OFAC Counterparty Due Diligence

OFAC sanctions due diligence is the process of verifying that a customer, supplier, partner or any other counterparty or intermediary is not on U.S. sanctions lists —and is not indirectly blocked— before closing a transaction and throughout the business relationship. 

It is not optional. OFAC penalizes on a strict liability basis: a company can be fined even if it did not know its counterparty was sanctioned. And its reach is extraterritorial, so under primary sanctions it binds non-U.S. companies whenever the transaction has any U.S. nexus —the dollar, a U.S. bank, a U.S.-origin good or a U.S.-based supplier. Under secondary sanctions, which do not require a U.S. nexus, dealing with sanctioned entities is itself sanctionable. 

Checking an entity goes well beyond typing a name into a website. It means deciding how much diligence to apply based on risk, tracing beneficial ownership and other interests in the entity to detect blocking that does not appear on any list, resolving false matches and documenting every check. 

This guide explains how to do it step by step and where the mistakes that lead to the most penalties lie.

What Is OFAC Sanctions Due Diligence?

OFAC sanctions due diligence is the systematic verification that a counterparty or other party involved in a transaction is not a blocked person and is not owned or controlled by one or more sanctioned persons, and that sanctioned individuals or entities do not exert any other influence that would make an entity sanctioned, under the sanctions programs administered by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). OFAC due diligence answers a binary, strict-compliance question: can I lawfully deal with this party under U.S. regulations?

Counterparty due diligence is one of the various components of an OFAC, EAR and ITAR compliance program. Here we develop in detail the component that prevents the most violations: knowing who you are dealing with.

Why It Applies to You Even If You Are Not a U.S. Company

OFAC primary sanctions bind a non-U.S. company whenever its transaction has a U.S. nexus, even if the company has no headquarters or subsidiary there. That nexus arises more easily than it seems: a dollar payment passing through a U.S. correspondent bank, a U.S.-origin component inside a product, or a service provided from the United States. The extraterritorial reach of U.S. sanctions makes counterparty screening a practical obligation for any company that trades internationally. The civil penalty can reach the greater of these two amounts for each violation: USD 377,700 per violation or twice the transaction amount (eCFR, 31 CFR 501, Appendix A, in force in 2026). In willful cases, liability is criminal: up to USD 1 million and 20 years in prison per violation.

Under secondary sanctions, a non-U.S. entity can be sanctioned for dealing with sanctioned parties even without a U.S. nexus.

How to Screen a Counterparty Step by Step

The OFAC screening process follows several steps in order: gathering information about the entity, including its controlling persons and other individuals and entities that exert influence over it or have interests in it (in other words, detailed KYC), screening against the lists, applying the 50 Percent Rule and resolving matches. Skipping any of them is the most common cause of the violations OFAC penalizes.

Step 1: Gather the Information

Before screening, you gather the information needed to identify the counterparty and its KYC environment unequivocally. In their tri-seal note of March 2024, OFAC and the other agencies set out which data should feed into screening: full legal name and trade name, nationalities, country of incorporation, operations and residence, addresses, geolocation data and, above all, beneficial ownership, not just nominal ownership. Without this data, screening produces unreliable results.

Step 2: Screen Against the OFAC Lists

Screening is done against OFAC’s consolidated list, not just the SDN List. OFAC maintains several lists with different levels of restriction; the consolidated list combines the SDN List and the non-SDN lists and is the one that should be used so as not to miss sectoral or other designations. The OFAC SDN List is the best known and can be searched free of charge on the official search tool at sanctionssearch.ofac.treasury.gov. Screening only against the SDN List is one of the screening failures OFAC identifies as a root cause of violations.

Step 3: Apply the 50 Percent Rule

OFAC’s 50 Percent Rule provides that any entity owned 50% or more —directly or indirectly, and aggregating the ownership of several blocked persons— by one or more blocked persons is itself blocked, even if it does not appear on any list (OFAC, FAQs 398-402, revised guidance of August 13, 2014). Technically, OFAC considers that in this scenario the sanctioned persons retain a property interest in all property and interests in property of the company in question. OFAC does not publish a list of these entities: each company must work it out by tracing the ownership chain. A 50% stake in an intermediary that in turn owns 50% of the counterparty carries the blocking through to the counterparty.

OFAC’s March 31, 2026 guidance on sham transactions and sanctions evasion describes the 50 Percent Rule as an objective test, but stresses that an unlisted entity may still be considered sanctioned even if the 50 Percent Rule is not met: control by a blocked person —even with ownership below 50%— can create exposure for other reasons. In practice, this means looking beyond the percentage and assessing who really runs the counterparty.

In its guidance of August 13, 2014, OFAC advises caution regarding non-sanctioned entities in which one or more sanctioned persons hold a significant but less than 50% interest. OFAC warns that these entities could be sanctioned in the future or be subject to other sanctions enforcement. Three relatively recent cases illustrate how the concept is applied:

On June 12, 2025, OFAC announced a USD 215,988,868 penalty against GVA Capital, Ltd., a U.S. venture capital firm, in part for making investments in a U.S. entity. According to OFAC, that entity was sanctioned not under the 50 Percent Rule but because the investment of funds from a sanctioned person turned the entity into property located in the United States, or in the possession of a U.S. person, in which a sanctioned person had a property interest.

