A London-headquartered private equity house is weeks from signing on a mid-market acquisition. Target has operations across three jurisdictions. During legal due diligence, a screening run surfaces a beneficial owner with a name that closely matches an entry on the UK Consolidated List (the list of persons designated under UK sanctions law, maintained by His Majesty's Treasury). The deal team wants to know: is the target itself caught? Can the acquisition proceed? What must be disclosed – and to whom?
Sanctions due diligence in M&A under OFSI legal support service is the structured process of identifying, assessing, and resolving UK financial-sanctions exposure before a transaction completes. OFSI (the Office of Financial Sanctions Implementation, the UK's financial-sanctions authority) administers the prohibitions that make a deal commercially impossible or criminally risky if a designated person is involved. The ownership-and-control test under UK sanctions law differs in material ways from the OFAC 50 percent rule, and those differences directly affect how a buyer analyses its target. Getting that analysis wrong creates post-completion liability that no indemnity fully addresses.
This page sets out what OFSI-focused M&A sanctions diligence involves, how the UK test compares with OFAC and EU equivalents, where deals most often go wrong, and what Calder & Vance does in a live transaction.
What sanctions due diligence in M&A under OFSI actually requires
Sanctions due diligence in M&A under OFSI requires a buyer to establish whether any designated person owns or controls the target, whether the target holds assets that would be frozen on completion, and whether the proposed deal itself constitutes a prohibited dealing in funds or economic resources.
The UK statutory regime imposes strict prohibitions on making funds or economic resources available, directly or indirectly, to or for the benefit of a designated person. Unlike some regimes, the UK rules do not require knowledge of a breach for civil liability to attach. A buyer that completes on a target owned by a designated person has potentially committed a strict-liability offence, regardless of whether it knew.
Diligence must therefore run earlier than most buyers expect. Waiting until the week before signing leaves no time to resolve a match, seek an OFSI licence, or restructure the deal. In our experience, sanctions diligence should be initiated at the same time as legal and financial due diligence – and it must be revisited at exchange, completion, and any long-stop extension.
The scope of the exercise is not limited to direct shareholders. The UK ownership and control test (the test for whether a non-listed entity is caught through a listed person's holdings or influence) looks through ownership chains and also covers effective control. That means checking not only who holds shares but who can direct the target's affairs – a broader and more fact-sensitive analysis than the OFAC threshold trigger.
How the UK ownership and control test differs from OFAC and EU rules
The UK ownership and control test is control-sensitive as well as percentage-based, which means a target can be caught even where no designated person holds a majority stake.
Under the US regime, the analysis is primarily mechanical. OFAC's guidance treats an entity as blocked when one or more blocked persons own it 50 percent or more in the aggregate, directly or indirectly. If aggregate ownership of blocked persons stays below that line, the entity is not itself blocked under OFAC rules – though other prohibitions may still apply to the transaction. The test is binary and ownership-focused.
The EU position is structurally closer to the UK. EU sanctions regulations define control broadly, covering entities in which a designated person holds a majority of voting rights, has the right to appoint or remove senior management, or exercises dominant influence by other means. An entity can be subject to EU asset-freeze obligations even where a designated person holds a minority interest, if that person can direct decisions.
The UK test, under the relevant thematic sanctions regulations made under the Sanctions and Anti-Money Laundering Act ("SAMLA"), reflects both an ownership prong and a control prong. OFSI guidance makes clear that the control element is not exhausted by formal rights; informal or practical control – including through economic dependence or contractual arrangements – can bring an entity within scope. For an M&A buyer, this means that a clean cap-table analysis is necessary but not sufficient. The buyer must also assess board appointment rights, veto provisions, and financing relationships.
Where does secondary-sanctions risk fit? A UK buyer acquiring a target with US operations, or whose supply chain touches USD-denominated flows, faces a secondary layer of OFAC analysis alongside OFSI. The position above covers the standard UK case. Your facts – the counterparty's US nexus, the currency, the goods or services involved – change the analysis significantly.
For an initial assessment of your OFSI and OFAC exposure in a live transaction, contact Calder & Vance at info@caldervance.com.
What are the main risks in sanctions due diligence in M&A under OFSI?
The main risks in sanctions due diligence in M&A under OFSI fall into four categories: missed designations in a complex ownership chain, stale data at completion, underestimation of the control test, and failure to assess the target's own book of business.
