The Treasury Department’s Office of Foreign Asset Control (“OFAC”) has been relatively quiet on the enforcement front. That is not unusual — every transition results in an enforcement hiatus.
Sanctions enforcement is a priority for this Administration. As expected, the Justice Department will play a more evident role in the sanctions enforcement process. This a new development, when DOJ declines there may be disclosure of such resolution.
The GVA case presents an interesting situation — GVA violated the Ukraine/Russia sanctions and failed to comply with an OFAC subpoena by failing to produce relevant documents in compliance with the subpoena.
GVA is a venture capital firm in San Francisco, California. Between 2018 and 2021 , GVA managed an investment for sanctioned Russian oligarch Suleiman Kerimov. Two years earlier, in 2016, GVA Capital officials met with Kerimov at his estate in France to secure his personal approval for the investments.
In April 2018, OFAC sanctioned Kerimov. GVA Capital nonetheless continued managing these investments by working through Kerimov’s nephew, Nariman Gadzhiev, who GVA Capital knew served as Kerimov’s proxy.
In April 2021, OFAC learned of an upcoming transfer of shares in Heritage Trust, a U.S. company that held the U.S. assets of Suleiman Kerimov, a Russian oligarch whom OFAC designated in 2018. OFAC’s investigation revealed that Kerimov retained an interest in the trust, even after his designation on April 6, 2018. Accordingly, on June 23, 2022, OFAC issued a Notification of Blocked Property directed at Heritage Trust, which at the time held approximately $1.3 billion in assets. This action prevented the imminent liquidation and flight of the entirety of Heritage Trust’s assets out of the United States.
Once Kerimov was sanctioned, in 2018, GVA Capital was told to speak to Nariman Gadzhiev, Kerimov’s nephew and primary financial facilitator regarding future transactions.
In September 2016, GVA Capital and Gadzhiev, acting on Kerimov’s behalf, ultimately agreed that Kerimov would invest $20,000,000 in the U.S. company. Following that agreement, Prosperity Investments, L.P.—a Guernsey-based entity in which Kerimov retained an interest—entered into a subscription agreement with GVA Auto LLC, a Delaware-based special purpose vehicle established by GVA Capital to make, hold, and dispose of direct or indirect investments in the U.S. company. GVA Auto issued a capital call for $20,000,000 to Prosperity on that same day, and Prosperity transferred this amount to GVA Auto’s account at a U.S. financial institution on September 13, 2016.
After OFAC added Kerimov to the SDN List, GVA Capital solicited a legal opinion regarding the applicability of U.S. sanctions to GVA Capital’s investments, including the investment in the U.S. company. The legal opinion, which was provided to GVA Capital on May 15, 2018, concluded incorrectly that Prosperity was not itself blocked property because it was not nominally owned 50 percent or more 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 Prosperity.
As part of OFAC’s investigation, on June 2, 2021, the agency issued an administrative subpoena pursuant to 31 C.F.R. § 501.602 to GVA Capital. GVA Capital provided an initial response on July 30, 2021, and certified on October 11, 2021, that it had completed its subpoena response. GVA Capital had produced in total approximately 173 documents at that time. GVA Capital made no mention of additional responsive materials for roughly two years.
Shortly thereafter, GVA Capital informed OFAC that it possessed information “relevant to OFAC’s inquiry” that had not yet been provided to OFAC. GVA Capital subsequently produced to OFAC approximately 1,300 records responsive to the subpoena beyond the original 173 documents produced in 2021. 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.
Applying the Sanctions Enforcement Guidelines, GVA did not voluntarily disclose the violations and the violations constituted an egregious case. The base penalty was the statutory maximum of $215,988,868. OFAC imposed the statutory maximum penalty of $215,988,868, based on GVA Capital willfully violated U.S. sanctions.
According to OFAC, this enforcement action highlights the risks that arise when gatekeepers fail to properly understand the risks associated with the provision of their services.
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. U.S. persons operating in these industries should have a clear understanding of their U.S. sanctions compliance obligations, as well as the risks posed by dealing with counterparties who are themselves sanctioned or who reside in sanctioned jurisdictions.
Finally, this enforcement action demonstrates the risk that U.S. 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. Here, GVA Capital knew that Kerimov retained a property interest in the shares of the U.S. company, as evidenced, among other things, by GVA Capital senior management’s personal dealings with Kerimov and Gadzhiev before and after Kerimov was designated.
