Sanctions Clause

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

• Penalties are severe and escalating: OFAC civil penalties can reach the greater of approximately $350,000 per violation or twice the value of the transaction under the International Emergency Economic Powers Act (IEEPA). Criminal penalties include up to $1 million per violation and 30 years' imprisonment. The EU, UK, and other jurisdictions impose comparable penalties. Recent legislative changes in the US (2024-2025) have further increased maximum penalties and expanded enforcement authority.
• Strict liability exposure: OFAC operates on a strict liability basis-intent is not required for civil penalties. A company that unknowingly processes a payment through a sanctioned entity faces the same potential liability as one that does so deliberately. Contractual screening obligations and representations are essential for demonstrating the compliance program that OFAC considers when exercising enforcement discretion.
• Extraterritorial reach: US sanctions have the broadest extraterritorial application of any trade restriction regime. Secondary sanctions can be imposed on non-US companies that facilitate significant transactions with sanctioned persons, even where no US person, US-origin goods, or US dollar clearing is involved. This creates compliance obligations for parties worldwide and makes the sanctions clause relevant in purely non-US transactions.
• Financial system access at stake: Banks and financial institutions are required to screen all transactions and reject or block those involving sanctioned parties. A sanctions violation by a commercial counterparty can result in the loss of banking relationships-a potentially existential consequence for any company engaged in international trade.
• Rapidly changing landscape: Sanctions programs are updated frequently, sometimes daily. The Russia/Ukraine conflict triggered the most extensive sanctions expansion in decades. Companies need contractual mechanisms that address not only current sanctions but the risk of future designations and the operational impact of compliance with evolving programs.

Key Elements of a Well-Drafted Sanctions Clause

1. Scope of covered sanctions programs: Enumerate the specific sanctions regimes that apply (US/OFAC, EU, UK/OFSI) and include a catch-all for other applicable sanctions and trade restriction laws. Address both comprehensive and list-based programs. Specify whether the clause covers secondary sanctions risk.
2. Representations regarding sanctions status: Each party should represent that it is not, and that its owners, directors, officers, and key personnel are not, Sanctioned Persons (defined to include persons on the SDN List, the EU Consolidated List, the UK Sanctions List, or any other applicable restricted party list). Include 50% ownership aggregation rules consistent with OFAC's guidance.
3. Screening obligations: Specify the frequency and scope of sanctions screening. At a minimum, require screening at onboarding and at defined intervals (quarterly or semi-annually). Identify the lists to be screened against. Address the use of automated screening tools and the resolution of potential matches (false positives).
4. Ongoing compliance covenants: Require each party to maintain a sanctions compliance program proportionate to its risk profile, to monitor for changes in sanctions status, to refrain from any action that would cause the other party to violate applicable sanctions, and to promptly notify the other party of any change in sanctions status or any sanctions-related inquiry from a governmental authority.
5. Export control provisions: Address classification of goods and technology under applicable export control regimes (EAR, ITAR, EU Dual-Use Regulation), end-use and end-user restrictions, deemed export risks, and licensing requirements. Specify which party bears responsibility for obtaining export licenses.
6. Wind-down and transition mechanics: If a party or transaction becomes subject to new sanctions, the clause should address the authorized wind-down period (if any), the mechanics for orderly disengagement, and the allocation of costs and liabilities during the wind-down. Reference any general or specific licenses that may authorize wind-down activities.
7. Termination rights: Provide for immediate termination without liability if a party becomes a Sanctioned Person or if continued performance would violate applicable sanctions. Address whether the non-sanctioned party has an obligation to seek a specific license before terminating.
8. Indemnification and cooperation: The party that causes a sanctions violation should indemnify the other for resulting losses, penalties, and costs. Both parties should covenant to cooperate with governmental investigations and to preserve relevant records.

Market Position & Benchmarks

Where Does Your Clause Fall?

• Aggressive (compliance-maximizing): Covers all major sanctions regimes plus secondary sanctions, requires quarterly screening of all transaction parties (including end-users and beneficial owners), mandates specific compliance program elements, includes unilateral termination right without cure period, requires real-time notification of any sanctions-related development, imposes indemnification for all sanctions-related losses without cap, and addresses deemed export risks explicitly.
• Market standard: References US, EU, and UK sanctions programs, requires screening at onboarding and periodically thereafter, includes representations regarding sanctions status of parties and majority owners, provides termination right upon a party becoming sanctioned, requires prompt notification of changes in sanctions status, and includes mutual indemnification for sanctions breaches.
• Light-touch: General compliance-with-law representation covering sanctions, no specific screening obligations, termination only upon an actual sanctions violation (not designation risk), no export control provisions, and limited or no indemnification specific to sanctions breaches.

