OFAC Action Shows Risk of Not Recognizing That ‘Property Interests’ Include ‘Any Interest Whatsoever’

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) fined GVA Capital Ltd. $215 million, primarily for violating the Ukraine/Russia-related sanctions regulations, when GVA mistakenly concluded that it could deal with blocked property in which the SDN maintained a “property interest” by using representatives and intermediary entities. The action highlights the enforcement risks associated with the “prolonged failure to produce responsive records” in reply to OFAC’s subpoena, which tacked on almost $2 million in penalties.

OFAC announced a significant penalty action on June 12 resulting from GVA’s activities in managing a $20 million investment by a sanctioned individual, Suleiman Kerimov. After Kerimov was added to the Specially Designated Nationals and Blocked Persons (SDN) List, GVA continued to manage his US investment, including assigning Kerimov’s US company share interest and attempting on more than one occasion to sell or further transfer that interest.

From the facts provided, it appears that GVA concluded it could deal in the US company shares beneficially owned by or for Kerimov despite being aware that Kerimov was the beneficial investor. Relying on a “legal opinion” that OFAC found flawed for concluding that an entity in which Kerimov indirectly held a “property interest” was not itself blocked, OFAC faulted GVA for proceeding to deal in an attempt to deal in the shares held by the fund vehicles created to hold the SDN’s interest.

OFAC apparently spent several years investigating GVA’s activities and found fault in GVA’s failure to be forthcoming in response to an administrative subpoena. According to the Enforcement Release, GVA initially responded to OFAC’s subpoena in 2021 and “made no mention of additional responsive materials for roughly two years,” at which time it produced additional documents representing approximately six times the original production.

OFAC concluded that this represented “28 months” of noncompliance with OFAC’s subpoena, noting that soon after the initial production, GVA certified that it had completed its response.

KEY TAKEAWAYS

This enforcement action is particularly noteworthy because it provides insight into OFAC’s views with respect to investment managers’ responsibilities when dealing with funds known to have emanated from sanctioned parties but when the SDN has layered the investment through one or more investment vehicles.

In particular, OFAC’s action emphasizes:

• When dealing with representatives known to be acting in the interest of an SDN, fund managers cannot ignore the source of funds and beneficial ownership of the monies and assets under management. Where, as here, the manager is aware that the investment was purchased using funds from a person who became sanctioned, OFAC signals that the manager must treat those assets as blocked property, even if there are multiple intermediary entities.
• OFAC’s action “demonstrates the risk that US persons face when relying on formalistic ownership arrangements that obscure the true parties in interest behind an entity or investment, without sufficiently considering factors such as control or influence over that investment.” The situation was likely exacerbated by the actual knowledge GVA had as to the original source of the investment funds, providing an indication that GVA had knowledge of the reason for the obfuscation.
• “Gatekeepers” (such as investment professionals, accountants, attorneys, and providers of trust and corporate formation services) play a role in preventing sanctions evasion. Although little is said about the legal opinion provided (other than noting its flaws), OFAC provided no mitigation credit to GVA given the circumstances surrounding GVA’s actions. It is unusual that OFAC would not provide some mitigation credit where the party relied on advice of counsel.
• Failing to comply with OFAC administrative subpoenas on time and in full can result in significant penalties. OFAC clearly viewed the situation as one where relevant, responsive information was either withheld or simply not identified in a timely manner. Unfortunately, there is no discussion of the parties’ reason(s) for the delay, so it is difficult to say whether there were other aggravating factors with respect to the subpoena compliance that led to this unusually large penalty.

FACTUAL BACKGROUND

Dealing in Property in Which an SDN Has a Property Interest

GVA’s relationship with Kerimov began around June 2016, when members of the company’s senior management traveled to France at least twice to meet with Kerimov to discuss an opportunity to invest in a US company. Kerimov ultimately agreed to invest in the US company “at or shortly after these meetings,” at which point GVA was told Kerimov’s nephew would assume responsibility for the investment. The remaining negotiations and discussions concerning Kerimov’s investment were in fact handled by his nephew.

GVA’s knowledge of the relationship and situation was highlighted by OFAC in the following statement:

Indeed, in a 2023 federal court filing related to this investment, GVA . . . represented that [his nephew] was “installed” by Kerimov in a directorial role to manage the investment in the U.S. company and repeatedly referenced direction regarding the investment coming from both Kerimov and [his nephew].

Kerimov’s investment occurred in September 2016 through a Guernsey-based company in which Kerimov “retained an interest,” Prosperity Investments, L.P. (Prosperity). Prosperity entered into a subscription agreement with a GVA special purpose vehicle established by GVA solely to make, hold, and dispose of direct or indirect investments in the US company.

