TL;DR: A sanctions clause is the one contractual provision where getting it wrong can land your CEO in prison, freeze your company's assets, and cut you off from the global financial system, all in a single enforcement action. Unlike most contract terms that allocate commercial risk between the parties, sanctions compliance is a matter of public law where the penalties are absolute and the government's enforcement reach is extraterritorial. OFAC can impose penalties of up to $20 million per violation and criminal penalties of up to 30 years' imprisonment. The clause establishes representations, covenants, and screening obligations to ensure that neither party, nor any person in the transaction chain, is a sanctioned entity or is using the contractual relationship to evade trade restrictions. Key variables include the scope of sanctions regimes covered, screening frequency, wind-down mechanics, secondary sanctions risk allocation, and the interaction between sanctions compliance and export control regulations.
What Is a Sanctions and Export Control Clause?
A sanctions and export control clause is a contractual provision that addresses compliance with trade sanctions programs administered by governmental authorities (including OFAC in the United States, OFSI in the United Kingdom, and the European Commission in the EU) as well as export control regulations (including the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR) in the US). The clause typically combines representations about current sanctions status, forward-looking covenants regarding continued compliance, operational screening obligations, and termination mechanics triggered by sanctions-related events.
Sanctions programs take several forms. Comprehensive sanctions prohibit virtually all transactions with targeted countries or regions (e.g., US sanctions on North Korea, Iran, Cuba, Syria, and the Crimea region). List-based sanctions target specific persons and entities appearing on designated lists (OFAC's Specially Designated Nationals and Blocked Persons List (SDN List), the EU's Consolidated List, the UK's Sanctions List). Sectoral sanctions restrict specific types of transactions (e.g., debt or equity transactions with designated Russian entities). Secondary sanctions extend the reach of US sanctions to non-US persons who engage in specified transactions with sanctioned parties, even where the non-US person has no US nexus.
Export controls regulate the transfer of controlled goods, technology, software, and technical data across borders or to foreign persons. The EAR governs dual-use items (commercial items with potential military applications), while ITAR governs defense articles and services. Violations of export controls can occur even within a single corporate group if controlled technology is shared with a foreign national employee ("deemed export").
The clause serves as both a compliance mechanism and a risk allocation tool. It shifts due diligence obligations to the party best positioned to perform screening, creates a contractual basis for termination that supplements the legal prohibition, and provides an evidentiary record of compliance efforts that can mitigate penalties in the event of an inadvertent violation.
Why It Matters
Key Elements of a Well-Drafted Sanctions Clause
Market Position & Benchmarks
Where Does Your Clause Fall?
Market Data
Sample Language by Position
Compliance-maximizing: Each Party represents and warrants that neither it nor any of its directors, officers, employees, or agents, nor any person owning directly or indirectly a fifty percent (50%) or greater interest in it, is a Sanctioned Person. Each Party shall screen all counterparties, beneficial owners, and end-users against all applicable Sanctions Lists no less frequently than quarterly and promptly upon notification of changes to any Sanctions List. Upon a Party becoming a Sanctioned Person, the other Party shall have the right to terminate this Agreement immediately without notice, without liability, and without prejudice to any other rights or remedies available at law or in equity.
Market standard: Each Party represents that it is not a Sanctioned Person and covenants that it shall not engage in any transaction or activity that would cause the other Party to violate any applicable Sanctions Laws. Each Party shall maintain reasonable screening procedures to verify the sanctions status of persons involved in the performance of this Agreement. Either Party may terminate this Agreement upon written notice if the other Party becomes a Sanctioned Person or if continued performance would reasonably be expected to result in a violation of applicable Sanctions Laws.
Light-touch: Each Party shall comply with all applicable trade sanctions, export control, and anti-boycott laws and regulations. Neither Party shall be required to perform any obligation under this Agreement to the extent that such performance would violate applicable Sanctions Laws. In the event that performance becomes prohibited by applicable Sanctions Laws, the affected obligations shall be suspended for the duration of such prohibition.
