Summary: With global regulators intensifying efforts to enforce sanctions, particularly concerning indirect or inadvertent breaches, Indian entities now face an elevated level of compliance risk — one that extends far beyond the scope of traditional list-screening methods. This article explores how OFAC’s evolving policies indicate that even providing indirect support or advisory services to sanctioned parties can result in substantial penalties. Recognising this, the article underscores the necessity for comprehensive and resilient compliance programmes. It further outlines actionable strategies — from adopting a substance-over-form perspective to ensuring timely disclosures — equipping Indian banks, consultancies, and corporates to develop robust compliance frameworks to safeguard against regulatory enforcement actions.

Introduction

The global sanctions landscape has shifted materially over the past few years. Regulators on both sides of the Atlantic, i.e., USA’s Office of Foreign Assets Control (“OFAC”) and the UK’s Office of Financial Sanctions Implementation (“OFSI”), are no longer focused solely on direct, obvious violations. Recent enforcement trends demonstrate that banks, consultancies, professional service providers and firms face meaningful liability for breaches that are indirect, inadvertent, or embedded within third-party relationships.

A major corporate consultancy agreed to a USD 1.05 million fine for apparent violations of US financial sanctions on Russia. This case serves as a stern reminder that even sophisticated advisory firms must maintain rigorous internal controls to prevent indirect prohibited transactions. For in-house counsel and senior leadership, the message is unambiguous and clear – a compliance framework built around basic list-screening is inadequate.

Enforcement Trends: Triggers Regulators are Looking For

OFAC and OFSI’s recent enforcement activities reveal sharper focus on ownership and control, and not merely whether a counterparty appears directly on a sanctions list. The most important structural lesson is straightforward: inserting an intermediary does not cure a sanctions prohibition.

Routing a transaction through another party does not make permissible what is otherwise prohibited, regardless of whether the relevant sanctions programme broadly prohibits dealing with a sanctioned person or restricts specified transactions. Equally, a sub-threshold ownership stake affords no shield where control, direction, or economic benefit flows to a designated person. Accordingly, liability can attach where a counterparty is not itself designated but is owned or controlled by a designated person.

Practical Takeaways for Indian Entities

Recent cases highlight how sanctions regulations apply to prohibited dealings conducted indirectly, just as they do to those committed directly. For Indian banks and corporate entities, including consultancies and professional service providers, engaged with customers or counterparties connected to high-risk jurisdictions, sanctions risk assessment is now crucial from both a compliance and governance standpoint.

The practical steps set out below move from transaction-level vigilance, identifying sanctions exposure embedded within payment flows and commercial arrangements, to the broader compliance infrastructure required to detect and manage such exposure systematically:

1. Apply substance over form at every stage – Payment arrangements routed through intermediaries must be assessed on economic substance, not contractual form. Essentially, it means that where an entity has no recourse to collect payment from its contractual counterparty unless and until that counterparty receives funds from a third party, the third party is, in substance, the true debtor, and it is this substantive relationship that determines the sanctions character of the arrangement. Compliance teams must endeavour to understand the economic substance of every arrangement, i.e., who bears the credit risk, who is the source of funds, and who benefits from the services rendered. Where those answers point toward a sanctioned party, the arrangement is legally exposed, regardless of its contractual form.
2. Treat non-payment as a sanctions red flag – Non-payment or persistent payment delays should be treated as a critical sanctions red flag. Organisations that continue to provide services, issue invoices to a sanctioned party for ultimate payment, or engage directly with that party to discuss outstanding amounts, without conducting a compliance assessment risk facilitating prohibited dealings in debt. Accumulating unpaid receivables over extended periods without triggering a compliance review represents a fundamental control failure. Each instance of non-payment or delayed payment should prompt an immediate sanctions assessment and, where appropriate, suspension of the engagement, pending clearance.
3. Invest in dedicated sectoral sanctions training – The indirect exposure risks identified above are compounded where stakeholders lack familiarity with sectoral sanctions programmes. Organisations must, therefore, provide targeted training that clearly differentiates between sector-specific restrictions from full-blocking designations. They must also ensure business-facing teams understand when to escalate any engagement involving parties under sectoral sanctions from any applicable regime before work commences, especially if payments or services could indirectly benefit a designated person.
4. Go beyond basic list-screening – Sanctions screening must extend to ownership and control layers. Checking a counterparty against the Specially Designated Nationals and Blocked Persons List (SDN List) or OFSI Consolidated List is insufficient, where that counterparty is owned or controlled by a designated person or where the true economic beneficiary of a transaction differs from the named counterparty. Firms must understand the limitations of their screening tools and supplement them accordingly. Compliance functions must also be adequately resourced as they are not an administrative overhead, but a frontline legal safeguard.
5. Conduct enhanced onboarding due diligence – Organisations must understand how customers manage their own sanctions compliance, including in relation to owned and controlled entities and payment chains involving intermediaries. Reliance on customer self-certification alone, without probing how that customer verifies its own counterparties and sources of funds, is unlikely to satisfy regulators.
6. Implement periodic, risk-based customer reviews – Review of customers operating in high-risk/ sanctioned jurisdictions should be more frequent and substantive, particularly for those instructing payments to such destinations, involving intermediary structures, or where payment irregularities of the kind described above have previously been identified.
7. Manage third-party vendor data gaps actively –Firms remain responsible for compliance even when relying on third-party data providers. The ownership opacity that gives rise to indirect dealing risk is often a function of inadequate data. Therefore, open-source media monitoring and manual checks should supplement automated screening, particularly where ownership information is concealed, registry data suppressed, or payment flows suggest undisclosed beneficial interests.
8. Disclose promptly and completely – Where a potential breach is identified, voluntary disclosure should be made as soon as reasonably practicable and with full detail. For reference, under OFSI’s framework, a discount of up to 30% is available for voluntary disclosure and cooperation, but incomplete or inadequate disclosure may reduce the benefit available. Similarly, under OFAC’s Economic Sanctions Enforcement Guidelines, a qualifying voluntary self-disclosure may, depending on the facts and circumstances of a particular case, result in a 50% reduction in the base amount of a proposed civil penalty.

Conclusion and the Path Ahead

Sanctions enforcement is evolving faster than most compliance frameworks. As regulators sharpen their focus on ownership structures, indirect dealings, and the reliability of third-party data, the gap between firms with genuinely robust programmes and those relying on legacy controls is widening and is increasingly visible to enforcement authorities.

For Indian companies operating globally as well Indian subsidiaries of US/ UK companies, the cost of complacency is significant.

Indian entities must vet end-users directly, as using intermediaries does not exempt them from sanctions liability. Furthermore, tracking payment delays is critical, as deferred payments from sanctioned entities can violate prohibitions against extending credit. Investment in technology, training, and independent review is, therefore, not optional; it is the foundation on which sustainable cross-border businesses must be built.