A Swiss trading company signs a long-term supply agreement with a distributor in a third market. Midway through contract negotiation, the compliance team raises a question: does the agreement need a sanctions clause? And if it does, what must that clause cover under Swiss law? The question is not academic. SECO – the State Secretariat for Economic Affairs, Switzerland's authority for economic sanctions enforcement – maintains its own autonomous sanctions ordinances, distinct from EU programmes and not simply a mirror of OFAC's rules.
Swiss law requires businesses with relevant cross-border exposures to understand the contractual obligations that flow from SECO ordinances. Sanctions clauses in contracts are not merely boilerplate comfort. Under the applicable Swiss regime, a well-drafted clause allocates risk, triggers compliance obligations, and creates a mechanism for suspension or termination when a counterparty falls within a prohibited category. The governing authority is SECO, acting under the Embargo Act (Embargogesetz), which empowers the Federal Council to issue ordinances imposing asset freezes, prohibitions, and related measures.
This briefing sets out how the SECO regime applies to contractual sanctions clauses, how it compares with the OFAC, OFSI, and EU positions, what the key risk flags are, and when to bring in counsel.
What is the SECO sanctions regime and who is bound by it?
SECO administers Switzerland's economic sanctions through ordinances issued by the Federal Council under the Embargo Act. The regime binds Swiss persons and entities, and it extends to activities conducted on Swiss territory – including contract execution, payment processing, and goods transit. Foreign subsidiaries of Swiss groups are not automatically bound, but Swiss parent companies must consider whether their actions in relation to an overseas subsidiary could constitute a breach of the Swiss ordinances.
Switzerland's sanctions list is maintained separately from the EU and UN lists, though in practice SECO ordinances frequently implement UN Security Council measures and, on a selective basis, autonomous Swiss measures aligned in substance with EU programmes. The practical point for contract parties is this: a transaction that is clean under OFAC may still be caught by SECO, or vice versa. Cross-border businesses cannot assume alignment.
The regime covers asset freezes, payment prohibitions, import and export restrictions, and service prohibitions. Each ordinance is specific to the relevant programme; the scope of prohibited activities varies. In our practice, we regularly see businesses apply a single template clause drawn from one regime and assume it covers Swiss obligations. It rarely does.
What must a sanctions clause cover under the Swiss regime?
A sanctions clause under the Swiss regime must, at minimum, address three functional requirements: a representation that no party is a sanctioned person or entity under the applicable SECO ordinances; a commitment to ongoing compliance throughout the contract term; and a mechanism for suspension or termination if a party becomes subject to a designation or if performance would otherwise require a prohibited act.
The representation should extend beyond the direct contracting parties. SECO ordinances, like the EU ownership and control rules, can capture entities through which a sanctioned person exercises significant influence, even where direct ownership does not reach a bright-line threshold. The Swiss regime does not adopt OFAC's mechanical 50 percent rule (the rule under which any entity owned 50 percent or more in aggregate by blocked persons is itself treated as blocked) as a standalone test. Instead, SECO's approach looks to the totality of ownership and control, more analogous to the EU and OFSI position.
A termination right, rather than a mere suspension right, is significant. Where a counterparty becomes sanctioned after signing, a contract that contains only a suspension mechanism may leave the non-defaulting party in an exposed position: unable to perform, unable to exit cleanly, and potentially in breach of the ordinances by maintaining the contractual relationship. We advise including an immediate-termination right exercisable without liability upon a verified designation event.
In addition, a robust clause should address downstream performance: a prohibition on sub-contracting, assignment, or novation to any person or entity that would be caught by the relevant ordinances. Supply chains in commodity trading, construction, and financial services regularly involve multiple layers of intermediaries. A clause that covers only the direct counterparty is insufficient.
How does the SECO ownership-and-control test compare with OFAC, OFSI, and the EU?
The divergence between the major regimes on ownership and control is the single most important cross-border risk in sanctions contract drafting. Understanding where each regime sits determines how broadly a clause must be drawn.