On December 2, 2025, OFAC announced a settlement under which IPI Partners, LLC, a U.S. private equity firm, agreed to pay USD 11,485,352 to OFAC for making investments on behalf of accounts belonging to an entity that was not sanctioned under the 50 Percent Rule but whose funds came from, and were controlled by, a sanctioned person. According to OFAC, the account constituted a U.S.-located property interest of a sanctioned person and therefore blocked property.

On December 9, 2025, a U.S. individual was required to pay OFAC USD 1,092,000 for acting as trustee of a trust in which a sanctioned person continued to indirectly control the investment of the contributed funds. Although the 50 Percent Rule did not technically apply, the trust constituted property located in the United States in which a sanctioned person had a property interest.

Step 4: Resolve False Matches

A screening match is almost never a conclusive identification. Names are transliterated in various ways and search tools return approximate matches. OFAC identifies as a root cause of violations the failure to account for alternative spellings of countries or parties —Habana instead of Havana, Kuba instead of Cuba— or a poorly calibrated match threshold. Each match is checked by comparing additional identifiers (date of birth, identification number, address, nationality) with the information already held on the counterparty, until the blocking is confirmed or ruled out.

Document and Monitor: It Is Not a One-Time Check

OFAC due diligence is not a one-off check: the lists are updated daily, so each counterparty must be rescreened periodically and the relationship monitored for as long as it lasts. A counterparty that is clean today may be designated tomorrow. That is why the process includes rescreening with every relevant list update, monitoring changes in ownership and keeping records of every check. Keeping this diligence documented does not only prevent violations: if one does occur, an effective compliance program is a mitigating factor recognized by OFAC. Counterparty due diligence is thus integrated with the rest of the company’s compliance program.

Sanctions Due Diligence in M&A Transactions

In a merger or acquisition, the buyer inherits liability for the acquired company’s sanctions violations —both before and after the transaction— so OFAC due diligence is an essential part of the process. OFAC states this expressly in its Framework: compliance functions should be integrated into the acquisition and integration process, and the post-closing audit is key to detecting problems. A party that acquires another without checking its sanctions exposure may see the value proposition of the deal significantly reduced. We develop this in our analysis of OFAC sanctions and EAR in mergers and acquisitions, and the systematic review is part of the compliance audit.

In practice

An illustrative case of the kind we see often: a European industrial company was about to sign a supply contract with a distributor in a third country. Screening the distributor’s name against the SDN List came back clean, and the sales team considered the check complete. On reviewing beneficial ownership during due diligence, it emerged that two SDN-designated persons, through two intermediate companies, together held 55% of the distributor. Under the 50 Percent Rule, the counterparty was blocked despite not appearing on any list. The transaction is stopped before signing, avoiding a strict liability violation under primary sanctions, since the payments would have been in U.S. dollars. It also avoids the risk of secondary sanctions arising from dealings with sanctioned parties without a U.S. nexus. The name was clean; the ownership was not.

Frequently Asked Questions

Is OFAC due diligence mandatory for non-U.S. companies?

Yes, in practice it is whenever the transaction has a U.S. nexus: dollar payments, U.S. banks, U.S.-origin goods or services provided from the United States are U.S. nexuses, which create risk under primary sanctions. OFAC penalizes on a strict liability basis, so a non-U.S. company can be fined even if it did not know its counterparty was sanctioned.

Likewise, under secondary sanctions, a non-U.S. entity can itself be sanctioned for dealing with entities that are sanctioned under the 50 Percent Rule.

How often should a counterparty be rescreened?

OFAC does not set a single frequency: the approach is risk-based. At a minimum, rescreen with every relevant list update and periodically according to the counterparty’s risk rating. High-risk parties require continuous monitoring.

What happens if a counterparty is added to the SDN List after the contract is signed?

From the moment of designation, the counterparty’s property and interests in property located in the United States or in the possession or control of a U.S. person are blocked, and transactions with it are prohibited within the scope of the sanctions. The company must stop the affected payments and movements and assess its blocking and reporting obligations. That is why continuous monitoring is part of the process, not an extra.

Is it enough to search the name on OFAC’s website?

No. Searching the name on the official search tool is only the first step. A complete check requires screening against the consolidated list, applying the 50 Percent Rule to beneficial ownership, resolving false matches, carrying out full KYC to determine whether sanctions may apply other than through the 50 Percent Rule, and documenting the result. A clean name does not guarantee that the counterparty is not indirectly blocked.

Free download: OFAC/EAR/ITAR Risk Checklist (in Spanish)

A practical checklist for screening counterparties and spotting where U.S. sanctions and export control violations tend to concentrate.

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Screen your counterparties with specialist guidance

If your company operates internationally and needs a reliable OFAC due diligence process, at Burke Compliance we help design and implement counterparty screening tailored to your risk level. Request a consultation.