On April 6, 2018, OFAC designated Kerimov under the Ukraine/Russia-related sanctions for being an official of the Government of the Russian Federation as defined in EO 13661.[1] On four occasions following his designation, GVA engaged in activities that OFAC found violated the sanctions regulations:

• In 2018 GVA and Prosperity entered into an “agreement of assignment and adherence” resulting in the transfer of Prosperity’s interest in the GVA SPV to a different entity, Definition Services, Inc., a British Virgin Islands–based entity that owned Prosperity. GVA signed the transfer agreement in its capacity as general partner of the GVA SPV. Because Definition and Prosperity both had the same owner (Heritage Trust), the transfer was found by OFAC to not have changed the ultimate beneficial ownership of the investment.
• In 2019 GVA attempted to sell Definition’s interest in the GVA SPV. As part of that effort, GVA maintained a formal line of communication with Heritage Trust’s US-based fiduciary, whose approval was required for any sale or distribution of Definition’s assets, and one informal line of communication with Kerimov’s nephew, who OFAC found GVA understood to be Kerimov’s representative in investment-related matters. The US-based fiduciary ultimately advised GVA that Definition would be “unable to proceed with this transaction at this time.”
• In 2020 GVA again attempted to sell Definition’s interest in the GVA SPV as part of a larger transaction. GVA engaged with Kerimov’s nephew “in his capacity as Kerimov’s representative,” as part of this effort as well.
• In 2021 GVA attempted to distribute the shares of the US company in kind, including to Definition. This attempt was initially hindered by a still-unresolved dispute between GVA and Definition regarding the amount of proceeds to which each party was entitled. While this dispute was ongoing, OFAC issued a Notification of Blocked property with respect to Heritage Trust on June 23, 2022.

After OFAC imposed sanctions on Kerimov, GVA obtained a legal opinion that addressed in part the applicability of US sanctions to the GVA SPV. That opinion “concluded incorrectly” that Prosperity was not a blocked entity “because it was not nominally owned 50% percent or more by a person on the SDN List.” Nonetheless, the legal opinion also advised that any sale or transfer of the shares could not “directly or indirectly” involve Kerimov.

Notwithstanding the latter part of the opinion of counsel, GVA dealt or attempted to deal in property it knew Kerimov had a property interest in via Prosperity Investments on four occasions, as listed above.

The Subpoena Responses

While the penalty imposed on GVA was almost entirely a result of the dealings and blocked property and provision of services to a sanctioned person, OFAC also sent a loud message about what it expects from parties responding to its administrative subpoenas. During its investigation, OFAC issued an administrative subpoena pursuant to 31 CFR § 501.602.

While there is limited discussion on the exact nature of GVA’s subpoena responses, OFAC cites the following failures:

• GVA initially responded to OFAC’s subpoena on July 30, 2021 and certified on October 11, 2021 that it had completed its subpoena response, producing approximately 173 documents.
• GVA Capital made no mention of additional responsive materials for about two years.
• After OFAC issued a Pre-Penalty Notice to GVA (on September 13, 2023), GVA informed OFAC that it possessed information “relevant to OFAC’s inquiry” that had not yet been provided to OFAC.
• GVA produced approximately 1,300 additional records responsive to the subpoena on February 23, 2024, more than two years after GVA first certified and recertified its compliance with OFAC’s subpoena.
• This resulted in 28 months of noncompliance with OFAC’s subpoena, which OFAC found constitutes 28 violations of the Reporting, Procedures and Penalties Regulations (RPPR) (31 CFR § 501.602).

OFAC PENALTIES

The tone and tenor of the settlement reflects significant concern from OFAC, resulting in the imposition of the statutory maximum civil monetary penalty applicable—$214 million for GVA’s sanctions violations and $1,988,868 for its RPPR violations, for a total penalty of $215,988,868.

While it found essentially no mitigating circumstances (save for this being a first offense by GVA), OFAC found a number of aggravating circumstances, including:

• GVA did not voluntarily self-disclose its violations
• The violations constitute an egregious case
• GVA’s violations were willful and knowing; OFAC based this conclusion on the following circumstances:
  • Members of GVA’s senior management knowingly facilitated Kerimov’s investment in the US company through Prosperity despite legal advice warning that any post-designation sale or transfer of Prosperity Investments’ assets directly or indirectly involving Kerimov would violate OFAC sanctions
• The violations were contrary to US foreign policy interests because they enabled a sanctioned Russian national to access the US financial system. Moreover, through GVA’s actions Kerimov’s shares of the US company appreciated to as high as $436 million in April 2021
• GVA’s attempts to sell or distribute Prosperity Investments’ interest conferred a direct financial benefit to Kerimov thereby undermining US sanctions

Legal practice assistant Charlie Biggs significantly contributed to this LawFlash.