PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP INTERNAL MEMORANDUM
TO: Priya Anand, Partner; Oliver Mackenzie, Partner
FROM: Leila Nazari, Associate; Robert Jansen, Associate
DATE: September 18, 2023
RE: Internal Investigation Findings — DTI / Caspian Star Transactions, C&H Matter No. 1016-00007
This memorandum is protected by the attorney-client privilege and constitutes attorney work product prepared in anticipation of litigation and/or regulatory proceedings. It is intended solely for use by the identified recipients in connection with Calderwood & Harkness LLP's representation of Dunmore Energy Holdings Ltd. This memorandum should not be disclosed to any third party, including the U.S. Department of the Treasury's Office of Foreign Assets Control ("OFAC"), without the prior express authorization of Priya Anand. Unauthorized disclosure may result in a waiver of applicable privileges.
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I. Executive Summary
Calderwood & Harkness LLP ("C&H" or the "Firm") was engaged on August 14, 2023, by Dunmore Energy Holdings Ltd. ("DEH" or the "Company") to conduct an internal investigation into five fuel oil sale transactions executed between DEH's wholly owned subsidiary, Dunmore Trading International Ltd. ("DTI"), and Caspian Star Commodities DMCC ("Caspian Star"), a Dubai-registered commodities trading firm. The engagement was initiated on the recommendation of Grandview Capital Partners LLC ("Grandview"), the majority equity holder of DEH, following DTI's internal discovery of a potential nexus between Caspian Star and a U.S.-designated Specially Designated National ("SDN").
The five subject transactions occurred between September 12, 2022, and January 23, 2023, and involved the physical sale of low-sulfur fuel oil ("LSFO"), 380 CST grade, delivered FOB Fujairah, UAE. The aggregate value of the five transactions was $4,726,500, spread across five separate commercial invoices. All five payments were denominated in U.S. dollars and were processed through Ridgeline National Bank, N.A. ("Ridgeline"), a U.S. financial institution headquartered in Houston, Texas.
Based on our review of the relevant transactional documents, corporate records, compliance records, and interviews with key personnel, we have reached the following principal conclusions:
First, the five transactions constituted apparent violations of U.S. sanctions administered by OFAC under Executive Order 14024 (April 15, 2021) and the Russian Harmful Foreign Activities Sanctions Regulations, 31 C.F.R. Part 587. At the time of the transactions, Caspian Star was owned or controlled by Timur R. Kadyrov, a Russian national who had been designated by OFAC as a Specially Designated National on March 18, 2022, under the RUSSIA-EO14024 program (SDN Entry ID 47218). Under OFAC's 50 Percent Rule, codified at 31 C.F.R. § 587.309, any entity owned fifty percent or more, directly or indirectly, by one or more blocked persons is itself a blocked entity, regardless of whether that entity appears on the SDN List by name. Because Kadyrov was the ultimate beneficial owner of Caspian Star, Caspian Star was itself a blocked entity throughout the September 2022 to January 2023 transaction period, and all five transactions constituted prohibited dealings with blocked property or interests in property.
Second, the U.S. nexus required to establish jurisdiction under the sanctions framework is clearly present. All five payments were denominated in U.S. dollars and cleared through Ridgeline National Bank, N.A. in Houston, Texas. Ridgeline processed three outgoing and two incoming USD wire transfers in connection with the Caspian Star transactions through its Houston operations center. These USD-denominated transactions involving a U.S. financial institution bring the transactions squarely within OFAC's jurisdictional reach.
Third, the violations were inadvertent. DTI had no actual knowledge of Kadyrov's beneficial ownership of Caspian Star at the time any of the five transactions were executed. The failure to identify the SDN link was attributable to a combination of factors: (1) a timing gap between Kadyrov's designation by OFAC on March 18, 2022, and OFAC's subsequent public identification of Caspian Star as an entity he owned or controlled (which did not occur until a supplemental SDN List update on May 12, 2023); (2) limitations in DTI's automated sanctions screening platform, HCS ScreenPro, which was provided by Harborview Compliance Solutions Inc. and which relied on public corporate registry data that continued to reflect a nominee shareholder — Farid Mammadov — as the sole owner of Caspian Star; and (3) procedural gaps in DTI's re-screening processes, including a delayed annual re-screening cycle and the absence of any policy requirement to re-collect beneficial ownership declarations from counterparties absent a counterparty-reported change in ownership.
