OFAC Fines Private Equity Firm for Russian Sanctions Violations

The U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC") fined a Chicago-based private equity firm for facilitating the continued investment of a sanctioned Russian oligarch in a U.S. fund.

According to an OFAC Enforcement Release, senior executives at the firm knowingly solicited and maintained a $50 million investment from a Russian oligarch through a British Virgin Islands-based entity. OFAC found that a senior member of the firm met in person with the oligarch’s nephew in San Francisco, and later with the oligarch himself at his estate in France, to secure the commitment. The firm, which specializes in buying, developing, and operating data centers, continued to process 51 transactions related to the investment between 2018 and 2022 despite the oligarch’s designation as a Specially Designated National in April 2018. These transactions included capital calls, profit distributions, and management fee collections.

OFAC determined the violations to be "non-egregious" but noted they were not voluntarily self-disclosed. OFAC stated that while the firm sought legal advice following the designation, it failed to inform outside counsel of the direct in-person meetings with the oligarch and his representatives. As a result, counsel provided advice based on a technical analysis of ownership thresholds while missing the prohibition on indirect dealings. OFAC noted that the firm "acted contrary to U.S. foreign policy interests" by allowing a sanctioned oligarch to grow his wealth through the U.S. financial system.

To settle the charges, the firm agreed to pay a civil penalty of $11,485,352. OFAC noted that the settlement amount reflected that the firm (i) had no prior sanctions history, (ii) eventually cooperated substantially by waiving attorney-client privilege regarding internal legal advice, and (iii) retained new counsel to navigate the investigation, though OFAC considered the firm's sophistication and actual knowledge of the investor's identity as aggravating factors.

In the Enforcement Release, OFAC highlighted several key compliance considerations for investment managers and other financial firms, including:

1. Look Beyond Formal Ownership: Compliance with OFAC's "50 Percent Rule" is necessary but may not be sufficient. Firms must conduct risk-based due diligence to identify a sanctioned person's underlying interest or control, especially in cases involving opaque legal structures or proxies.
2. Full Disclosure to Counsel: Obtaining legal advice is not a shield against liability if material facts are withheld from counsel. For advice to be effective, it must be based on a complete understanding of all relevant information.
3. "Reason to Know" Standard: Firms cannot ignore information that suggests a sanctioned person's involvement. Receiving a counterparty attestation of compliance does not negate a firm's responsibility to act on information giving it "reason to know" the attestation may be inaccurate.