Ownership-chain gaps. Standard legal due diligence often stops at UBO level with a basic screening run. It does not necessarily map every intermediate holding vehicle, nor does it capture recently updated designations issued between the diligence date and completion. OFSI makes new designations without advance notice, and a designation issued the day before signing can render a deal unlawful overnight.
Control not just ownership. The risk is sharpest where a designated person's economic interest is low but their influence over the target's board or financing is high. Sellers do not always disclose these arrangements voluntarily, and they may not appear on a register of persons with significant control.
The target's own exposures. A buyer acquiring a financial institution or a trading business inherits its counterparty exposures. If the target has a banking customer who is subsequently designated, or holds receivables from a sanctioned entity, the buyer becomes the holder of those positions on completion. Diligence must assess not only who owns the target but who the target deals with.
Post-completion obligations. If a match is found post-completion, the buyer has reporting obligations to OFSI and may have a frozen funds position to manage. Failure to report knowledge or reasonable cause to suspect a designated person holds interest in funds is itself an offence. Acting promptly, and with legal advice, is essential.
Have you mapped the full ownership and control chain – or only the first layer of registered shareholders?
The diligence procedure: a decision sequence for M&A counsel
A well-constructed OFSI sanctions diligence process moves in defined steps, each with a specific legal question and a decision gate that determines whether the deal can proceed, must be restructured, or requires an OFSI licence.
Step 1 – Initial screening. Run all identifiable legal persons and natural persons in the ownership and control chain against the UK Consolidated List, the EU consolidated list, and the OFAC SDN and non-SDN lists. Flag name matches and near-matches for further review. This step covers the position on the date of screening; it must be repeated.
Step 2 – Match resolution. Evaluate each flag against identifiers: date of birth, nationality, address, and associated aliases. False-positive resolution should be documented. Where a match cannot be excluded on identifiers alone, proceed on a worst-case basis pending further information from the seller.
Step 3 – Ownership-and-control mapping. Go beyond the share register. Identify nomination rights, consent rights over material decisions, financing covenants, and related-party arrangements that could give a designated person control in the UK legal sense. Document the analysis.
Step 4 – Business-book review. For a target with a material customer or counterparty base, screen key relationships. Tier them by value and frequency of dealing. Flag any relationship with a person or entity subject to an asset freeze.
Step 5 – Red-flag triage. Where a genuine designation match arises at any step, assess whether the deal structure can be modified to eliminate the prohibited element – for example, through a carve-out of the designated person's interest. Where no clean structure is available, assess the OFSI specific-licence route.
Step 6 – Pre-completion refresh. Rerun the screening and control mapping no earlier than a defined number of business days before completion. New designations issued after the initial run must be caught. The gap between initial diligence and completion is a live risk window.
If a transaction has already been flagged, or a filing has been refused, an early review preserves options that narrow with time. Contact us at info@caldervance.com.
When does an OFSI licence become necessary – and what does that mean for deal timetables?
An OFSI specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) is necessary when a deal involves funds, economic resources, or a dealing with a designated person that cannot be restructured away and that does not fall within an applicable general licence.
An OFSI general licence (a standing authorisation permitting a defined category of transactions without a separate application) may cover certain limited purposes – legal fees, basic living expenses, and specific sector provisions. In an M&A context, general licences rarely cover the full transaction. A specific licence application is usually required for acquisitions where a designated person has a direct or indirect economic stake in the target.
The licensing process involves setting out the factual basis of the transaction, identifying the designated person, explaining why the licence grounds are met, and providing supporting documentation. OFSI has discretion on whether to grant, and it may impose conditions. The outcome cannot be guaranteed.
Deal timetables must allow for the licensing process if a specific licence is needed. An application lodged late in a transaction timeline can cause a deal to miss long-stop dates. In our experience, identifying the need for a licence at the diligence stage – rather than at exchange or completion – is the difference between a manageable process and a failed deal.
The cross-regime picture matters here. Where OFSI licensing is needed, counsel must also assess whether a US general or specific licence is required under OFAC rules, and whether EU-level authorisation is needed for any EU-dimension counterparty. Running these applications in parallel rather than sequentially can significantly reduce the timeline cost.
Cross-border M&A: where OFSI, OFAC, and EU rules interact
A cross-border M&A transaction frequently engages multiple sanctions regimes simultaneously, and the most demanding prohibition in the picture governs – even if only one of the buyer, seller, or target is based in the relevant jurisdiction.
