OFAC Issues Guidance On Sham Transactions And Sanctions Evasion

Overview

On March 31, 2026, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued Guidance on Sham Transactions and Sanctions Evasion (the Guidance), underscoring its “substance-over-formality” approach to policing sham transactions designed to circumvent sanctions. Although not precedential, the Guidance represents a rare instance where OFAC articulates concrete analytical factors that are intended to inform sanctions compliance assessments.

The Guidance begins with some illustrative examples of sham transactions drawn from OFAC’s enforcement experiences, highlighting scenarios where blocked persons employed opaque legal structures—including trusts, proxies, straw owners, and front businesses—to conceal their continuing interests.¹ Building on these examples, the Guidance sets out seven red flags that may indicate a transaction is a sham, including commercial unreasonableness, intra-family transfer, unclear transfer purpose, overly complicated corporate structures involving higher-risk jurisdictions, blocked persons’ continued involvement, and suspicious timing relating to transfer. Notably, OFAC cautions that neither the presence nor absence of any single red flag or any combination of them is dispositive. Rather, the inquiry turns on a functional assessment of whether the blocked person has genuinely relinquished his ability to benefit from or access the property.

Practical considerations

In light of the Guidance, companies should reconsider how these red flags are reflected in their existing sanctions compliance frameworks, especially when evaluating divestments or prospective investments involving historically blocked persons or (property) interests. Below are a few points for your consideration.

Reassess existing compliance programs and past transactions

For some companies, a review of current sanctions compliance programs and any pending or recently completed transactions may reveal that inquiries arising from the OFAC-raised red flags already overlap with traditional “Know Your Customer” and anti-money laundering obligations imposed on financial institutions. Likewise, other companies should assess whether their existing sanctions compliance processes sufficiently capture sham‑specific risks, including ultimate beneficial ownership and control, continued involvement of any blocked person, and commercial reality and purpose underlying the transactions.

Use historically blocked interests as a reference point for bona fide divestment analysis

When evaluating potential specially designated national (SDN)‑related risks in a divestment transaction, companies should exercise heightened caution where a formerly blocked or sanctioned person remains involved or accessible. The degree to which such a person continues to exert influence—directly or indirectly—may serve as a useful yardstick for assessing whether a purported divestment is bona fide or whether it raises concerns under OFAC’s sham‑transaction framework.

Adopt a risk‑based sanctions compliance framework

For organizations that do not yet have a formal sanctions compliance program in place, OFAC’s Guidance reinforces the importance of adopting a risk‑based approach rather than a purely box‑checking exercise. Programs should be tailored to the company’s geographic footprint, retail customer base, transaction profile, and use of investment vehicles, including offshore entities.

Incorporate red flags into legal due diligence processes

Companies should ensure that OFAC‑identified red flags—such as continued involvement of a blocked person, intra-family transactions, unclear purpose of transfer, lack of commercial reasonableness, and unduly complex corporate structures and transactional arrangements in higher-risk jurisdictions—are systematically incorporated into legal and transactional due diligence, employing a more inquisitive and iterative approach to screen the counterparty’s course of dealing in multilayered corporate structures to unveil any potential sham risks. These indicators are particularly critical in corporate mergers and acquisitions, restructurings, and divestment transactions involving offshore structures or sanction‑sensitive jurisdictions. 

Below are two illustrative hypotheticals reflecting scenarios companies commonly encounter in the course of sanctions compliance.

Scenario one 

A Russian SDN (A) holds an investment portfolio at a U.S. brokerage account through a British Virgin Islands (BVI) holding company (BVI Co.). After designation, A directs BVI Co. to “divest” the U.S. account investment by selling it to a newly formed Cayman Islands special purpose vehicle (SPV) owned by A’s close family affiliate, a non‑designated person (B). In parallel, ownership of the Cayman SPV is settled into a discretionary trust governed by Cayman law, with B named as the settlor and primary beneficiary and a professional trustee appointed. The trust deed grants the trustee formal discretion, but A is named as protector with veto rights over material investment and disposition decisions, and a nonbinding letter of wishes expresses the trust assets be managed in accordance with A’s long‑standing investment strategy.

The paperwork reflects a market‑price sale and a full transfer. The purchase is partially financed by funding traceable to BVI Co. and a services agreement channels a portion of investment returns to an entity affiliated with A.

Scenario two

A Singapore operating company is owned through a Jersey holding company. A minority indirect owner later becomes designated under U.S. sanctions. Pursuant to pre‑existing sanctions provisions, the holding company initiates a divestment of the sanctioned party’s interest to an unaffiliated third‑party buyer. The transaction is conducted at arm’s length, all governance and information rights are terminated at closing, no side agreements or seller financing exist, and no further economic interests or influence remain with the sanctioned party.

Prior to the release of the Guidance, OFAC had demonstrated its willingness to sanction the entities participating in sham transactions designed to evade U.S. sanctions. OFACdid, for example, on March 12, 2026, designate four sham charities that act as civilian organizations doing humanitarian work but essentially fund terrorist operations. Going forward and guided by the principles in the Guidance, OFAC may revisit past conduct and thereby take retrospective enforcement actions where transactions are later determined to have preserved an SDN’s control, benefit, or access.

Key takeaways 

In tandem with the earlier Framework for OFAC Compliance Commitments, companies should enhance and recalibrate their risk-based sanctions compliance programs, with a particular focus on identifying and policing sham transactions. As OFAC emphasizes, “these red flags are not intended to convey a ‘one-size-fits-all’ approach”; companies should remain vigilant in executing their sanctions compliance programs. Companies should not view the Guidance as a substitute for any existing sanctions framework but rather as a complementary tool to be integrated into compliance reviews, especially in the context of divestments, restructurings, and other transactions involving sanctioned parties.

We will continue to monitor developments in this area, and we encourage you to subscribe to be kept informed of the latest developments. Please contact the authors or your usual Herbert Smith Freehills Kramer contacts for more information.

Footnotes

1. A non-exhaustive enumeration of examples includes “a blocked oligarch transferred ownership of his private jet to a trust, whose sole beneficiary was his unsanctioned wife, while the oligarch continued to use the jet for travel; a blocked person transferred millions of dollars of funds into trusts held for his minor children and then attempted to move these funds through U.S. banks; a designated narcotrafficker funded a bank account in his wife’s name and continued to benefit through his wife’s management of the account; an investment advisor continued to manage property on behalf of a blocked oligarch through multiple intermediate companies under the oligarch’s trust, which was managed by his nephew; and following its designation, a company sanctioned for narcotics trafficking was reincorporated under a different name with new nominal owners while continuing the blocked company’s operations.”

2.The table is provided for illustrative purposes only and should not be construed as formal legal advice or relied upon as such. We would be pleased to conduct a more comprehensive analysis of specific transactions upon request.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.