A UK-incorporated trading business signs a long-term supply agreement with a European counterparty. Six months later, one of that counterparty's parent entities appears on the Office of Financial Sanctions Implementation (OFSI) consolidated list of designated persons. The contract is silent on sanctions. The business cannot pay. It cannot terminate without a financial penalty. And it has no clear route to an OFSI licence. A well-drafted sanctions clause would have resolved all three problems before they arose.
Sanctions clauses in contracts under OFSI address the legal obligations that arise when a counterparty, transaction, or asset becomes subject to UK financial sanctions. They serve three functions: they allocate liability between contracting parties when a sanctions trigger occurs; they define each party's notification and suspension obligations; and they create a clear contractual route to termination or suspension that does not itself constitute a prohibited act. As of August 2026, UK financial sanctions are administered under the Sanctions and Anti-Money Laundering Act – known as SAMLA – and the relevant thematic designation regulations, with OFSI responsible for enforcement and licensing.
This page explains what OFSI-compliant sanctions clauses must do, how they interact with OFAC and EU obligations, where standard commercial drafting falls short, and how Calder & Vance assists businesses that need these provisions drafted, reviewed, or stress-tested.
What do sanctions clauses in contracts under OFSI actually cover?
An OFSI-compliant sanctions clause is a suite of contractual provisions – not a single boilerplate paragraph – that together manage the legal consequences of a UK financial-sanctions trigger. The clause suite must address designation risk, performance obligations, notification duties, and termination rights in a manner consistent with OFSI's enforcement approach and SAMLA's prohibition structure.
At minimum, a sound OFSI-oriented clause suite covers four areas. First, a representations and warranties block in which each party confirms it is not a designated person, is not owned or controlled by a designated person, and is not otherwise subject to UK financial sanctions. Second, a notification obligation requiring each party to alert the other promptly if it becomes aware of a sanctions event affecting itself, its affiliates, or – depending on the transaction – its own key counterparties. Third, a suspension or withholding right allowing the non-affected party to pause performance without breach while the position is assessed or an OFSI licence is sought. Fourth, a termination right that can be exercised cleanly if the sanctions event is not resolved within a defined period or if an OFSI licence is refused.
What a sanctions clause cannot do is authorise performance that OFSI prohibits. Any clause that purports to override a financial-sanctions prohibition is unenforceable and, depending on how it is used, may itself constitute evidence of a deliberate breach. This is a point that sometimes surprises non-specialist drafters: the clause must work within the sanctions regime, not around it.
In our experience, many commercial contracts in the UK market contain a one-line sanctions representation that was inserted to satisfy a bank's lending condition. It addresses the position at signing. It does not address what happens after signing – and that is precisely when sanctions exposure is most likely to materialise.
What is the legal basis and how does OFSI enforce it?
UK financial sanctions derive their force from SAMLA and the thematic designation regulations made under it – covering, among other areas, counter-terrorism, non-proliferation, and the various country-linked regimes that the UK has maintained or built since leaving the EU's common foreign-policy structure. OFSI, a directorate of HM Treasury, is the competent authority for financial-sanctions enforcement and licensing in the UK.
OFSI operates a civil enforcement power under SAMLA. It can impose a monetary penalty on any person who, in the UK or as a UK person, deals with funds or economic resources owned, held, or controlled by a designated person, or makes funds available to such a person, without a valid OFSI licence or other exemption. The penalty can reach the higher of a fixed maximum or a percentage of the value of the breach; the figures are set by the relevant secondary legislation and should be verified against the current position before reliance.
OFSI's enforcement guidance also addresses the reporting obligation. A relevant firm – which includes financial institutions, professional services firms, and other regulated entities – must report to OFSI as soon as practicable once it knows or has reasonable cause to suspect that it holds funds or economic resources belonging to a designated person. Contracts that generate payment obligations, escrow arrangements, or security interests can all create holding scenarios that trigger this duty.
The position above covers the standard case. Your facts – the counterparty structure, the transaction type, the governing law of the contract, and the jurisdictions of the parties – change the analysis materially.
To discuss how OFSI's rules apply to a specific contract or counterparty, contact Calder & Vance at info@caldervance.com.
How do OFSI sanctions clauses compare with OFAC and EU approaches?
The cross-border dimension is where standard drafting most commonly fails. A contract between a UK seller and a US buyer will face both OFSI and OFAC obligations; a contract between a UK exporter and an EU distributor will face both OFSI and the relevant EU Council regulation. These regimes share objectives but differ in their ownership tests, licensing mechanisms, and clause-drafting norms.
