations.
- Sanctions clauses under SECO (Switzerland) – how Swiss sanctions obligations shape contract drafting under SECO's regime.
- Sanctions risk assessment under BIS and the EAR – US export-control risk assessment for goods, technology, and services with a US nexus.
Frequently asked questions: sanctions clauses in contracts under OFSI
Who administers sanctions clauses in contracts under OFSI?
OFSI – the Office of Financial Sanctions Implementation, part of HM Treasury – administers and enforces UK financial sanctions under SAMLA and the relevant thematic regulations. OFSI issues specific licences for otherwise prohibited transactions, publishes enforcement guidance and a monetary-penalties methodology, and has the authority to impose civil monetary penalties for breaches. The ECJU administers trade and export licences separately, but financial-sanctions obligations in contracts fall squarely within OFSI's remit. The two authorities operate distinct regimes, and a contract may engage both where goods and financial flows are both involved.
What does OFSI prohibit in relation to sanctions clauses in contracts?
OFSI's financial-sanctions prohibitions make it unlawful to make funds or economic resources available to or for the benefit of a designated person, or to deal with such funds or resources. These prohibitions apply directly regardless of what a contract says. A sanctions clause does not create the obligation – the statute does. The clause's function is to allocate contractual risk, create rights of suspension and termination, and impose continuing warranties. A clause that conflicts with the statutory prohibition, or that purports to authorise what OFSI prohibits, is void to that extent and does not protect either party from enforcement action.
How is enforcement of sanctions clauses in contracts handled under OFSI?
OFSI enforces the underlying statutory prohibitions, not the contractual clauses. If a transaction breaches the financial-sanctions regulations, OFSI may impose a civil monetary penalty based on the value of the breach, regardless of what the contract provides. A well-drafted sanctions clause reduces breach risk by creating early-warning obligations, termination rights, and screening commitments – but it does not substitute for compliance with the statute. If OFSI opens an investigation, the relevant documents will include the contract, the clause, and the compliance steps the parties took before and during performance. Prompt voluntary self-disclosure, where a breach is identified, can affect how OFSI treats the matter.
About the author
Henry Ashworth advises on UK financial sanctions and export controls, including OFSI licensing and enforcement, judicial-review challenges to designations, and the design of sanctions-compliance programmes for UK-nexus businesses. He acts for multinationals, financial institutions, and commodity traders navigating the obligations imposed by SAMLA and the relevant thematic regulations. 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.
For an assessment of your contract's sanctions-clause coverage under OFSI, contact Calder & Vance at 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.