OFAC's secondary sanctions risk means that a non-US buyer acquiring a target with US operational links, US investors, or USD-denominated financing must run an OFAC analysis alongside OFSI. Secondary sanctions under certain US programmes can affect non-US persons who engage in significant transactions with designated parties, regardless of any US nexus in the direct transaction. The scope of secondary-sanctions exposure is programme-specific and requires separate analysis.
EU sanctions apply to all persons operating within the EU, to EU nationals globally, and to EU-incorporated entities wherever they are. A target with EU subsidiaries is subject to EU asset-freeze rules in respect of those subsidiaries, irrespective of whether the acquisition itself is governed by English law. A buyer acquiring the whole group must obtain comfort under each relevant regime.
Switzerland, Canada, and Australia have autonomous sanctions regimes that broadly track the EU and UN positions but are not identical to them. Where a target or its key relationships involve those jurisdictions, each regime's own list and test must be applied. We work with local counsel in the relevant jurisdictions where the analysis requires it.
The practical consequence: an M&A legal team should not treat OFSI diligence as the whole of the sanctions work. It is the primary layer for a UK-law governed deal. It sits alongside, not above, the other applicable regimes.
Common myths about sanctions diligence in M&A – and the correct position
The most persistent misconception we encounter is that sanctions diligence is essentially a screening exercise: run the names, clear the flags, move on. This misses the depth that OFSI's ownership-and-control test demands, and it misses the temporal dimension entirely.
A second myth is that a no-match result is a clean result. A no-match on the date of screening says nothing about the position one week before completion, or on completion day. Designations are made at any time, sometimes accelerated by geopolitical events, and a deal that screened clean in month one of a six-month process can be non-compliant by month five. Ongoing monitoring, not a one-time run, is what the law requires in practice.
A third myth is that sanctions risk sits with the seller to disclose. In our cross-border M&A practice, we regularly advise buyers who discover sanctions issues that the seller was unaware of, had not assessed, or had assessed incorrectly. Buyer beware is the operative standard. Reliance on seller warranties does not eliminate the regulatory liability that attaches to a completing buyer.
Finally, some deal teams believe that the prohibition on dealing with a designated person is limited to the direct transaction. That is incorrect. Making funds available to a third party that then uses them for the benefit of a designated person engages the prohibition as surely as a direct dealing. The indirect-benefit analysis is a material part of the OFSI diligence scope.
How Calder & Vance supports sanctions diligence in M&A
We provide legal support for sanctions diligence in M&A under OFSI as a defined, document-deliverable service – not a general advisory retainer.
Our work on a live deal typically includes: screening the ownership and control chain against all relevant lists (UK, EU, OFAC, and where relevant the UN Consolidated List), documenting the match-resolution analysis, preparing the ownership-and-control legal memorandum addressing the UK test and any EU or US divergences, reviewing the target's key commercial relationships for designated-counterparty exposure, advising on deal structuring where a modification is needed to remove a prohibited element, and, where a specific licence is required, preparing and submitting the OFSI application and managing OFSI's queries.
In a recent matter, a financial services acquiror identified a potential designation issue within a target's indirect ownership structure during a cross-border acquisition. We mapped the full control chain, assessed the UK and EU tests in parallel, confirmed that the interest in question did not meet the control threshold under OFSI guidance, and produced a documented legal memorandum the buyer's board could rely on at completion. The deal completed on schedule.
We also advise on the post-completion side: reporting obligations if an issue surfaces after signing, obligations when a customer or counterparty is designated during the ownership period, and programme design for ongoing monitoring of acquired entities.
What does working with us look like in practice? At instruction, we agree a defined scope of work, a timeline tied to the deal timetable, and a fixed-fee entry point. Our team covers OFSI and ECJU (Henry Ashworth), OFAC and BIS (J. M. Aldridge), and EU regime analysis (Claire Dubois) under one engagement, so multi-regime questions are handled without separate instruction.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions analysis for financial-institution relationships and correspondent banking risk.
- Maritime and shipping sanctions under BIS/EAR – export-control and sanctions diligence for shipping, cargo, and vessel transactions.
- Maritime shipping sanctions: BIS/EAR compliance support – end-to-end export-control classification and sanctions screening for shipping transactions.