Export Compliance Isn’t Just for Exporters

Often, when we think of export compliance, our focus is on the Shipping Department and boxes going out the door.  But did you know that OFAC recently settled with a Chicago Private Equity fund for $11.48M?  This firm had been managing a $50M investment that had ties to Suleiman Kerimov, a sanctioned Russian oligarch and a Government of the Russian Federation official.

So how could something like this happen?  Did they not have a screening program in place?  Did they not understand Kerimov’s involvement?  Were they not familiar with OFAC’s sanction program or the current geopolitical landscape between the United States and Russia?  All valid questions, so let’s look at the fact pattern and circle back to these:

• A foreign entity that was funding the investment was tied to a Delaware trust.  Sounds compliant, except that trust was created to hold US assets for Kerimov, who was also directing the foreign entity’s investment decisions.  Despite knowing and understanding this, the company continued to maintain investments with the foreign entity.  Not so compliant.
• Was the firm just not educated enough to handle this level of compliance?  Unexpectedly, no, the firm was sophisticated and managed billions of dollars from investors.
• Did those representing the investment lie about who they were and who they were representing in an attempt to conceal the true identity?  Surprisingly, no, the representatives openly shared and introduced themselves as part of the Kerimov team.  This means that they acted contrary to US foreign policy interests and went so far as to allow a blocked person to access the US financial system.
• Was Kerimov missing from all meetings, thus confusing whether he was really involved at all?  Remarkably, no, he was present at meetings at his own estate in France, sometimes with his nephew present. This means that the company had knowledge, as their senior executive would meet with Kerimov and his representatives face-to-face.

As a seasoned compliance professional, you are probably thinking – Red Flag(s)!  However, they continued doing business as usual even though Kerimov was an SDN.  OFAC has sent a clear message regarding compliance – as a US Person (including US companies and their foreign subsidiaries), you must Know Your Customer, which includes understanding, researching, and vetting ownership.  Basic screening is no longer adequate.  Financial firms need to understand all those involved – family offices, trusts, foreign representatives, and know not only the breakdown of ownership (think OFAC 50% rule) but also who is the decision maker if under the 50% ownership rule.