On May 21, the U.S. Treasury Department Office of Foreign Assets Control (OFAC) announced a small but noteworthy enforcement settlement: a fine against a U.S. investment fund because the foreign subsidiary of that fund purchased Iranian securities. It appears that OFAC’s enforcement action was not based on “facilitation” of a prohibited transaction with Iran, but rather on the U.S. parent’s failure to maintain sufficient controls to prevent its foreign subsidiary from conferring an economic benefit to Iran. As a result, the U.S. investment manager, Genesis Asset Managers LLP (GAM US) will pay a civil penalty of $112,500.
GAM US manages assets for Genesis Emerging Markets Fund (GEMF), an investment fund organized in Gurensey. GAM US contracts with its London-based subsidiary, Genesis Investment Management (GIM UK), through an Investment Advisory Agreement (the “Agreement”). The Agreement provides that GIM UK will provide investment advice and recommendations to GAM US as well as carry out certain transactions as an agent of GAM US. In 2007, pursuant to authority contained in the Agreement, GIM UK purchased around $3 million of shares for GEMF in the First Persian Equity Fund, a company that invests exclusively in Iranian securities.
Under the Iranian Transactions Regulations (ITR), U.S. companies are prohibited from taking direct or indirect action to provide goods or services to Iran. This includes actions taken, regardless of location, where the benefit of the action is received in Iran.
As the facts of this matter are described in OFAC’s Enforcement Information, assuming GAM US was at least one beneficiary of the purchase of shares by GIM UK, this might appear to be a straightforward violation of the ITR. What U.S. companies should note, however, is that OFAC appears to have asserted jurisdiction over GAM US for failing to properly oversee the actions of its agent. Nowhere in the brief Enforcement Information does OFAC allege that GAM US violated the ITR prohibition on facilitation by a U.S. company of a transaction that the U.S. company could not participate in itself. The information only notes that the allegedly prohibited purchase was made pursuant to “delegated authority” in the Agreement. The information lists aggravating factors that include: GAM US did not have an OFAC compliance program in place at the time of the violation; GAM US exercised a minimal degree of caution or care in the conduct that led to the violation; and officers of GAM US were aware of the conduct giving rise to a violation.
In sum, OFAC’s enforcement action in this case suggests the agency pursued the following theory of liability: a U.S. company is in violation of the ITR if it fails to properly oversee its non-U.S. subsidiary’s actions and passively receives information that that subsidiary is investing in a company that invests in Iranian securities. Essentially, it seems the penalty was imposed for failure to prevent a transaction with Iran by all non-U.S. participants that took place outside the United States.
GAM US voluntarily self-disclosed the violation and cooperated “substantially” with OFAC’s investigation. Some commentators have expressed surprise that OFAC determined this offense to be non-egregious and issued a relatively small penalty, because the potential penalty faced by GAM US could have been in the millions of dollars. These results, however, may illustrate the importance and value of disclosure and cooperation. It is also possible OFAC recognized that its theory of jurisdiction in this matter was novel and potentially not provable in court, so the agency was willing to settle the case for a much smaller amount to avoid having to defend its long jurisdictional reach in court.
As the U.S. and other governments around the world tighten the hold to choke off funds moving into Iran, U.S. companies may face an expanding responsibility to guard against transactions – even between non-U.S. parties – that inure to the benefit of Iran, its government, or its economy.