Diversity & Inclusion
On May 21, 2012, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a $112,500 settlement involving international securities investments. This settlement may have broader significance than the relatively low dollar amount. The U.S. investment manager for a Channel Islands fund allegedly violated the Iranian Transactions Regulations (ITR), 31 C.F.R. part 560, when its British subsidiary, acting as its agent, made a $3 million investment in a Caribbean-based fund that invested exclusively in Iranian securities.1
Genesis Asset Managers LLP (GAM US) is the investment manager of a Guernsey-organized investment fund, Genesis Emerging Markets Fund (GEMF), and GAM US appears to have outsourced at least some of its core investment responsibilities to a foreign subsidiary. According to a brief statement issued by OFAC, GAM US had a contractual relationship with its London-based subsidiary, Genesis Investment Management LLP (GIM UK), through which GIM UK was authorized to carry out transactions as an agent of GAM US. In 2007, pursuant to its arrangement with GAM US, GIM UK bought about $3 million of shares for GEMF in First Persian Equity Fund, a Cayman Islands company that invested exclusively in Iranian securities.
OFAC’s settlements do not reflect a final agency determination that a violation has occurred, and the specific legal theory of the alleged ITR violation is not explained in OFAC’s announcement. Three possible theories seem most likely:
1. GAM US, through the actions of its foreign agent, ran afoul of prohibitions on new investment in Iran or in property owned or controlled by the government of Iran. See 31 C.F.R. §§ 560.207, 560.316.
2. GAM US indirectly provided a service to Iran or the government of Iran. See 31 C.F.R. § 560.204.
3. GAM US facilitated a transaction by a foreign person (its agent GIM UK, its principal GEMF, or both) that would have been prohibited had GAM US engaged in the transaction directly. See 31 C.F.R. § 560.208.
OFAC identified several aggravating factors, including GAM US’s alleged failure to exercise “a minimal degree of caution or care in the conduct that led to the apparent violation” and the lack of any OFAC compliance program. OFAC also identified mitigating factors, including that this appeared to be GAM US’s first offense, and other factors discussed below.
Other noteworthy aspects of the settlement:
Transactions involving Iran, even those occurring five years ago by non-U.S. companies, likely will continue to be scrutinized by OFAC and other parts of the U.S. government. Businesses in regulated industries or with significant international components may want to review existing arrangements to ensure that their affiliates are aware of and, where appropriate, abiding by U.S. economic sanctions.
1 About two years later, in 2009, OFAC imposed additional sanctions against First Persian Equity Fund pursuant to U.S. nonproliferation authorities, see 31 C.F.R. part 544, for the fund’s links to Iran’s Bank Melli. OFAC appears to have alleged only violations of the ITR, and not of part 544, relating to GAM US.
2 This provision is section 213 of the Senate version of H.R. 1905, which was approved by a voice vote in the Senate on May 21. The legislation will next return to the House of Representatives for its consideration.
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