This post was written by Michael J. Lowell.

On May 21, 2012, the Office of Foreign Assets Control (“OFAC”) announced the settlement of an apparent violation of the U.S. sanctions on Iran by Genesis Asset Managers, LLP (“GAM US”). GAM US agreed to remit $112,500 in order to settle potential civil liability relating to an investment in the First Persian Equity Fund (“FPEF”), by its foreign agent. Although based in the Cayman Islands, FPEF invests exclusively in Iranian securities, according to OFAC’s announcement. This case is noteworthy because the apparent violation appears to be based solely on an investment decision by the foreign agent (and subsidiary) of GAM US, pursuant to delegated authority.

According to OFAC’s announcement, GAM US is the investment manager for Genesis Emerging Markets Fund (“GEMF”), an investment fund organized under the laws of Guernsey (a British Crown dependency in the English Channel). GAM US has contractual authority to manage, invest, and reinvest GEMF’s assets under a Management Agreement. GAM US, in turn, authorizes its London-based subsidiary, Genesis Investment Management LLP (“GIM UK”), “to carry out transactions as an agent of GAM US in accordance with the investment policies and strategies adopted from time to time by GEMF.” Pursuant to this delegated authority, GIM UK purchased approximately $3 million shares in FPEF for GEMF. Therefore, the theory of liability in this settlement was based on the investment of foreign assets (GEMF’s assets) by a foreign entity (GIM UK) in a Cayman Islands company investing in Iranian securities, because the U.S. person (GAM US) had delegated its contractual authority to manage and invest GEMF’s assets without having sufficient controls in place to ensure compliance with OFAC sanctions.

Among other factors, including officer awareness of the conduct and the benefit conferred on Iran, OFAC found as an aggravating factor that “GAM US failed to exercise a minimal degree of caution or care in the conduct that led to the apparent violation,” which presumably refers to the lack of controls in the Investment Advisory Agreement between GAM US and GIM UK. Mitigating factors cited by OFAC include the substantial cooperation by GAM US in the OFAC investigation, voluntary disclosure, agreement to settle without a Prepenalty Notice, implementation of appropriate remedial actions, and the fact that GAM US may not have fully understood its OFAC obligations.
This settlement demonstrates once again the need to consider limitations and other controls in delegations of authority to non-U.S. agents, and the high expectations OFAC places on companies in the financial industry. OFAC’s announcement may be found here.