Example Clause Language
Financial services agreement: The Client represents and warrants that (a) it is not, and no person owning a controlling interest in it is, a Sanctioned Person; (b) it is not organized or resident in a Sanctioned Country; (c) it will not use any proceeds of any transaction contemplated hereby, directly or indirectly, to fund or facilitate any activity or transaction with or for the benefit of any Sanctioned Person or in any Sanctioned Country; and (d) it maintains a sanctions compliance program that includes transaction screening, customer due diligence, and employee training. The Bank shall have the right to delay, block, or refuse to process any transaction that the Bank reasonably believes may violate applicable Sanctions Laws, without liability to the Client.
Technology license agreement: The Licensee acknowledges that the Licensed Technology may be subject to export controls under the EAR, ITAR, or equivalent regulations in other jurisdictions. The Licensee shall not export, re-export, or transfer the Licensed Technology or any direct product thereof to (a) any Sanctioned Country, (b) any Sanctioned Person, or (c) any end-user for use in connection with chemical, biological, or nuclear weapons, or missiles capable of delivering such weapons, without first obtaining all required governmental authorizations. The Licensee shall maintain records sufficient to demonstrate compliance with this Section and shall make such records available for inspection upon request.
Supply chain agreement with wind-down provision: If any Party or any material subcontractor becomes subject to Sanctions that prohibit or materially restrict performance under this Agreement, the Parties shall cooperate in good faith to implement an orderly wind-down of affected obligations within the time period authorized by applicable law or any general or specific license. During the wind-down period, neither Party shall be liable to the other for any failure to perform obligations that are prohibited by applicable Sanctions Laws. Costs incurred in connection with the wind-down, including costs of re-sourcing, shall be borne by the Party that became subject to Sanctions, except to the extent such Sanctions result from the actions of the other Party.
Common Contract Types
Negotiation Playbook
Key Drafting Notes
Common Pitfalls
Jurisdiction Notes
United States: OFAC administers the most extensive and aggressively enforced sanctions program globally. Key statutes include IEEPA, the Trading with the Enemy Act (TWEA), and various country-specific sanctions statutes. OFAC publishes enforcement guidelines that consider factors including the existence of a compliance program, voluntary self-disclosure, remedial measures, and cooperation. The EAR (administered by the Bureau of Industry and Security) and ITAR (administered by the Directorate of Defense Trade Controls) govern export controls. The Entity List, Military End-User List, and Denied Persons List supplement the SDN List for export control purposes. US persons face potential criminal liability for willful violations of both sanctions and export controls.
United Kingdom: Post-Brexit, the UK operates an autonomous sanctions regime under the Sanctions and Anti-Money Laundering Act 2018 (SAMLA). OFSI is the primary enforcement authority. The UK's sanctions lists have diverged from EU lists in some respects, requiring separate screening. The UK has significantly expanded its Russia-related sanctions since 2022 and has increased OFSI's enforcement powers, including a strict liability standard for monetary penalties (introduced in 2024). Export controls are administered under the Export Control Act 2002 and the Strategic Export Control Lists.
European Union and other jurisdictions: EU sanctions are imposed through Council Regulations with direct effect in all member states, but enforcement is administered at the national level, creating inconsistencies. The EU has adopted over fifteen sanctions packages targeting Russia since 2022, creating the most complex sanctions program in EU history. EU sanctions do not generally include secondary sanctions provisions, creating a tension with US secondary sanctions that EU blocking statutes attempt to address (EU Blocking Regulation 2271/96, as amended). Other significant sanctions regimes include those of Canada (SEMA), Australia (Autonomous Sanctions Act 2011), Japan, and Switzerland. In cross-border transactions, the most restrictive applicable sanctions regime typically sets the contractual floor, but parties must ensure compliance with all applicable regimes, compliance with US sanctions does not guarantee compliance with EU or UK sanctions, and vice versa.
Related Clauses
This glossary entry is provided for informational and educational purposes only. It does not constitute legal advice, and no attorney-client relationship is formed by reading this content. Sanctions and export control laws are complex, rapidly evolving, and carry severe penalties for non-compliance, including criminal liability. The information herein reflects the regulatory landscape as of the date of publication and may not reflect subsequent changes. Consult qualified legal counsel specializing in trade compliance for advice on your specific circumstances.
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