Under OFAC, the test is mechanical: a 50 percent or more aggregate ownership by blocked persons in the SDN List (the list of Specially Designated Nationals and blocked persons maintained by OFAC) automatically renders the owned entity blocked, regardless of control or influence. The threshold is additive across multiple blocked owners. A clause designed for OFAC will typically contain a representation that no person owns 50 percent or more of the counterparty. That framing is too narrow for Swiss, UK, and EU purposes.
Under OFSI and the EU, ownership and control is the test: an entity may be caught where a designated person holds less than 50 percent but nonetheless exercises dominant influence, holds rights over decision-making, or retains effective control through structural arrangements. OFSI's enforcement guidance and the relevant EU Council Regulation both use this broader formulation. A clause that stops at the ownership threshold will not capture a structure where a listed person controls a company through contractual rights or governance mechanisms without reaching 50 percent.
SECO's approach is closer to the EU and OFSI model. The Federal Council ordinances do not publish a single bright-line percentage equivalent to OFAC's rule. SECO applies an analysis that considers who ultimately controls or benefits from the relevant assets or activities. This means a well-drafted clause for Swiss-law contracts must test control as well as ownership, and should include a representation that no designated person exercises direct or indirect control over the counterparty – not merely that no single person holds a qualifying percentage.
For a business operating simultaneously under OFAC, OFSI, EU, and SECO obligations, the prudent approach is to draft the sanctions representations to the most exacting common standard: ownership tested at 50 percent or more under OFAC, and control tested on a qualitative basis for OFSI, EU, and SECO. A single harmonised clause is achievable, but it requires deliberate drafting. Off-the-shelf boilerplate drawn from a US-law template will not do the job.
The position above covers the standard case. Your specific contract – the sector, the counterparty's jurisdiction, the payment flows, and the governing law – changes the analysis materially. For a cross-regime assessment of your contractual obligations, contact Calder & Vance at info@caldervance.com.
What are the reporting and record-keeping obligations connected to sanctions clauses?
SECO ordinances impose affirmative obligations that do not depend on a contractual trigger. A Swiss party that knows or suspects that its contractual counterparty is a sanctioned person must report that fact to SECO. The reporting obligation arises by operation of law; it is not created by the sanctions clause, though a well-drafted clause should notify both parties of its existence and require each party to make any required reports promptly.
Record-keeping obligations under the applicable SECO ordinances require that records relating to assets, transactions, and positions subject to the sanctions regime be maintained for a period prescribed in the relevant ordinance. The specific period should be verified against the current ordinance text, as it varies by programme and is subject to amendment. As a general matter, sanctions record-keeping obligations across the major regimes – OFAC, OFSI, and EU – commonly run to five years, and SECO practice is broadly aligned with that range, though practitioners should confirm the applicable period for each specific ordinance before relying on any figure.
The obligations do not sit only with the Swiss party. Where a contract is governed by Swiss law and is performed in whole or in part on Swiss territory, the reporting and record-keeping obligations of the SECO regime may bind all parties to the contract in respect of their Swiss-territory performance. A sanctions clause should clearly allocate these obligations: which party is responsible for making SECO reports, at whose cost, and what information the other party must provide to enable that reporting.
In our experience, the allocation of reporting obligations is the most commonly neglected element of a sanctions clause in a cross-border commercial contract. The parties focus on the termination right and overlook the affirmative regulatory duties. That oversight creates a compliance gap that can produce liability independently of any contractual breach by the counterparty.
What risk flags should businesses monitor throughout the contract term?
A sanctions clause is a snapshot taken at the moment of signing. The risk does not stop there. Designations occur after execution; ownership structures change; sub-contractors are appointed without notification; beneficial owners restructure their holdings. A static clause with no monitoring protocol attached to it provides legal form without operational substance.
Several risk flags warrant particular attention under the SECO regime. First, re-designation: a counterparty delisted from SECO's schedule may still be listed under an EU ordinance applied by analogy or under a UN Security Council designation. Where Switzerland has implemented a UN resolution, the UN Consolidated List designation remains directly operative regardless of any domestic de-listing. Businesses must screen against multiple lists, not only the SECO schedule.
