A US-headquartered private equity fund is mid-way through structuring a joint venture with a partner in a third market. The fund's counsel identifies a minority shareholder in the partner's parent holding company whose name generates a potential match on the SDN List (OFAC's list of Specially Designated Nationals and blocked persons). The signing deadline is six weeks away. Does the joint venture proceed? Can it be structured to proceed lawfully? And what happens if the fund closes without answering that question?
Joint-venture sanctions structuring under OFAC requires, at minimum, a disciplined ownership-and-control analysis of every material counterparty, a determination of whether any proposed transaction or ongoing governance right is prohibited, and – where a risk exists – a decision on whether a specific licence, a structural remedy, or a withdrawal is the appropriate path. OFAC administers these rules under IEEPA and related statutory authority, and its 50 percent rule (the rule treating entities owned 50 percent or more in the aggregate by blocked persons as themselves blocked) applies automatically, without any designation action. The analysis cannot be deferred to post-closing.
This page explains the OFAC legal tests that govern joint-venture structuring, the procedure for managing identified risks, the points at which OFSI, EU Council regulations, and other regimes intersect the analysis, and how Calder & Vance supports cross-border transaction teams through each stage.
Why joint-venture structuring raises distinct OFAC issues
A joint venture is not a one-time transaction: it creates an ongoing legal relationship in which prohibited conduct can arise repeatedly, at each governance meeting, capital call, or distribution. That continuing exposure is what makes the OFAC analysis at structuring stage more consequential than in a standard trade transaction.
Three features of a typical joint-venture structure generate OFAC exposure that a standard counterparty screen will not catch on its own. First, the ownership chain above a joint-venture partner may be multi-layered and partially opaque, with beneficial interests held through nominees, trusts, or intermediary holding companies registered in jurisdictions with limited public registry data. Second, the governance rights that a minority partner receives – board seats, veto rights over major decisions, access to strategic information – can constitute a prohibited "service" or "facilitation" if a blocked person has effective control over that partner, even where the 50 percent ownership threshold is not reached. Third, the ongoing operational activities of the joint vehicle itself – procuring goods, engaging sub-contractors, opening bank accounts, entering into supply agreements – each carry independent sanctions exposure once the entity is formed.
In our experience, deal teams that treat OFAC diligence as a simple name-check against a screening database routinely miss the aggregation question: two listed persons each holding below 50 percent can together reach the threshold, making the joint-venture partner itself a blocked entity under the rule. Have you mapped the full beneficial-ownership chain, or only the direct shareholders?
The OFAC legal tests: ownership, control, and facilitation
Three distinct OFAC tests determine whether a proposed joint-venture structure is lawful: the 50 percent ownership rule, a control analysis, and the prohibition on facilitating transactions that a US person could not conduct directly.
The 50 percent rule operates mechanically. If blocked persons own, in aggregate, 50 percent or more of an entity – directly or through any number of intermediate layers – that entity is itself treated as blocked, whether or not it appears on any OFAC list. The rule applies to the joint-venture partner, to any intermediate holding company, and to the joint vehicle itself once formed. Ownership interests must be aggregated across all blocked persons with a stake in the same entity: the rule does not require any single blocked person to hold 50 percent alone.
Where ownership falls below 50 percent, a separate control analysis is required. OFAC's guidance indicates that a blocked person who exercises effective control over an entity – through contractual rights, informal direction, or a management role – can render that entity's dealings with US persons prohibited, even absent majority ownership. Control is a facts-and-circumstances question. It is not resolved by the ownership figure alone.
The facilitation prohibition is the third layer. A US person may not facilitate a transaction by a non-US person that the US person itself could not lawfully conduct. In a joint-venture context, this means that a US sponsor cannot structure a joint vehicle – or its governance – so as to enable a foreign partner to conduct activities that would be prohibited if the US sponsor performed them directly. Counsel who advise only on the initial investment and not on the ongoing governance structure leave their clients exposed to this ground.
The position above covers the standard analytical framework. Your facts – the counterparty's jurisdiction, the precise ownership percentages, the governance rights negotiated, and the operational activities of the proposed vehicle – change the analysis materially. To discuss your specific structure, contact Calder & Vance at info@caldervance.com.
How does OFAC joint-venture analysis differ from OFSI and EU tests?
The OFAC ownership test is purely numerical at the 50 percent threshold, but the OFSI and EU rules add a separate, qualitative control limb that can catch structures the OFAC test would not – and that difference directly affects how a joint venture should be documented.