Under OFAC, the prohibition on transacting with blocked persons extends to entities that blocked persons own 50 percent or more in the aggregate – a mechanical, aggregated ownership threshold. OFSI and the EU apply an ownership and control test: a non-designated entity can be caught not only through majority ownership but also through other forms of control that a designated person exercises, even at lower equity stakes. This difference is consequential for sanctions warranties. An OFAC-style warranty that tracks only the 50-percent figure will understate the exposure under a UK or EU analysis.
EU Council regulations also require attention to the EU Blocking Regulation, which restricts EU operators from complying with certain extraterritorial US sanctions measures. A contract that sits at the intersection of OFAC and EU obligations may require a carefully structured clause that navigates both the US prohibition and the EU restriction on compliance with it – a genuinely difficult drafting problem that requires input from counsel covering both regimes. We regularly advise on exactly this intersection, working with local counsel in the relevant EU jurisdictions where the analysis requires it.
For transactions that also engage UN Security Council measures – which underlie many of the designation regimes that OFSI, OFAC, and the EU implement – clause drafting should acknowledge the UN Consolidated List as a distinct source of obligation, not merely a subset of one national regime. Our sanctions clause drafting service for UN-based regimes addresses this layer in parallel with the national-regime analysis.
The practical result is that a robust multi-jurisdiction contract needs a clause suite that is architecturally layered: a core OFSI-compliant structure, a supplemental OFAC representation and covenant where US persons or US-dollar payments are involved, and an EU-law-aware carve-out where EU operators are parties. These layers must cohere. They must not create internal contradictions that a counterparty could use to argue non-performance.
What is the drafting procedure and what does it involve?
Drafting OFSI-compliant sanctions clauses follows a defined sequence, and each stage produces a specific output that feeds the next. Knowing that sequence helps a GC or compliance officer understand what they need to provide and what they will receive back.
The first stage is a transaction and counterparty mapping. Before a single clause is drafted, the adviser needs to understand: the structure and jurisdiction of each contracting party; the nature of the goods, services, or funds involved; the payment routes and currencies; the governing law of the contract; and the secondary-counterparty risk (subcontractors, payment processors, escrow agents). This mapping exercise determines which sanctions regimes are live and what the clause suite needs to address.
The second stage is a clause architecture decision. Based on the mapping, the adviser selects the appropriate structure: a standalone sanctions schedule, a set of defined terms and covenants woven into the main agreement, or a short-form clause suitable for lower-value or lower-risk transactions. The architecture also decides the allocation of risk – in a balanced commercial negotiation, both parties bear symmetrical obligations; in a supply contract where one party controls the risk, the obligations may be asymmetric.
The third stage is drafting and calibration. This is where the specific OFSI prohibitions, the OFSI licensing route, and the notification timeline are translated into contractual mechanics. A clause that gives a party an unlimited period to seek an OFSI licence before the other party can terminate is commercially unacceptable. A clause that gives only 24 hours may be impractical given OFSI's own processing timelines. The calibration of these windows is a practitioner judgment, informed by experience of how OFSI handles licence applications in comparable situations.
The fourth stage is counterparty negotiation support. Sanctions clause negotiations are frequently where cross-border transactions stall. The other party's counsel may propose language that is appropriate for OFAC but inconsistent with OFSI. We assist in identifying those gaps and proposing bridging language that is acceptable under both regimes.
The fifth stage is final review and sign-off. Before execution, the clause suite is reviewed against the current OFSI consolidated list position, the current thematic regulations, and any general licences or specific licensing guidance that OFSI has issued in the relevant area. The review confirms that no provision of the agreed clause will itself constitute a prohibited act under SAMLA.
What are the most common risk flags in sanctions contract clauses?
Five drafting failures appear repeatedly in contracts that reach us after a sanctions event has already occurred. Identifying them early – ideally before a contract is signed – is significantly cheaper than managing the consequences after.
The first is the static representation problem. A warranty that a party is not designated is true only at the moment it is given. Contracts with multi-year terms need a continuing covenant, not a point-in-time warranty. Without a continuing obligation to notify of a change in status, the non-affected party has no contractual right to suspend performance until it independently discovers the designation – by which time it may already have made a prohibited payment.
The second is incomplete ownership coverage. As noted above, OFSI applies an ownership and control test. A clause that addresses only the contracting party – and not its affiliates, its majority shareholders, or the entities that control it – leaves a significant gap. We have acted for businesses that discovered mid-contract that a counterparty's controlling parent had been designated, with no contractual mechanism available to suspend performance without themselves incurring a termination liability.