Fourth, upon discovering the SDN link on June 2, 2023, DTI acted promptly. Derek Huang, DEH's Chief Compliance Officer, immediately reported the finding to Marcus Whitfield, SVP & General Counsel of DEH, and DTI blocked Caspian Star as a counterparty and froze all pending transactions within three business days of discovery, on June 5, 2023. No transactions were pending at that time, as the last transaction had been completed on January 23, 2023.
Based on the foregoing findings, and for the reasons set forth in detail in Sections IV through VII of this memorandum, we recommend that DEH proceed with filing a voluntary self-disclosure ("VSD") with OFAC as soon as practicable, targeting a filing date no later than October 15, 2023. The combination of voluntary self-disclosure and the strong mitigating factors present in this matter — including the absence of actual knowledge, the inadvertent nature of the conduct, prompt remediation upon discovery, and the existence of a pre-existing sanctions compliance program — makes this matter a strong candidate for resolution without the imposition of a civil monetary penalty, or with a substantially reduced penalty. The statutory maximum civil penalty exposure is $9,453,000 (calculated as twice the aggregate transaction value), but we believe that a resolution in the range of a Finding of Violation without a penalty, a cautionary letter, or a no-action determination is a realistic and achievable outcome.
II. Investigation Methodology
A. Document Review
The C&H investigation team conducted a comprehensive review of documents produced by DTI and DEH in connection with this engagement. Documents were collected from DTI's London offices, DEH's Houston offices, and electronic repositories maintained by DTI's compliance and trading functions. The review encompassed ten categories of documents, which are enumerated below:
1. Counterparty Onboarding File for Caspian Star (July 2021). This file included the completed KYC (Know Your Customer) questionnaire submitted by Caspian Star; corporate registry extracts from the Dubai Multi Commodities Centre ("DMCC") Free Zone Authority reflecting Caspian Star's registered address at Unit 4412, Jumeirah Business Centre 1, Cluster G, Jumeirah Lakes Towers, Dubai, UAE; a certified copy of Caspian Star's DMCC commercial license; a passport copy and UAE resident visa for Farid Mammadov, identified as the sole shareholder and managing director of Caspian Star; two trade references from unrelated commodities trading firms; and sanctions screening results generated by HCS ScreenPro, the automated screening platform provided by Harborview Compliance Solutions Inc. (headquartered at 2300 Clarendon Blvd, Suite 700, Arlington, VA 22201).
2. Five Sale Contracts. ISDA-form trade confirmations for each of the five subject transactions, each referencing the sale of LSFO 380 CST grade with delivery terms specified as FOB Fujairah, UAE. Each confirmation was executed by authorized signatories of both DTI and Caspian Star and contained standard representations and warranties regarding sanctions compliance, including representations by Caspian Star that it was not, and was not owned or controlled by, any person on any applicable sanctions list.
3. Five Commercial Invoices. Invoice numbers CS-DTI-0091, CS-DTI-0094, CS-DTI-0101, CS-DTI-0108, and CS-DTI-0115, corresponding to the five subject transactions. Each invoice set forth the volume of LSFO delivered (in metric tons), the agreed price, payment terms (net 30 days, wire transfer in USD), and banking details for Caspian Star's account at Emirates Gulf Commercial Bank, Dubai.
4. Wire Transfer Records. Records obtained from Ridgeline National Bank, N.A. (700 Louisiana Street, Suite 4800, Houston, TX 77002) documenting five USD wire transfers associated with the five subject transactions. The wire transfer records reflect that Caspian Star's payments were routed from its account at Emirates Gulf Commercial Bank, Dubai, through the U.S. correspondent banking system via Ridgeline National Bank's Houston operations center, and credited to DTI's USD account at Ridgeline. Ridgeline processed three outgoing and two incoming USD wire transfers in connection with these transactions.
5. DTI's Global Sanctions Compliance Policy (Version 3.2, effective January 1, 2022). This document sets forth DTI's internal policies and procedures governing sanctions compliance, including counterparty screening requirements, re-screening frequency (annual), escalation procedures for potential sanctions hits, and recordkeeping obligations. The policy designates the DEH Chief Compliance Officer as the senior officer responsible for sanctions compliance across all DEH subsidiaries, including DTI.
