The U.S. Treasury’s Office of Foreign Asset Control (“OFAC”) recently settled an economic sanctions violation with a Chicago-based private equity firm; the PE firm agreed to pay $11,485,352 to OFAC to settle its potential civil liability for apparent multiple violations of the Ukraine/Russia-related sanctions.
Background.
On or about September 28, 2017, prior to OFAC’s of Russian oligarch Suleiman Kerimov on the Specially Designated Nationals and Blocked Persons (SDN) List, the PE firm accepted an investment from Definition Services, Inc. (“Definition”), a British Virgin Islands-based entity. According to OFAC’s release, Definition was owned by Heritage Trust (“Heritage”), a Delaware-based trust controlled by the Karimov family. Prior to the investment, PE firm representatives met with representatives of Definition and were made aware that Suleiman Kerimov was the source of Definition’s funds.
On April 6, 2018, OFAC designated Kerimov an SDN pursuant to Executive Order 13661. The PE firm’s systems apparently identified the potential hit on Mr. Kerimov which prompted it to conduct an investigation.
Following Mr. Kerimov’s designation, the PE firm engaged outside counsel who advised that the PE firm that it was not obligated to block the Definition account because available records did not show that Kerimov owned, directly or indirectly, 50% or more of Definition. We note, however, that the record states that the PE firm failed to inform counsel of the meetings that PE firm representatives held with Definition’s representatives, and the information that the PE firm gleaned from those meeting that Karimov was the ultimate source of Definition’s funding. Moreover, Definition, when asked by the PE firm after Karimov’s designation, stated that Kerimov was “not affiliated with Definition or any of the entities that directly or indirectly own it.” Heritage was subsequently added to the SDN List in June of 2022.
OFAC weighing the above factors found both mitigating and aggravating factors that were the basis for the civil settlement that the PE firm ultimately accepted.
Calculation of Economic Sanctions.
OFAC’s Economic Sanctions Guidelines are set forth at 31 CFR Part 501 Appendix A. Appendix A provides a general framework for the enforcement of all economic sanctions programs administered by OFAC, and includes a matrix by which OFAC calculates fines based upon certain objective and subjective categories.
Subjectively, OFAC considers, among other factors:
• Willfulness and recklessness. Here, the PE firm had systems in place that identified the potential OFAC issue and consulted counsel. Counsel, based upon information provided and publicly available, made a determination that blocking was not necessary.
• Awareness. On the flip-side, the PE firm had actual knowledge of the source of Definition’s funding, and failed to inform counsel of such facts.
Objectively, the PE firm:
• Failed to block Definition’s investment or inform OFAC of the potential violation.
• Did cooperate with OFAC once the violation was discovered.
Base Civil Penalty Calculation. Considering the above factors as applied to the matrix for base amount of civil penalties set forth in Appendix A, OFAC determined that the offence was or offenses were (i) Not Egregious, and (ii) Not Voluntarily Disclosed, which would land the case in Box 2 of the Matix. Box 2 states that in a non-egregious case, if the apparent violations come to OFAC’s attention by means other than a voluntary self-disclosure, the base amount of each proposed civil penalty in the Pre-Penalty Notice shall be the “applicable schedule amount.” For apparent violations where the statutory maximum penalty applicable to the apparent violation is $377,700 or greater, the maximum base amount for each offense shall be capped at $377,700. For apparent violations where the statutory maximum penalty applicable to each apparent violation is less than $377,700, the maximum base amount for each offense shall be capped at the statutory maximum penalty amount applicable to the apparent violation.
Then, the base penalty amount may be adjusted to reflect applicable General Factors for Administrative Action which are described in Section III of Appendix A. Each factor may be considered mitigating or aggravating, resulting in a lower or higher proposed penalty amount. In cases involving a large number of apparent violations, where the transaction value of all apparent violations is either unknown or would require a disproportionate allocation of resources to determine, OFAC may estimate or extrapolate the transaction value of the total universe of apparent violations in determining the amount of any proposed civil monetary penalty.
Conclusion.
U.S. sanctions programs are political in nature and often crafted under time-pressures which may cause some ambiguity. Obtaining beneficial ownership information, particularly for non-US persons, can be difficult and even more trying to independently verify. Practitioners in this space sometimes refer to understanding both sanctions law and sanctions lore. Understanding the genesis of particular sanctions programs, and using modern database information and technology resources, will assist in proper compliance.
This paper is intended as a guide only and is not a substitute for specific legal advice. Please reach out to the author for any specific questions. We expect to continue to monitor the topics addressed in this paper and provide future client updates when useful.