Market Data

• OFAC issued over 30 enforcement actions in 2024, with aggregate penalties exceeding $1.5 billion. The trend line shows increasing penalties and a broader range of targeted industries (technology, financial services, shipping, energy).
• Approximately 90% of cross-border commercial contracts involving a US party or US dollar-denominated payments now include specific sanctions clauses, up from approximately 65% in 2015.
• Screening obligations appear in approximately 75% of sanctions clauses in financial services contracts but only 45% of non-financial commercial agreements, representing a significant compliance gap.
• Post-2022, approximately 80% of new sanctions clauses in European contracts specifically reference the EU's Russia-related sanctions packages, reflecting the unprecedented scope and complexity of these measures.
• Export control provisions are included alongside sanctions clauses in approximately 55% of technology and manufacturing contracts, but fewer than 20% of services agreements-despite the applicability of deemed export rules to technology transfers in services engagements.

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

• Credit agreements and loan documents (standard in all syndicated lending)
• International supply and procurement agreements
• Technology license and distribution agreements
• Shipping, freight, and logistics contracts
• Insurance and reinsurance contracts
• Joint venture and partnership agreements (particularly in energy, mining, and infrastructure)
• Mergers and acquisitions (purchase agreement reps and covenants)
• Financial services agreements (banking, payments, correspondent banking)
• Government contracts and subcontracts
• Real estate transactions (particularly involving foreign counterparties or investment funds)

Negotiation Playbook

Key Drafting Notes

• Define "Sanctioned Person" with precision: Include persons on the SDN List, the Sectoral Sanctions Identifications List, the EU Consolidated List, and the UK Sanctions List. Address the OFAC 50% rule (any entity owned 50% or more in the aggregate by one or more SDNs is itself blocked). Consider whether to extend the definition to persons in Sanctioned Countries or persons subject to sectoral sanctions.
• Address secondary sanctions risk explicitly: Non-US parties may be reluctant to accept obligations arising from US secondary sanctions, which they may view as an extraterritorial overreach. Consider whether secondary sanctions risk should be addressed through a separate representation, a risk allocation provision, or a specific termination trigger.
• Coordinate with force majeure: If a new sanctions designation makes performance impossible or illegal, is this a force majeure event or a sanctions termination event? The answer has different consequences for liability and remedies. Draft both provisions to avoid conflict, and consider whether sanctions-related non-performance should be carved out of force majeure entirely.
• Build in flexibility for evolving programs: Sanctions programs change rapidly. Avoid overly specific references that may become outdated. Use defined terms ("Sanctions Laws," "Sanctioned Persons," "Sanctions Lists") that incorporate future amendments and additions by reference.
• Consider the operational burden: Screening obligations must be proportionate to the transaction and the parties' capabilities. A multinational bank can screen daily; a small manufacturer may struggle with quarterly screening. Draft screening obligations that are achievable and verifiable.

Common Pitfalls

• US-centric drafting in multinational contracts: Referencing only OFAC and US sanctions in a contract involving EU or UK parties creates gaps. Each jurisdiction's sanctions regime has unique requirements and prohibitions. A comprehensive clause addresses all applicable regimes.
• Ignoring beneficial ownership: Screening only the named counterparty is insufficient under OFAC's 50% rule. If the counterparty is 50% or more owned by an SDN, the counterparty is itself blocked. The clause should require representations and screening covering beneficial ownership.
• No wind-down mechanism: When a counterparty is newly designated, immediate termination may itself violate sanctions (e.g., acceleration of debt owed to a blocked person). The clause should address authorized wind-down activities and align with any general licenses issued by OFAC or equivalent authorities.
• Conflating sanctions and export controls: While often addressed together, sanctions and export controls are distinct legal regimes with different regulatory frameworks, enforcement agencies, and compliance requirements. A clause that addresses only sanctions may miss export control obligations, and vice versa.
• Failing to address sanctions on payment mechanics: Even if neither party is sanctioned, a payment routed through a sanctioned financial institution or in a currency that requires clearing through a sanctioned jurisdiction can trigger a violation. The clause should address payment routing and intermediary screening.

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

• Anti-Corruption Clause - Often paired with sanctions provisions in a comprehensive compliance package
• Force Majeure - New sanctions designations may trigger force majeure provisions; coordination is essential
• Representations and Warranties - Sanctions representations form part of the compliance rep package
• Termination for Cause - Sanctions violations typically constitute grounds for immediate termination
• Indemnification - Sanctions breach indemnities may be uncapped given the severity of potential penalties
• Governing Law - Choice of law determines which sanctions regime is the primary contractual reference point
• Assignment Clause - Assignment restrictions may need sanctions screening for potential assignees

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.