6. HCS ScreenPro Re-Screening Logs for Caspian Star. Automated system logs documenting the re-screening of Caspian Star conducted in October 2022. The logs confirm that the screening was performed against the OFAC SDN List, the EU Consolidated Sanctions List, and the UK Office of Financial Sanctions Implementation ("OFSI") list. No matches were returned. The logs also reflect the date and time of the screening, the version of the screening platform in use, and the data sources relied upon for the beneficial ownership module.
7. Borwick & Thatcher LLP FY 2022 Management Letter. A management letter dated January 30, 2023, prepared by Borwick & Thatcher LLP (1 More London Place, London SE1 2AF, UK), DEH's external auditors, and addressed to the DEH Board of Directors. The letter identified Caspian Star among a group of counterparties flagged as "high-risk" based on credit risk criteria — specifically, the absence of audited financial statements. The management letter did not reference sanctions compliance.
8. DTI Internal Email Correspondence (March–June 2023). A corpus of internal email communications relating to the enhanced compliance review initiated by Derek Huang on March 6, 2023, in response to the Borwick & Thatcher audit flag. This correspondence documents the chronology of the enhanced review, including assignments to compliance staff, follow-up requests for updated KYC information from Caspian Star, and interim status reports.
9. Derek Huang Email of June 2, 2023. An email from Derek Huang, CCO of DEH, to Marcus Whitfield, SVP & General Counsel of DEH, reporting the discovery that OFAC's SDN List supplemental information had been updated on May 12, 2023, to expressly identify Caspian Star Commodities DMCC as an entity owned or controlled by Timur R. Kadyrov. The email recommended immediate blocking of Caspian Star as a counterparty and engagement of external counsel to evaluate the implications of the finding.
10. DTI's Caspian Star Account Block Memorandum (June 5, 2023). An internal memorandum documenting DTI's decision to block Caspian Star as a counterparty and freeze all pending transactions. The memorandum was issued by the DTI compliance function and approved by Gregor Albrecht, Managing Director of DTI, within three business days of Huang's discovery.
In total, the C&H investigation team reviewed approximately 1,450 pages of documents and 347 individual electronic communications in connection with this engagement. All documents were maintained in a secure, access-controlled review workspace in accordance with C&H's information security protocols.
B. Interviews
In addition to the document review, the C&H investigation team conducted a series of interviews with key personnel at DEH and DTI. These interviews were designed to supplement and contextualize the documentary record, to assess the state of mind and knowledge of relevant individuals at the time of the transactions, and to understand the compliance processes and systems in place during the relevant period. The interviews were conducted as follows:
• Derek Huang, Chief Compliance Officer, DEH — Interviewed on August 22, 2023. Mr. Huang provided detailed information regarding the enhanced compliance review initiated on March 6, 2023, his manual review of the OFAC SDN List on June 2, 2023, the circumstances of his discovery of the Kadyrov–Caspian Star link, and the remedial steps taken thereafter. Mr. Huang also described DTI's sanctions compliance policies and procedures, the HCS ScreenPro screening platform, and the circumstances surrounding the delayed re-screening in October 2022.
• Gregor Albrecht, Managing Director, DTI — Interviewed on August 24, 2023. Mr. Albrecht provided information regarding DTI's trading operations, the nature and commercial context of the LSFO transactions with Caspian Star, DTI's counterparty approval processes, and his involvement in the decision to block Caspian Star as a counterparty on June 5, 2023.
• Janet Sorensen, Chief Financial Officer, DEH — Interviewed on August 28, 2023. Ms. Sorensen provided information regarding the USD payment flows associated with the subject transactions, the relationship between DTI and Ridgeline National Bank, and DEH's financial controls and audit processes, including the Borwick & Thatcher FY 2022 management letter.
• Two DTI Trading Desk Employees (names withheld to preserve individual privacy within this privileged memorandum) — Interviewed on August 29 and August 30, 2023. These individuals provided information regarding the commercial negotiation and execution of the five LSFO transactions with Caspian Star, their interactions with Caspian Star's trading personnel, and their awareness (or lack thereof) of the ownership structure of Caspian Star.
• One DTI Compliance Analyst (name withheld) — Interviewed on September 1, 2023. This individual provided information regarding the day-to-day operation of the HCS ScreenPro screening platform, the mechanics of the October 2022 re-screening, and the compliance team's staffing levels during the relevant period.
