The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently announced two separate enforcement actions against IPI Partners, LLC and Gracetown, Inc. for violations of Ukraine-/Russia-related sanctions. OFAC is the agency responsible for administering and enforcing U.S. economic sanctions programs.

These actions highlight OFAC’s willingness to scrutinize private equity and other investment structures with opaque ownership chains. They also serve as a reminder of the substantial penalties companies can face for failing to thoroughly investigate and address red flags before proceeding with a transaction.

IPI Settles with OFAC for $11.5 Million over Indirect Dealings with a Designated Oligarch

On December 2, OFAC announced an $11.485 million settlement with IPI Partners, a Chicago-based private equity firm specializing in data center investments. OFAC alleged that IPI violated U.S. sanctions on Russia by engaging in more than 50 transactions involving property in which designated Russian oligarch Suleiman Kerimov held an interest.

According to OFAC, the nominal investor in IPI’s fund was a British Virgin Islands (BVI) entity ultimately owned by Heritage Trust, a Delaware-based Kerimov family trust. Before and after the investment commitments, an IPI senior manager met personally with Kerimov and his representatives, including Kerimov’s nephew, to secure a total investment of $50 million.

Kerimov was designated as a Specially Designated National (SDN) in April 2018. U.S. persons are generally prohibited from transacting, directly or indirectly, with an SDN or entities 50% or more owned by an SDN. Additionally, an SDN’s property and interests in property within the United States, or under the control of a U.S. person, must be blocked and reported to OFAC.

Following Kerimov’s designation, IPI received advice from outside counsel that, because Kerimov did not formally own 50% or more of the BVI entity, the account did not need to be blocked. IPI also received written assurances that Kerimov was not affiliated with the investment. However, OFAC concluded that IPI’s prior meetings with Kerimov and his representatives gave the firm reason to know Kerimov was the ultimate owner of the BVI entity, making the transactions indirect dealings with an SDN. According to the Enforcement Release, outside counsel was not informed of these meetings.

OFAC deemed the violations non-egregious but noted that IPI did not voluntarily self-disclose, resulting in a base penalty of approximately $14.3 million. OFAC also found IPI’s initial cooperation unsatisfactory. Although IPI later improved its cooperation after retaining new counsel, waiving privilege, and providing additional records, its delayed engagement limited mitigation credit.

Gracetown, Inc. Agrees to $7.1 Million Settlement for Failure to Report Blocked Property

On December 4, OFAC announced a $7.139 million penalty against Gracetown, Inc., a New York property management company, for continuing to receive monthly payments connected to designated Russian oligarch Oleg Deripaska despite having received notice from OFAC that such dealings were prohibited.

According to OFAC, Gracetown was formed to manage three luxury real estate properties purchased by Deripaska through various legal entities. From 2006 until 2018, Deripaska was Gracetown’s ultimate beneficial owner, but in the months leading up to his designation in 2018, ownership was transferred to a relative.

Beginning in 2013, Gracetown received payments owed to Baufinanz, a BVI company owned by Deripaska. These payments were deposited into Gracetown’s accounts and treated as loans from Baufinanz to manage the properties.

When OFAC designated Deripaska in 2018, it mailed Gracetown a Notification of Blocking, instructing that all property and interests in property of Deripaska were blocked and had to be reported within 10 business days. Despite this, Gracetown continued to receive payments from Baufinanz for two years after the designation.

Compounding the violations, Gracetown failed to report nearly four years’ worth of blocked property, ultimately submitting a delayed report in 2022. OFAC determined that Gracetown acted willfully or recklessly, had long been aware of Deripaska’s ownership, and disregarded clear compliance obligations. As a result, OFAC treated the matter as egregious and applied the maximum statutory base penalty of $8.9 million.

Gracetown received minimal mitigation credit, which was primarily due to the absence of prior OFAC violations, resulting in a final penalty of $7.1 million.

Enforcement Actions Based on Beneficial Ownership, Self-Blinding

There are a few key takeaways from these enforcements:

First, a blocked person’s interest in property is not limited to legal titles or formal ownership percentages. Even where a blocked person owns less than 50% of an entity or property, the underlying practical and economic realities may mean that a U.S. person is nonetheless prohibited from dealing with that property.

Second, advice from outside counsel cannot excuse sanctions violations where the advice does not account for critical facts. For legal advice to be effective, it must be based upon a complete and accurate picture of all material facts, and incomplete or misleading information can undermine compliance.

Third, in both cases, OFAC penalized companies that had reason to know of key circumstances that impacted sanctions compliance. The standard for liability includes actual knowledge and constructive knowledge, or “reason to know.” Any potential concerns and red flags must be fully resolved before moving forward with a transaction or relationship.

Finally, as we have noted previously in a Swiss finance company’s settlement, a Tri-Seal Compliance Note, and a declined prosecution, voluntary disclosure is a powerful mitigation tool. Neither IPI nor Gracetown voluntarily disclosed their conduct and ultimately faced penalties near the statutory maximum. By contrast, as outlined in OFAC’s Enforcement Guidelines, self-disclosure can reduce base penalties by 50% or even lead to a non-prosecution agreement in the case of a criminal violation.

Please contact the authors if you have any questions.