Under OFSI (the UK's Office of Financial Sanctions Implementation) and the relevant EU Council regulations, a non-listed entity is caught if a designated person either owns it (applying an ownership test broadly comparable to OFAC's) or controls it. Ownership and control (the UK and EU test for whether a non-listed entity is caught through a listed person) is not met by the ownership figure alone: control can be established through board composition, contractual veto rights, or the practical ability to direct commercial decisions. A joint-venture structure designed to hold ownership below 50 percent for OFAC purposes may still be captured by OFSI or EU rules if a designated person holds a casting vote, appoints the majority of directors, or can block material resolutions.
This divergence has practical consequences for deal documentation. Governance provisions that appear unproblematic under the mechanical OFAC ownership test – a 45 percent stake with enhanced minority-protection rights, for instance – may constitute prohibited "control" under OFSI or the EU analysis. Where a joint venture involves UK or EU counterparties, financing, or banking relationships, the more demanding OFSI and EU control tests govern the conduct of those participants, even if the deal is primarily structured under US law.
Singapore's sanctions regime, administered under the Monetary Authority of Singapore's guidelines and the relevant regulations, applies its own ownership and control tests. Structures with a Singapore nexus – a holding company incorporated there, a clearing bank operating under MAS supervision, or a partner with Singapore-regulated financial activities – require a separate analysis under Singapore law. We regularly advise on multi-regime joint-venture structures where OFAC, OFSI, EU, and Singapore obligations intersect within a single transaction.
For a fuller treatment of the OFSI position on joint-venture structuring, see our related service page: Joint-venture sanctions structuring under OFSI: legal support. For the Singapore regime, see Joint-venture sanctions structuring under Singapore sanctions: legal support.
What is the procedure for managing an identified OFAC risk in a joint venture?
When a sanctions risk is identified in a proposed joint-venture structure, the response follows a defined sequence: confirm the finding, assess the transaction exposure, determine the available paths, and execute the chosen path before closing.
The first step is to confirm whether the identified person or entity is, in fact, designated. Screening tools generate false positives, and a positive match must be verified against the current SDN List and the relevant programme lists before any remedial action is taken. Where the match is confirmed, the next question is whether the 50 percent rule or a control analysis captures the joint-venture counterparty itself.
If the counterparty is blocked, or if the proposed structure would involve prohibited dealings, three paths exist. The first is a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction). Licence applications to OFAC are evaluated on a policy basis by the programme team responsible for the relevant sanctions programme. The processing timeline for a specific licence application is not fixed by rule and varies materially by programme and by the complexity of the transaction; applicants should expect a waiting period that is measured in months rather than weeks for most substantive licensing requests. There is no guarantee of approval.
The second path is a structural remedy: redesigning the joint-venture documentation to remove the prohibited element. This may involve a change in ownership percentages, a buy-out of the relevant interest, a modification of governance rights that would otherwise constitute control, or a ring-fencing of the joint vehicle's operations to exclude any prohibited nexus. Structural remedies require careful legal drafting, because a remedy that removes the OFAC prohibition may create a different problem under OFSI, EU, or local-regime tests.
The third path is withdrawal from the transaction. If neither a licence nor a structural remedy is available within the deal timeline, the appropriate advice is to decline to proceed. In our cross-border practice, the cases where withdrawal becomes necessary are precisely those where the OFAC analysis was deferred until late in the deal process, leaving insufficient time to pursue a licensing path.
If a transaction has already closed, or if a filing has already been refused, an early legal review can preserve options that narrow with time. For a confidential review of an existing position, contact us at info@caldervance.com.
Risk flags that indicate specialist counsel is needed
Several structural features of a proposed joint venture raise the risk profile above the level that standard in-house screening can resolve, and indicate that specialist sanctions counsel should be engaged before the deal progresses further.
The most common risk flag is an opaque ownership chain: a joint-venture partner incorporated in a jurisdiction without a public beneficial-ownership registry, or one whose shareholders include nominee entities, discretionary trusts, or entities in jurisdictions with significant sanctions exposure. Beneficial-ownership data obtained from third-party commercial databases is often incomplete and should not be treated as a substitute for a legal opinion on the ownership chain.
A second flag is any prior regulatory contact. If a proposed joint-venture partner, or any entity in its ownership chain, has been the subject of a prior OFAC designation, a voluntary self-disclosure, or a settlement with any sanctions authority, that history is material to the current analysis and should be investigated rather than ignored.
