An SEC-registered investment adviser entered into a settlement agreement with the U.S. Treasury Department’s Office of Foreign Assets Control for allegedly failing to maintain a compliance program. The problem was triggered when the adviser’s foreign affiliate caused one of its clients to invest in a Cayman Islands fund that appeared on OFAC’s list of Specially Designated Nationals. Genesis Asset Managers, LLP agreed to a $112,500 fine for an apparent violation of the Iranian Transactions Regulations (31 C.F.R. part 560) that occurred in 2007.
OFAC claimed that Genesis did not maintain an OFAC compliance program at the time the investment was made. Of course, Genesis was not required to do so.
These were the aggravating factors in this case:
- Genesis failed to exercise a minimal degree of caution or care in the conduct that led to the apparent violation
- Officers of Genesis were aware of the conduct giving rise to the apparent violation
- Substantial economic benefit was conferred to Iran
- Genesis did not have an OFAC compliance program in place at the time of the apparent violation
These were the mitigating factors:
- Genesis has not received a penalty notice or Finding of Violation from OFAC for substantially similar violations
- Genesis substantially cooperated with OFAC’s investigation
- Genesis voluntarily self-disclosed the apparent violation
- Genesis took appropriate remedial action
- Genesis may not have fully understood its OFAC obligations under U.S. law.
I find the last one strange. Every firm needs to comply with the OFAC regulations that prohibit transactions with parties on OFAC’s list of Specially Designated Nationals. Genesis is based on Britain so maybe the firm was bit confused about the extra-territorial reach of US law across the banking and investment systems.
Advisers should adopt risk-based procedures to ensure compliance with OFAC regulations. Most advisers and fund managers are not subject to a formal regulatory requirement to adopt written AML procedures or know-your-customer programs. That does not mean that such programs are bad ideas.
An adviser that can effectively demonstrate a reasonable OFAC/AML compliance program may be able to avoid heightened scrutiny from regulators. And investors are increasingly expecting their fund managers to have AML programs in place. If a violation does occur, the existence of a formal program can help mitigate the damage. In its enforcement guidelines, OFAC has stated that it may consider the “existence, nature and adequacy of a [firm’s] risk-based OFAC compliance program” in determining whether to bring an enforcement action and the amount of any penalty imposed.
It’s fairly easy to license a system and check your investors and business partners against the OFAC list and other sanctions lists.
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