A private equity firm agrees heads of terms on a UK acquisition. The target has trading relationships across three continents and a complex ownership structure. Two days before signing, the compliance team flags a shareholder in the ultimate holding chain whose name is similar to an entry on the HM Treasury Consolidated List (the UK register of persons and entities subject to financial sanctions administered by OFSI – the Office of Financial Sanctions Implementation). The deal is on hold. The question is not whether to investigate; the question is how deep to go and how quickly.
Sanctions due diligence in M&A under OFSI requires a structured review of the target, its ownership chain, and its material counterparties against UK financial-sanctions obligations under the Sanctions and Anti-Money Laundering Act ("SAMLA") and the relevant thematic sanctions regulations. The ownership and control test (the UK test for whether a non-listed entity is caught through a listed person's ownership or control) is broader than a name-screen alone and differs in important respects from OFAC's mechanical 50 percent rule (OFAC's rule treating entities owned 50 percent or more by blocked persons as themselves blocked). As of February 2026, getting this analysis wrong can delay or kill a transaction, and in a post-completion context can result in an enforcement referral to OFSI or a voluntary self-disclosure obligation.
This page sets out the OFSI-specific diligence procedure, where it diverges from OFAC and EU rules, the risk flags most likely to surface in a deal, and how Calder & Vance supports M&A teams through the process from heads of terms to post-completion.
What does OFSI-specific diligence cover and who needs it?
OFSI-specific sanctions due diligence in M&A covers any transaction where a UK person – including a UK-incorporated entity or a person conducting business in the United Kingdom – acquires, invests in, or extends credit to a target that might be owned or controlled by a designated person, or might itself be designated under UK financial-sanctions regulations. The obligation to screen arises before completion. It is not optional, and it does not disappear because the transaction is structured as a share deal rather than an asset deal.
Who is in scope? The answer is broader than most deal teams assume. UK-nexus is not limited to the acquirer's place of incorporation. A foreign acquirer using a UK bank, settling in sterling, or employing UK counsel to document the deal has a UK person in the chain. Each of those persons faces individual liability if they deal with a designated person or make funds available to one – whether or not they had actual knowledge of the designation at the time of dealing.
In our experience, the parties most exposed are acquirers in the mid-market who rely on a standard KYC screen run by the transaction bank, in the belief that this covers their OFSI obligations. It does not. A KYC screen is designed for customer-onboarding; it is not a sanctions-legal analysis of ownership and control.
The legal basis for the prohibition is the relevant thematic regulations made under SAMLA, together with OFSI's published enforcement guidance. The firm responsible for administering and enforcing financial sanctions in the UK is OFSI, a directorate of HM Treasury. OFSI has the power to impose civil monetary penalties, publish the details of an enforcement case, and refer matters to law enforcement for criminal investigation.
How does the OFSI ownership and control test work – and how does it differ from OFAC and the EU?
The OFSI ownership and control test asks two questions: is a designated person the owner of a relevant entity, and does a designated person control it? Both limbs matter. Ownership under UK rules is not limited to a single threshold in the way that OFAC's 50 percent rule operates. Control captures the ability to direct or influence the actions of the entity – a concept that can reach a minority shareholder who holds veto rights over material decisions, or a creditor whose loan covenants give it effective governance over the borrower.
Compare this with OFAC's approach. OFAC applies the 50 percent rule: if blocked persons own 50 percent or more in the aggregate, directly or indirectly, the entity is treated as blocked. The test is mechanical. Ownership below that line does not automatically block the entity under OFAC rules, regardless of the actual influence exercised. This means a 49 percent holding by an OFAC-designated person does not automatically produce a prohibition under US sanctions – but the same holding may still engage OFSI's control analysis under UK rules.
