Law Firms: Big OFAC Penalty Is Compliance Warning to 'Financial Gatekeepers'
A large U.S. sanctions penalty earlier this month is a sign of the Office of Foreign Assets Control’s rising compliance expectations for investment firms, accountants, wealth advisers and other financial “gatekeepers,” particularly if they’re aware that funds may be indirectly tied to a sanctioned person, law firms said. The fine, which was the largest OFAC penalty since 2023, also could begin a trend of tougher enforcement on those gatekeepers, law firms said, especially if they rely on wrong legal advice or don’t fully cooperate with OFAC.
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Herbert Smith said the case underscores OFAC’s expectation that fund managers and other financial intermediaries serve as “frontline enforcers of U.S. sanctions policy,” while Morgan Lewis said it provides valuable insight into OFAC’s “views with respect to investment managers’ responsibilities.”
Arnold & Porter said it’s now especially “critical for parties operating in these industries to develop and maintain effective, risk-based sanctions compliance controls and to understand the sanctions risks present where an existing investor becomes sanctioned.”
OFAC fined California-based venture capital firm GVA Capital more than $215 million for allegedly violating U.S. sanctions against Russia and for failing to comply with an OFAC subpoena (see 2506120076). The firm knowingly managed an investment for sanctioned Russian oligarch Suleiman Kerimov, OFAC said, and relied on an incorrect legal opinion that a foreign entity -- in which Kerimov had a minor ownership stake -- wasn’t blocked because it wasn’t owned 50% or more by Kerimov.
Troutman Pepper said the case represents a “rare instance” of OFAC imposing a statutory maximum civil penalty, a decision the agency reached after GVA Capital allegedly used ownership arrangements that tried to hide Kermov’s “true” involvement.
“Shell games typically don’t work in OFAC’s world,” Troutman Pepper said. “OFAC is not afraid to dig deeply into the facts and impose devastating penalties when it finds a violation, particularly when the agency deems the conduct to be ‘egregious,’ as it did here.”
Morgan Lewis said GVA Capital appeared to conclude that it was allowed to deal in a U.S. company’s shares, even though they were beneficially owned by or for Kerimov, despite being aware that Kerimov was the beneficial investor. It noted that OFAC “faulted” GVA for relying on a legal opinion that the agency “found flawed.”
The penalty shows fund managers “cannot ignore the source of funds,” and the owner of any assets, if they’re dealing with a representative known to be acting on behalf of a sanctioned person, Morgan Lewis said. The manager “must treat those assets as blocked property, even if there are multiple intermediary entities.”
“The situation was likely exacerbated by the actual knowledge GVA had as to the original source of the investment funds,” the firm said, “providing an indication that GVA had knowledge of the reason for the obfuscation.”
Morgan Lewis noted that OFAC didn’t provide much detail about the flawed legal opinion that GVA Capital relied on, and it gave GVA Capital no mitigation credit for relying on the advice of a lawyer. “It is unusual that OFAC would not provide some mitigation credit where the party relied on advice of counsel,” the firm said.
Herbert Smith said this shows that reliance on an outside lawyer “is not a defense if the legal advice is based on incomplete facts or a superficial understanding of OFAC rules.” Troutman Pepper also said legal opinions “won’t necessarily help if it’s not based on a thorough exploration of the facts and a clear understanding of the nuances of OFAC’s regulations.”
GVA Capital also didn’t comply fully with an OFAC subpoena, the agency said. The investment firm at first gave the agency just 173 documents, and it didn’t give the rest of the roughly 1,300 documents until OFAC informed the company it planned to issue a penalty -- and that was two years later.
Morgan Lewis said failing to comply with an OFAC subpoena “can result in significant penalties,” adding that the agency “clearly” believed information “was either withheld or simply not identified in a timely manner.”
“If you get an OFAC subpoena, don’t play games with partial responses -- provide a robust and well-vetted response the first time,” Troutman Pepper said.
O’Melveny said GVA Capital’s “tepid cooperation” was a “major” reason it received such a large penalty. The case also shows that OFAC believes investment professionals, accountants, attorneys, and trust and corporate formation service providers are in a “better position than others to identify” whether sanctioned people have any interest in property or funds.
Wealth fund administrators and advisers should review their compliance frameworks to “align with OFAC’s expectations,” the firm said, which may include putting in place steps to identify all ultimate beneficial owners, carrying out “periodic [know your customer] refreshes,” and introducing “thorough” sanctions screening.
O’Melveny also noted that the large fine could be a sign of significant enforcement to come under President Donald Trump.
The investigation began under the Biden administration, but the firm said the “substantial” penalty is “consistent with the Trump Administration’s stated priorities of vigorously targeting economic sanctions evasion and other acts that compromise national security.”