A private equity fund completes an acquisition. Shortly after closing, OFAC designates one of the portfolio company's minority shareholders. Overnight, the fund holds an interest that may itself be blocked – and every dividend, management fee, and governance vote touching that holding becomes a potential sanctions violation. The question is not whether to act. It is how to act lawfully, quickly, and without compounding the exposure.
Divesting a sanctioned interest under OFAC requires either a specific licence authorising the transaction or confirmation that an existing general licence covers the divestiture. Acting without authorisation – even to exit the position – can constitute a prohibited transaction. The governing authority is OFAC, operating under IEEPA and related executive orders, and the specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is the standard route where no general authorisation applies.
This page explains the legal basis, the divestiture procedure, the cross-regime dimensions that often catch cross-border funds off guard, the key risk flags, and how Calder & Vance supports clients through the process from initial triage to closing.
What makes a divestiture "prohibited" in the first place?
A divestiture of a sanctioned interest is prohibited because completing it – transferring title, receiving sale proceeds, or discharging associated obligations – constitutes a transaction with a blocked person or in blocked property under OFAC's rules. The prohibition flows from IEEPA and the applicable executive orders and programme-specific regulations; it is not limited to deliberate engagement.
The 50 percent rule (OFAC's rule treating entities owned 50 percent or more by one or more blocked persons as themselves blocked, in aggregate) extends the prohibition beyond the named designee. A fund may hold shares in a company that is not itself listed but is majority-owned by a blocked person. That company is treated as blocked property. The fund's shareholding is therefore tainted, and any sale of those shares must be authorised.
Aggregation matters. Two blocked persons each holding twenty-six percent of the same entity together cross the threshold, even if neither does alone. In our experience, clients who discover a sanctions problem post-closing have often screened only the direct counterparty and missed this layer. The discovery that a second-tier holding is blocked can be a more serious position than it first appears – because the problem has often been sitting unnoticed, and unreported, for some time.
There is a further point that surprises non-US entities: OFAC's rules bind US persons wherever they operate and – under the secondary-sanctions architecture – can create material compliance risk for non-US firms that have a US nexus in the transaction structure (a US-dollar clearing bank, a US-incorporated holding company, US limited partners).
The legal basis and OFAC's authority
OFAC administers the US sanctions programmes under authority delegated from the President, principally through IEEPA and, for older programmes, TWEA. Each programme is implemented through a separate set of programme-specific regulations, but the core machinery – the prohibition on dealing in blocked property, the licensing power, the civil and criminal penalties – is common across programmes. OFAC is part of the US Department of the Treasury.
The prohibition on transactions with blocked persons and blocked property is strict liability in its civil dimension. Good faith is a mitigating factor in the penalty analysis, but it does not provide a defence to the underlying violation. That asymmetry defines the urgency of obtaining authorisation before completing a divestiture, not after.
When a licence is required, OFAC has wide discretion. It considers the totality of the circumstances: the nature of the sanctioned interest, the identity of the counterparties, the use of proceeds, and whether the divestiture has a humanitarian, commercial, or unwinding rationale. For divestitures of positions acquired before a designation – so-called legacy holdings – OFAC has historically been more receptive to licensing, provided the applicant can demonstrate it did not acquire the interest knowing of the eventual designation. The programme-specific regulations and OFAC's published licensing policies set out the broad criteria; the precise analysis is licence-specific.
The position above covers the standard case. Your facts – the programme in play, the nature of the blocked interest, the identity of the buyer, the jurisdiction of closing – change the analysis significantly. For a preliminary assessment of whether a licence is required and the likely OFAC posture, contact Calder & Vance at info@caldervance.com.
How does the OFAC divestiture procedure work?
The OFAC divestiture procedure, in the absence of a covering general licence, runs through a specific-licence application submitted to OFAC's Licensing Division. The application must identify the blocked property, the parties, the proposed transaction structure, the use of proceeds, and the legal basis for relief.