The EU position is closer to the UK test. EU Council regulations use both ownership (generally interpreted at 50 percent as a key reference point, consistent with the EU's guidance) and a broad control limb that looks at governance influence. In our cross-border practice, we regularly advise deal teams who have completed an OFAC screen and assumed the EU and UK analyses follow. They do not. The control dimension under OFSI can catch a counterparty that passes an OFAC screen cleanly.
There is a further divergence that affects deal structure. OFAC's rules operate primarily as asset-blocking and dealing prohibitions, focused on the economic relationship. OFSI's regime includes a separate test for "making funds available" that is broad enough to cover the payment of deal proceeds to an entity that is owned or controlled by a designated person, even where the designated person does not receive the funds directly. That analysis has to be run for every payment step in the transaction – not just the final purchase price.
The position above covers the standard analysis. Your facts – the target's jurisdiction, its ownership chain, the counterparties in the deal, the relevant designated persons, and the regimes in play – change the analysis materially.
For a structured review of your transaction's OFSI exposure, contact Calder & Vance at info@caldervance.com.
What is the step-by-step diligence procedure in a live deal?
Effective OFSI sanctions diligence in a live M&A transaction follows a defined sequence. Skipping steps or compressing the sequence under time pressure is the most common source of post-completion exposure. The procedure below maps a mid-complexity transaction; the sequence is the same for larger or more complex deals, but the depth at each step increases.
- Scope the analysis. Identify every entity and individual in the ownership chain of the target, from the immediate seller down to the ultimate beneficial owners. For each, confirm: jurisdiction, nationality, any publicly known political-exposure or sanctions profile. This stage defines the universe of names to be screened.
- Run primary screening. Screen each name against the HM Treasury Consolidated List, the OFAC SDN List (OFAC's list of Specially Designated Nationals and blocked persons), the EU Consolidated Sanctions List, and the UN Consolidated List. Screening against one list only is not sufficient. Under OFSI, a UK person can face liability for a transaction that does not touch a UK-listed person but does touch an EU- or UN-listed person that is also subject to UK regulations.
- Analyse ownership and control. For any name that produces a potential match, or any entity in the chain where ownership or control is opaque, conduct the full legal analysis under OFSI's ownership and control test. This is a legal step, not a screening step; it requires review of constitutional documents, shareholder agreements, loan agreements, and any side arrangements that might give a third party effective control.
- Review material counterparties. Where the target has significant trading relationships, those counterparties should be screened for designation. A target that contracts regularly with a designated person may itself have an OFSI exposure that the buyer inherits at completion.
- Address historic dealing. If the diligence reveals that the target or any entity in its ownership chain has previously dealt with a designated person – whether before or after designation – that exposure should be assessed. OFSI's regime does not automatically grandfather pre-designation transactions, and a buyer who completes in knowledge of a historic breach may face its own obligations.
- Document and decide. Prepare a written diligence record setting out the scope, methodology, findings, and conclusions. This record is critical for any subsequent OFSI query and for demonstrating that the transaction parties acted responsibly. Where the analysis reveals a prohibition or a material risk, the record should set out the options: restructure, seek a specific licence, or decline.
Timelines are deal-specific. A straightforward acquisition with a clean ownership chain and no red flags can be reviewed within a matter of days. A complex structure with layered holding vehicles, multiple jurisdictions, and ambiguous control positions requires more time. In our experience, compressing this analysis to meet an artificial signing deadline produces the highest risk of error.
What are the main risk flags in OFSI M&A diligence?
Several patterns regularly produce elevated risk in OFSI M&A diligence. Identifying them early – ideally at the initial scope review – determines how much legal resource the transaction requires and whether any restructuring is needed before signing.
Opaque ownership structures. Layered holding vehicles in jurisdictions with limited public-register disclosure are the most common source of hidden designation risk. A target owned through a chain of shelf companies in low-disclosure jurisdictions requires full beneficial-ownership mapping before any conclusion can be drawn. The OFSI control test extends through every layer.