The third is absent or unworkable termination mechanics. Some contracts state that a sanctions event is a force majeure without specifying how long each party must wait, whether a licensing attempt is required first, and what happens to sums already paid. A force majeure label is not a clause. The mechanics matter.
The fourth is governing-law mismatch. A contract governed by the laws of a third jurisdiction may give that jurisdiction's courts the power to interpret the sanctions clause. If that jurisdiction does not recognise OFSI's designations as having direct legal effect, the contractual allocation of liability may not be enforceable as drafted. This arises particularly in contracts with governing-law choices of certain Middle Eastern or Asian legal systems, where the relationship between domestic law and UK financial sanctions needs careful attention.
The fifth is licence-application silence. OFSI's licensing regime allows certain otherwise-prohibited transactions to proceed under a specific or general licence. A contract that does not address the parties' obligations when a licence application is pending – who applies, who bears the cost, what happens if it is refused, what the other party's rights are in the interim – creates a gap that a counterparty can exploit.
If a transaction has already been flagged, a clause has been challenged, or a counterparty has raised a sanctions concern, an early review can preserve options that narrow with time. Contact us at info@caldervance.com.
A common misconception: is standard boilerplate sufficient?
A recurring view among procurement and legal operations teams is that a standard sanctions boilerplate – the kind inserted by a bank's lending team or lifted from a trade association template – is sufficient for most contracts. It is not. And the gap between what boilerplate covers and what OFSI requires is where enforcement exposure lives.
Standard boilerplate typically addresses only the position at signing, covers only the direct contracting party, and is drafted against a generic "applicable sanctions law" definition that may not accurately track SAMLA's scope. It does not address post-signing notification obligations, OFSI's specific licensing route, the ownership-and-control test, or the interaction with OFAC or EU obligations. In a cross-border contract, this means the clause does almost none of the work a sanctions clause needs to do.
There is also a liability point that boilerplate misses entirely. Under SAMLA, the obligation not to deal with the funds or economic resources of a designated person falls on the party performing the contract – it is not discharged by the other party's warranty that it is not designated. A business that relies solely on a counterparty's representation, without building in its own monitoring obligation and suspension right, has not adequately managed its OFSI exposure. The representation is evidence of due diligence in a licensing or mitigation context; it is not a defence to a prohibited dealing.
In our practice, we have advised on contracts where a four-page sanctions schedule replaced a single boilerplate sentence. The work prevented a prohibited payment and preserved a commercially significant relationship when the counterparty's affiliate appeared on the OFSI list eight months after signing. The scenario is not unusual; the difference is in the drafting.
How Calder & Vance assists with sanctions clause drafting and review
Our sanctions contract-clauses service under OFSI covers the full lifecycle of a contract's sanctions exposure: from initial architecture and drafting through counterparty negotiation support and post-signing clause review when the position changes.
For new contracts, we map the transaction and counterparty structure, design the clause architecture appropriate to the risk level, draft the clause suite to OFSI's current requirements, and provide a cross-regime overlay for OFAC or EU obligations where the transaction is cross-border. Where the contract involves dual-use goods or controlled technology, we coordinate with our export-controls practice – see our BIS/EAR sanctions risk assessment service – to ensure that the contractual controls are consistent with the applicable export-licensing conditions.
For existing contracts, we review the current clause suite against OFSI's consolidation list position and enforcement guidance, identify the gaps described above, and provide a redline with explanatory notes suitable for use in counterparty negotiations.
For financial institutions and compliance-intensive businesses, we also assist with template library development: building a tiered set of sanctions clause templates – from a short-form clause for low-value domestic transactions to a full multi-jurisdiction schedule for high-value cross-border deals – that in-house teams can deploy consistently. Our compliance audit and testing service can then be used to verify that the templates are being applied correctly and that the clause library remains current as the sanctions position evolves.
We offer a fixed-fee entry point for initial clause review and drafting engagement. Scope and fee are confirmed at the outset, so there are no billing surprises during a time-sensitive negotiation.
Related practices
- Compliance Audit and Testing – verify that sanctions clause templates are applied correctly and remain current
- Sanctions Clause Drafting for UN-Based Regimes – layered clause support where UN Security Council measures underlie the designation
- BIS/EAR Sanctions Risk Assessment – export-control alignment for contracts involving dual-use goods and controlled technology