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Treasury settles for less

June 15, 2012

Trade sanctions attorney Erich Ferrari has an interesting take on a recent settlement between OFAC (an agency within the Treasury Department) and Genesis Assets Managers, a U.S. firm that invested in a company whose investment portfolio is made up entirely of Iranian securities.  Such a blatant violation of U.S. sanctions laws would normally prompt prosecution and a heavy fine, or at least a higher settlement amount than what OFAC ultimately agreed to.    Here’s what Mr. Ferrari says about the settlement:

Today, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that Genesis Assets Managers, LLP (GAM) was paying $112,500 to settle apparent violations of the Iranian Transactions Regulations (ITR). In short, GAM a U.S. based firm serving as a investment manager for Genesis Emerging Markets Fund, violated the ITR when its agent, Genesis Investment Management, LLP invested $3 million to Cayman Islands’ based First Persian Equity Fund on behalf of GAM. First Persian Equity Fund is a company which invests solely in Iranian securities.

Despite OFAC finding that GAM failed to use a minimum amount of caution, provided a substantial benefit to Iran through their actions, and had knowledge of the transactions, OFAC stated that GAM’s activities were not egregious. I must say I was surprised by OFAC’s finding that the activity was non-egregious, considering this is a financial services firm operating without any sort of OFAC compliance program. Moreover, OFAC admits GAM’s activities undermined the sanctions program by providing a substantial economic benefit to Iran. There must have been a great deal of lawyering done to convince OFAC that this activity wasn’t completely reckless.

There were a few things working in GAM’s favor when OFAC determined what settlement amount was appropriate. First, they self-disclosed the apparent violation; thereby reducing any base penalty by half. Second, they substantially cooperated with OFAC during its investigation. Third, they took steps to remediate the violations. Finally, and quite surprisingly, OFAC stated that GAM may not have known of their OFAC obligations under U.S. law. Again, I am surprised by this, as those in the financial services industry should be more on aware of OFAC and the sanctions programs it administers than anyone. Indeed, the financial services industry is the first line of defense for catching and preventing OFAC violations.

Despite my surprise at how OFAC is viewing the apparent violations, I think it goes to show what a great tool the voluntary self-disclosure program can be. Since OFAC found that the transactions were non-egregious and GAM self-disclosed the base penalty was capped at $125,000. Therefore, mitigation based on other factors found in the OFAC Enforcement Guidelines was only $12,500 or about 10% of the base penalty. However, when one considers that the base penalty could have been in the millions, it really does seem like GAM received a massive break from OFAC.

Mr. Ferrari expresses “surprise” at the leniency of the settlement.  But this event does seem consistent with the Obama administration’s tendency to enter settlements with sanctions violators and terror financiers.

By the way, aren’t we repeatedly told that the Obama administration (including Geithner and Clinton) has adopted the toughest sanctions regime against any country ever?  Yet in this instance, a clear sanctions violator is let off with a slap on the wrists.

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