Minority shareholders with governance rights. A designated person holding 15 or 20 percent of the target is not automatically caught by OFAC's 50 percent rule. But if that person holds a board seat, veto rights over asset disposals, or the right to approve material contracts, the control limb of the OFSI and EU tests may be engaged. Deal teams sometimes treat minority stakes as immaterial. Under OFSI, that assumption requires explicit legal review.
Creditor and lender positions. Senior lenders with tight covenant packages can satisfy OFSI's control test even without equity. This matters in leveraged acquisitions where the target carries existing debt from a lender that is itself subject to scrutiny.
Post-designation historic contracts. Where the diligence reveals that the target entered into a contract with a designated person after the date of designation, that position requires careful analysis. The buyer does not automatically inherit criminal exposure, but it may inherit a civil position and an OFSI reporting obligation.
Multi-regime complexity. A target with US operations, an EU-listed shareholder, and a UK bank account may face concurrent OFAC, EU, and OFSI prohibitions. The "stricter prohibition governs" principle means the analysis cannot be run on the most permissive regime and applied to the others. Each regime must be assessed separately.
If a transaction has already been flagged – a hit on screening, a query from the bank, or a refusal to settle – early specialist review preserves options that narrow with time. Contact Calder & Vance at info@caldervance.com for a confidential assessment.
How do OFSI licensing and OFAC specific licences interact in a cross-border deal?
Where OFSI diligence reveals a prohibition, the first question is whether a licence route is available. OFSI has the power to grant a specific licence (a case-by-case authorisation to conduct an otherwise prohibited transaction) under the relevant thematic regulations. The licensing process is distinct from the OFAC specific-licence process, and the two authorisations are not interchangeable: an OFAC licence does not authorise the UK limb of a transaction, and an OFSI licence does not relieve OFAC obligations.
In a cross-border deal with both UK and US persons involved, the licensing strategy must be coordinated from the outset. Applying for an OFSI licence without assessing the OFAC position – or the EU general authorisation position – can produce a situation where one limb of a transaction is licensed and another is not, resulting in a fragmented deal that cannot close legally under either regime.
OFSI assesses licence applications against a defined set of grounds set out in the relevant regulations. These typically include grounds based on prior obligations, humanitarian purpose, and the public interest, among others. Not every transaction qualifies. An application that is not properly evidenced – that does not clearly establish the applicable licensing ground and address OFSI's likely queries – will either be refused or result in protracted correspondence that consumes the deal timeline. We assess eligibility, prepare and submit the licence application, and manage the regulator's queries at each stage of the process.
Where an EU authorisation is also required, the analysis tracks the relevant EU Council Regulation and the competent national authority for the member state where the EU person is established. The grounds are set out in the regulation and differ in some respects from the OFSI grounds. In our cross-border practice, we have acted for deal parties who needed concurrent OFSI and EU authorisations and for whom sequential applications would have killed the deal commercially. Coordinated, parallel applications are the correct structure in those situations.
A practical scenario: what happens when a potential match emerges at signing?
In a recent matter, a mid-market acquirer in the professional services sector was three business days from signing when a name-match emerged during a final ownership-chain sweep. The match was a partial name match – not a confirmed designation – against a minority shareholder in the target's ultimate parent structure. The transaction bank paused settlement pending resolution.
We assessed the ownership and control position under OFSI, ran parallel checks against the OFAC SDN List and the EU Consolidated Sanctions List, and confirmed that the match was a false positive based on distinguishing data on nationality, date of birth, and address. We documented the analysis in a written record and provided a formal opinion for the bank's file. Settlement proceeded. The matter illustrated two points that recur in deal-process sanctions work: partial name matches produce disproportionate disruption if there is no pre-agreed escalation procedure, and a written legal analysis – not just a narrative from the screening tool – is what a bank's compliance function actually needs to release a hold.
The outcome above is illustrative; no guarantee of a particular result is given for any future matter. But it is a reliable pattern that early involvement of specialist counsel avoids the situation where a clean transaction is delayed or aborted because the response to a partial match is not proportionate, structured, or documented to the standard the bank requires.