A third flag is a joint-venture structure that involves goods, technology, or services with dual-use characteristics. An entity that is not blocked may still be subject to BIS export-control restrictions under the EAR (the Export Administration Regulations, administered by BIS), and a joint venture whose activities involve the transfer, re-export, or deemed export of controlled items requires a parallel export-control analysis. The OFAC and BIS analyses are related but distinct, and missing either one exposes the deal to enforcement risk.
A fourth flag is any financing structure that routes through a jurisdiction subject to a comprehensive OFAC programme, or through a financial institution that has itself been the subject of recent OFAC enforcement. US-dollar clearing through a correspondent bank creates a US-person nexus that extends OFAC jurisdiction to the transaction, even where the direct parties to the joint venture are non-US entities. For a detailed treatment of the correspondent-banking dimension of sanctions exposure, see our service page on correspondent banking and de-risking under OFAC.
Is your deal team aware that the financing structure, and not just the direct parties, can trigger OFAC jurisdiction? That question should be asked before the term sheet is signed.
A common misconception: the joint vehicle itself is not automatically clean
A persistent assumption among deal teams is that a newly incorporated joint vehicle – one that has never appeared on any sanctions list and has no operational history – is, by definition, a clean counterparty. This assumption is incorrect, and it is one of the most consequential errors we encounter in our cross-border practice.
As set out above, the 50 percent rule operates automatically: if blocked persons own the joint vehicle in the required aggregate, the vehicle is blocked from the moment of its formation, without any designation action, and without any prior conduct. The vehicle's lack of operational history is irrelevant. Its absence from any list is irrelevant. Its good-faith incorporation documents are irrelevant. The only question is the ownership chain as it stands at the moment of formation – and at every subsequent moment when US-person dealings with the vehicle occur.
In a recent matter, a manufacturing business in the industrial equipment sector sought our advice on a joint-venture structure in which its proposed partner was a locally incorporated entity with no prior sanctions history. We identified that a blocked person held a direct equity stake in one of the partner's intermediate holding companies, with the aggregate blocked-person ownership in the joint vehicle, when computed through the chain, sitting just above the threshold. The deal was restructured to address the ownership question before closing. No licence was required. The matter proceeded on a sound legal basis.
The corollary applies equally: a non-US partner in a joint venture may itself be subject to OFSI or EU control tests even where the OFAC ownership threshold is not met. The multi-regime character of cross-border joint ventures means that a clean OFAC analysis does not produce a clean analysis under every applicable regime.
How Calder & Vance structures the engagement
Calder & Vance advises deal teams, general counsel, and compliance officers on the OFAC legal issues that arise at each stage of a joint-venture transaction, from initial counterparty diligence through to post-closing governance review.
At the pre-signing stage, our work covers: screening the counterparty and its full beneficial-ownership chain against the SDN List and all relevant programme lists; applying the 50 percent aggregation test across the ownership structure; assessing governance rights for evidence of control by a blocked or designated person; reviewing the proposed financing structure for US-person nexus; and identifying any BIS or export-control dimension arising from the activities of the proposed joint vehicle. We deliver a structured legal memorandum setting out the findings, the applicable tests under OFAC and any other relevant regime, and a recommended path.
Where a risk is identified, we assess eligibility, prepare and submit the licence application to OFAC, and manage the regulator's queries through the review process. Where a structural remedy is preferred, we advise on the required documentation changes and verify that the remedy is effective under all applicable regimes – not only under OFAC. Where withdrawal is the appropriate advice, we provide that advice clearly and document the reasoning.
At the post-signing and post-closing stages, we advise on the ongoing compliance obligations of the joint vehicle and its participants, including screening obligations for new counterparties, periodic re-screening requirements, and the procedure for VSD (voluntary self-disclosure to a regulator) where a potential violation is identified after closing.
Our practice covers OFAC, OFSI, the relevant EU Council regulations, the Singapore regime, and the other major sanctions regimes under one roof. We instruct local counsel in the relevant jurisdiction where local legal work is required, but the cross-regime coordination and the international sanctions analysis sit with us throughout.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions-risk analysis for financial-institution relationships in cross-border structures
- Joint-venture sanctions structuring under OFSI – UK financial-sanctions analysis for joint-venture transactions
- Joint-venture sanctions structuring under Singapore sanctions – MAS-regime analysis for Singapore-nexus joint ventures