The process has four practical stages:
- Triage and legal basis: Confirm whether the interest is in fact blocked (applying the 50 percent rule through the full ownership chain), whether any general licence already covers the divestiture, and whether the transaction requires only a specific licence or also involves parallel issues such as deblocking of sale proceeds.
- Licence application preparation: Draft a complete and accurate application. Incomplete applications are the single most common cause of delay. OFAC may issue a deficiency notice, but the clock does not stop during the gap.
- OFAC review: OFAC's review period for specific licence applications is not fixed by statute. Processing times vary materially by programme and current caseload. We advise clients to treat the period as open-ended and to maintain interim controls – freezing the position, suspending distributions, and preserving records – for its duration.
- Conditions and closing: Licences are typically issued with conditions: reporting requirements, restrictions on the use of proceeds, and sometimes a requirement to remit proceeds to a blocked account pending further OFAC action. Compliance with every condition is mandatory; a breach of a licence condition is itself a sanctions violation.
Where a general licence does cover the divestiture, the analysis still requires care. General licences under the relevant programme may impose time windows, exclude certain categories of blocked persons, or require reporting after the transaction. In our cross-border practice, we regularly advise clients who have assumed a general licence covers their position only to find that a specific condition has not been met.
Cross-regime dimensions: how does OFSI and EU treatment compare?
For a cross-border investor, OFAC is rarely the only regime in play. The same holding may be subject to UK financial sanctions administered by OFSI, EU sanctions under the applicable Council regulation, and potentially other jurisdictions depending on the fund's structure. The divergences between regimes materially affect the transaction plan.
Under OFAC, the ownership test is mechanical: 50 percent or more in the aggregate, and the entity is blocked regardless of actual control. Under OFSI and the EU, the test includes both ownership (typically at the same threshold) and ownership and control (the UK and EU test for whether a non-listed entity is caught through a listed person), where control can be established even below the ownership threshold. This means a fund can face a UK or EU prohibition on an entity that OFAC does not treat as blocked – and vice versa.
The licensing routes differ too. OFSI issues specific licences under SAMLA and the relevant thematic regulations; the EU Member State competent authority issues licences under the applicable Council regulation. Neither OFSI nor the EU competent authority is bound by an OFAC licence, and neither regime gives automatic recognition to the other's authorisations. A divestiture of a position that crosses all three regimes needs three parallel licensing processes unless a general licence (or equivalent) is available in each.
One convergence is worth noting: all three regimes treat proceeds of a divestiture as potentially blocked property until those proceeds are handled in a manner consistent with the applicable authorisation. A seller who receives sale proceeds into an unblocked account, having overlooked that the proceeds themselves require separate treatment, creates a new compliance problem at the moment of closing.
Switzerland (SECO), Canada (GAC), and Australia (DFAT) maintain their own regimes. For funds with limited partners or portfolio companies in those jurisdictions, local-law analysis is required alongside the OFAC, OFSI, and EU positions. We work with local counsel in the relevant jurisdiction on multi-regime divestitures.
If a transaction has already been flagged, or if a filing has been refused, an early review can preserve options that narrow with time. Contact our team at info@caldervance.com for a confidential review.
Risk flags in a sanctioned-interest divestiture
Several patterns consistently drive avoidable violations and compliance failures in sanctioned-interest divestitures. Identifying them early is the most cost-effective step an investor or in-house team can take.
Distributions received before the licence is obtained. A dividend, profit distribution, or interest payment received while a licence application is pending – or while the position is blocked and no general licence applies – is a prohibited receipt of blocked property. This is one of the most frequent inadvertent violations in portfolio-level sanctions reviews we conduct.
Governance acts that constitute a prohibited service. Voting shares, approving a board resolution, or providing management services to a blocked entity can themselves be prohibited, even if the investor's stated intent is simply to manage an unwanted position pending divestiture. The prohibition is on the act, not the motive.