Common misconceptions about OFSI diligence in transactions
The most persistent myth in this area is that a clean KYC screen conducted by the transaction bank satisfies the parties' OFSI obligations. It does not. The bank's screen is performed for the bank's own onboarding purposes, under the bank's own risk appetite. It is not a legal opinion and it is not directed at the parties' independent obligations under UK sanctions law. Each party to a transaction – acquirer, seller, and their advisers where they have a UK nexus – has its own potential liability for dealing with a designated person or making funds available to one. Relying on the bank's screen as a proxy for that analysis is a structural gap in the diligence.
A second misconception is that OFSI compliance is a lighter obligation than OFAC compliance because OFSI has historically published fewer enforcement actions. That characterisation is outdated. OFSI's enforcement posture has strengthened materially in recent years, and the regime now includes powers to impose significant civil monetary penalties on a strict-liability basis for certain violations, and to publish the details of enforcement cases as a form of reputational sanction. The question is not whether OFSI enforces; the question is when a gap in diligence becomes a ground for an enforcement referral.
A third misconception is that OFSI diligence is a box to tick at the start of a deal and then set aside. In a deal with a long period between signing and completion – common in regulated-sector acquisitions or in deals requiring merger-control clearance – the sanctions position must be rechecked at completion. The HM Treasury Consolidated List changes. A target whose ownership chain was clean at signing may not be clean at completion if a new designation is made in the intervening period.
Related practices
- Correspondent banking and de-risking under OFAC – sanctions risk assessment and legal support for financial institutions managing correspondent relationships
- M&A sanctions diligence: extended OFSI service – advanced ownership-chain analysis and licensing support for complex cross-border acquisitions
- Maritime, shipping, and BIS/EAR sanctions compliance – export-control and trade-sanctions support for shipping and logistics transactions
Frequently asked questions: OFSI sanctions due diligence in M&A
How long does running sanctions diligence in a deal take under OFSI?
Timeline depends on the complexity of the target's ownership structure and the number of jurisdictions involved. A straightforward acquisition with a clean, transparent ownership chain and no potential matches can be assessed and documented within two to five business days. A layered structure with multiple holding vehicles, ambiguous control positions, or partial screening matches will require longer – and if a licensing application proves necessary, OFSI's processing time should be factored into the deal schedule at the earliest opportunity. Raising OFSI diligence late in the deal process is the most reliable way to compress the time available for a structured response.
What are the main risks in sanctions due diligence in M&A under OFSI?
The main risks are: (1) inheriting a target with a prohibited ownership position that was not identified before completion; (2) making a prohibited payment – including deal proceeds – to or for the benefit of a designated person; (3) failing to make a required disclosure to OFSI where a transaction reveals a suspected breach; and (4) post-completion discovery of a pre-completion breach, which may trigger both an OFSI enforcement process and representations and warranties claims between the parties. Each of these risks is addressable with proper diligence and, where necessary, a licence application before completion.
Do we need specialist counsel for sanctions due diligence in M&A?
General transaction counsel can identify a sanctions issue. Resolving it – running the ownership and control analysis under OFSI, comparing the position with OFAC and EU rules, assessing licence eligibility, and producing a written opinion that a bank's compliance function will accept – requires specialist sanctions experience. In our experience, the transactions where general counsel attempt to manage a live OFSI issue without specialist support are the ones most likely to produce a delayed closing, a missed licence ground, or an inadequate disclosure. The cost of specialist involvement at the outset is materially lower than the cost of managing an enforcement exposure after completion.
About the author
Henry Ashworth advises on UK financial sanctions and export controls, including OFSI licensing and enforcement, and judicial-review challenges to designations. He acts for corporate acquirers, financial institutions, and individuals on the full range of OFSI matters, from transactional diligence and licensing to enforcement defence and disclosure. 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.
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.