Second, beneficial ownership changes. The SECO ownership-and-control analysis means that a change in the beneficial ownership of a counterparty – even without a change in the direct shareholders – can alter whether the entity is caught. A change-of-control notification obligation in the sanctions clause is essential. Without it, the non-defaulting party may not learn of a designation event until an auditor or regulator raises it.
Third, correspondent and payment bank exposure. Even where a Swiss-law contract is clean under SECO, a payment routed through the US financial system triggers OFAC jurisdiction. Secondary-sanctions risk is a live concern for Swiss businesses transacting in US dollars, or using US financial institutions in the payment chain. In a recent matter, a trading company with a clean SECO position discovered that its USD payment instruction had been flagged by its US correspondent bank because the beneficial owner of the recipient was on the SDN List. The SECO clean position did not protect against the US bank's blocking obligation.
If a transaction has already been flagged, or a counterparty has received a communication from SECO or a correspondent bank, an early review preserves options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential review.
What are the common drafting errors in sanctions clauses governed by Swiss law?
The most frequent drafting error is the single-regime clause: a representation drafted exclusively for OFAC purposes that refers only to the SDN List and the 50 percent ownership threshold. Deployed in a Swiss-law contract with cross-border payment flows, it leaves the SECO, EU, and OFSI positions entirely uncovered.
A second error is the absence of a warranty as to sub-contractors. Commercial contracts routinely permit sub-contracting with notice. If the sanctions clause does not extend the representation to sub-contractors at all tiers, a sanctioned person can enter the supply chain at the second or third remove without triggering the clause. SECO, like the EU position, looks through the contractual chain when assessing whether a prohibited act has occurred.
Third – and this is the myth that consistently surprises sophisticated clients – is the assumption that a sanctions clause creates a complete defence to regulatory liability. It does not. If a party performs under a contract that it knows involves a sanctioned person, the existence of a contractual representation from that sanctioned person that it is not sanctioned provides limited mitigation before SECO. The regulatory obligation to refrain from prohibited acts exists independently of the contract. A sanctions clause allocates contractual risk between the parties; it does not substitute for the party's own due-diligence obligations.
Fourth, parties sometimes omit a governing-law-specific adaptation when a contract spans multiple jurisdictions. A contract governed by Swiss law but performed partly in the UK attracts both SECO and OFSI obligations. The sanctions clause must be drafted to address each operative regime, not merely the governing law regime.
When should a business involve sanctions counsel in contract review?
Sanctions counsel should be involved at the drafting stage, not at the point of crisis. The cost of retrofitting a sanctions clause into an executed contract is significantly higher than the cost of reviewing the initial draft. More importantly, some risks identified at the drafting stage – a counterparty whose ownership chain includes a politically exposed person in a high-risk jurisdiction, or a payment structure that necessarily routes through a US financial institution – may not be manageable through drafting alone. Early identification gives the business time to restructure or decline.
Counsel should also be consulted when a new designation occurs in respect of a sector or jurisdiction in which a business has existing contracts. A designation that does not directly name a counterparty may nonetheless catch that counterparty through the SECO ownership and control analysis. In our cross-border practice, we regularly advise clients on whether new SECO ordinances or new designations within existing ordinances require a contract to be suspended, renegotiated, or terminated.
Where a contract has already been performed and a compliance question has arisen retrospectively, the priority is to scope the potential exposure, assess whether a voluntary disclosure is appropriate, and preserve any available defences. SECO, like OFAC and OFSI, takes into account the quality of a party's compliance programme and its cooperation with the authority when assessing enforcement outcomes. A well-documented compliance history and a proactive disclosure posture are material.
Related practices
- Sanctions compliance audit and testing (Australia) – assess and strengthen your compliance programme across the Australian autonomous sanctions regime.
- Sanctions risk assessment under BIS / EAR – understand how export-control classification and risk assessment interact with your trade compliance obligations.
- Sanctions risk assessment under OFAC – map your secondary-sanctions exposure and US-nexus risk across the OFAC-administered programmes.