The US Treasury’s Office of Foreign Assets Control (OFAC) assessed a civil monetary penalty of $215.9m against GVA Capital Ltd. of San Francisco, California, for violations of OFAC’s sanctions against Russia as well as related reporting obligations.

“The penalty amount reflects OFAC’s determination that GVA Capital’s conduct was egregious and not voluntarily self-disclosed,” OFAC said.

This is also a notable case because it is the first such enforcement action under President Trump’s second administration.

Details

Between April 2018 and May 2021, GVA Capital, an early-stage venture capital firm, knowingly managed an investment for Kerimov despite being aware of his blocked status, OFAC stated in its order.

It was in 2016 that GVA Capital officials first met with Kerimov at his estate in France to secure his personal approval for the investments, OFAC said.

In April 2018, OFAC sanctioned Kerimov, but OFAC alleges that GVA Capital nonetheless continued managing these investments by working through Kerimov’s nephew, Nariman Gadzhiev, who GVA Capital allegedly knew served as Kerimov’s proxy.

After OFAC added Kerimov to its Specially Designated Nationals and Blocked Persons List (SDN List), GVA Capital solicited a legal opinion regarding the applicability of US sanctions to GVA Capital’s investments, including the investment in the US company that had been offered to Kerimov. The legal opinion, which was provided to GVA Capital on May 15, 2018, concluded incorrectly that the investment property was not blocked property because 50 percent or more of it was not nominally owned by a person on the SDN List.

Nonetheless, the legal opinion explicitly cautioned GVA Capital that any sale or transfer of the shares could not directly or indirectly involve Kerimov. Despite receiving this legal guidance, GVA Capital on four occasions dealt or attempted to deal in the property or interests in property of, or provided a prohibited service to, Kerimov, via Kerimov’s interest in the investment property.

As part of an OFAC investigation in June 2021, the agency served the firm with an administrative subpoena and GVA Capital produced in total approximately 173 documents at the time in response. GVA Capital made no mention of additional materials for roughly two years.

OFAC issued a Pre-Penalty Notice to GVA Capital in September 2023, and it was then that GVA Capital informed OFAC that it possessed information “relevant to OFAC’s inquiry” that had not yet been provided to the agency.

GVA Capital subsequently produced approximately 1,300 additional records relevant to the subpoena.

“On February 23, 2024 – over two years after GVA Capital first certified compliance – GVA Capital re-certified that it had completed its response to the subpoena. GVA Capital’s prolonged failure to produce responsive records led to 28 months of non-compliance with OFAC’s subpoena, resulting in 28 violations,” OFAC said in its order.

Penalty and aggravating factors

OFAC determined that GVA Capital did not voluntarily self-disclose the violations and that the violations constituted “an egregious case,” making the maximum fine a justifiable one.

OFAC determined the following to be aggravating factors:

• GVA Capital willfully violated US sanctions with GVA Capital’s senior management’s blessing and oversight, despite senior leadership receiving legal advice from OFAC to end its relationship with Kerimov; and
• GVA Capital harmed the integrity of US sanctions and undermined broader US foreign policy objectives.

Gatekeepers and internal controls

OFAC said this enforcement action highlights the risks that arise when gatekeepers – such as investment professionals, accountants, attorneys, and providers of trust and corporate formation services, among others – fail to properly understand the risks associated with the provision of their services.

“Gatekeepers occupy crucial financial and legal positions that place them at particular risk of knowingly or unwittingly furnishing access by illicit actors to the licit financial system. Given that they often occupy positions of trust, gatekeepers are also often better positioned than others to monitor for and identify ways in which a blocked person may retain an interest in property,” OFAC said.

According to the agency gatekeepers should remain vigilant of the risk that unscrupulous actors, including sanctioned parties or their proxies, may seek to use professional services to conceal a property interest or otherwise evade US sanctions.

This enforcement action also demonstrates the importance for non-bank financial institutions, including venture capital firms and investment advisers, of developing and maintaining effective, risk-based sanctions compliance controls. Robust internal controls should enable the organization to clearly and effectively identify, escalate, and report to appropriate personnel within the organization transactions and activities that may be prohibited by OFAC.

Firms should continually test the effectiveness of its controls by way of internal and/or external audits and also, crucially, update and reinforce training specific to managing a risk-based US sanctions compliance program.

OFAC says as much in the conclusion to its order. “US persons operating in these industries should have a clear understanding of their US sanctions compliance obligations, as well as the risks posed by dealing with counterparties who are themselves sanctioned or who reside in sanctioned jurisdictions”.