The buyer's sanctions status. A divestiture to another blocked person is not permissible. The buyer must be cleared through screening before the licence application is filed, because OFAC will examine the proposed counterparty. A buyer who is added to the SDN List between filing and closing requires a new analysis.
Proceeds routing. Where OFAC requires sale proceeds to be paid into a blocked account or held in escrow, routing them elsewhere – even to the seller's own account – is a violation. The licence conditions govern. Read them before closing.
Record-keeping. OFAC requires records of transactions subject to OFAC regulations to be maintained for five years. That obligation runs from the date of the transaction, not the date of the licence. A business that loses records in a system migration creates an enforcement exposure that cannot easily be corrected.
Voluntary self-disclosure. Where an apparent violation has already occurred – a distribution received, a governance vote cast – the question of whether to file a VSD (voluntary self-disclosure to a regulator) is one of the most consequential decisions in an enforcement matter. OFAC treats timely and complete disclosure as a significant mitigating factor. The decision, the timing, and the scope of disclosure all require careful judgement. We have acted for clients at this stage and the quality of the initial disclosure shapes the entire enforcement posture.
Common misconceptions about divesting a sanctioned interest
The most persistent myth in this area is that acting to exit a blocked position is inherently lawful because the investor's intent is to reduce rather than maintain exposure. That is wrong. OFAC's civil prohibition does not distinguish between acquiring a blocked interest and divesting one. Both are dealings in blocked property. Proceeding without authorisation – however commercially urgent the divestiture – constitutes a violation.
A related misconception is that a non-US parent company, fund manager, or general partner is outside OFAC's reach if the fund itself is not US-incorporated. Secondary-sanctions risk, US-dollar transactions passing through US correspondent banks, US limited partners, and US-incorporated subsidiaries all create nexus. The practical question is not whether OFAC can act, but what the exposure looks like and how it is managed.
A third misconception is that once OFAC has issued a licence, the work is done. Licences are operative legal documents with conditions. Breaching a condition – including a reporting deadline, a proceeds-handling requirement, or a restriction on the permitted buyer – is itself a new violation. Post-licence compliance management is part of the engagement, not an afterthought.
How Calder & Vance supports the divestiture
Our team works through the full lifecycle of a sanctioned-interest divestiture: from the initial exposure analysis, through the licence application, to post-licence conditions management and record-keeping.
In a recent matter, a financial institution held an indirect minority position in a portfolio company through a co-investment structure. A key upstream shareholder was designated under the applicable OFAC programme. We mapped the ownership chain, confirmed that the 50 percent rule was not triggered on the primary holding but that a parallel co-investment vehicle crossed the threshold, and assessed whether the institution's governance rights over the primary holding independently constituted a prohibited service. We assessed eligibility, prepared and submitted the licence application, and managed OFAC's queries during review. The matter reached a conclusion that preserved the institution's ability to recover commercial value from the position within the bounds of the applicable authorisation.
We operate across the major regimes. For matters that require parallel OFSI or EU licensing, we co-ordinate the applications across the relevant authorities and ensure that the transaction timeline reflects the different processing structures. Where a VSD is required alongside the divestiture, we advise on the scope and timing of disclosure in a way that is consistent with the overall compliance and commercial objectives.
Our engagement for a divestiture matter begins with a fixed-fee triage assessment. The triage confirms whether a licence is required, which regime or regimes are in play, whether any immediate interim controls are needed, and what the filing timeline looks like. Clients leave the triage with a clear picture of the legal position and a plan of action.
Related practices
- Correspondent banking and de-risking under OFAC – managing sanctions-driven financial-institution exit and access risk
- Divesting a sanctioned interest under OFAC (advanced structuring) – complex multi-party and multi-jurisdiction divestiture structures
- Joint-venture sanctions structuring under EU rules – EU ownership, control, and licensing considerations for joint ventures