All interviewees were provided Upjohn warnings at the outset of each interview, consistent with the principles established in Upjohn Co. v. United States, 449 U.S. 383 (1981), and the requirements of applicable bar rules. Each interviewee was informed that Calderwood & Harkness LLP represents the Company (DEH and its subsidiaries), not any individual; that the interview was being conducted to gather facts for the purpose of providing legal advice to the Company; that the interview was protected by the Company's attorney-client privilege; that the privilege belongs to the Company, not to the individual; and that the Company could choose to waive the privilege in the future at its discretion. Each interviewee acknowledged understanding of these warnings before the interview proceeded.
No interviewee requested or was provided individual counsel during the interview process. Based on the information gathered during the interviews, we do not believe that the interests of any individual interviewee are materially adverse to those of the Company in connection with this matter, though this assessment may require revisiting as the matter progresses.
III. Factual Findings
The factual narrative set forth below is based on the documents and interviews described in Section II above. Where our findings are based on documentary evidence, we have noted the relevant source documents. Where our findings are based on interview testimony, we have noted the relevant interviewee. All factual statements reflect our assessment of the most likely facts based on the evidence available as of the date of this memorandum.
A. Counterparty Onboarding
Caspian Star Commodities DMCC was onboarded as an approved trading counterparty of DTI on July 8, 2021. The onboarding process was managed by DTI's London-based compliance team, operating from DTI's registered offices at 25 Finsbury Square, London EC2A 1PQ, United Kingdom (Companies House No. 12849371). The compliance team was supported in the onboarding process by Ashworth & Kline LLP (10 Aldermanbury, London EC2V 7HR, UK), DTI's then-outside trade compliance counsel, with lead partner Nigel Ashworth advising on the KYC and sanctions screening components of the onboarding.
The KYC documentation provided by Caspian Star as part of the onboarding process identified Farid Mammadov as the sole shareholder (100%) and managing director of Caspian Star. Mammadov, an Azerbaijani national resident in the UAE, presented a UAE resident visa and a copy of his passport as part of the identification documentation. The KYC questionnaire submitted by Caspian Star affirmed that Mammadov was the ultimate beneficial owner of the company and that no other person held, directly or indirectly, an ownership interest in Caspian Star of 25% or greater.
The following documentation was collected and retained in DTI's counterparty onboarding file for Caspian Star:
• Completed KYC questionnaire (DTI standard form, Version 2.1);
• DMCC commercial license (License No. JLT-11847);
• DMCC Free Zone Authority corporate registry extract, reflecting Mammadov as 100% shareholder and sole director;
• Certified copy of Mammadov's UAE resident visa;
• Certified copy of Mammadov's Azerbaijani passport;
• Two trade references from unrelated commodities trading firms (names on file); and
• Sanctions screening results generated by HCS ScreenPro.
Sanctions screening was performed through the HCS ScreenPro platform between July 8 and July 12, 2021. The screening was conducted against the following sanctions lists:
• OFAC Specially Designated Nationals and blocked Persons List (SDN List);
• European Union Consolidated List of Persons, Groups, and Entities Subject to EU Financial Sanctions; and
• United Kingdom Office of Financial Sanctions Implementation (OFSI) Consolidated List.
The screening was performed on the entity name "Caspian Star Commodities DMCC" and on the individual name "Farid Mammadov." No matches were returned for either the entity or the individual. Based on the screening results and the documentation collected, DTI's compliance team assigned Caspian Star a "Standard Risk" rating under DTI's counterparty risk classification framework. The Standard Risk rating reflected the absence of any sanctions hit, Caspian Star's domicile in the UAE (a jurisdiction not subject to comprehensive U.S. sanctions), and the nature of the anticipated trading relationship (physical commodity sales of refined petroleum products).
It is a critical factual point that, at the time of Caspian Star's onboarding in July 2021, Timur R. Kadyrov had not yet been designated by OFAC. Kadyrov's designation did not occur until approximately eight months later, on March 18, 2022. Accordingly, no sanctions screening — regardless of its sophistication — would have identified a Kadyrov-related risk at the time of Caspian Star's onboarding.
B. OFAC Designation of Kadyrov
On March 18, 2022, OFAC designated Timur R. Kadyrov as a Specially Designated National pursuant to Executive Order 14024, which authorizes sanctions against persons determined to operate or have operated in specified sectors of the Russian Federation economy, or to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, certain activities or persons described in the Order.
Kadyrov's designation carried the following identifying information:
• Full Name: Timur Rasulovich Kadyrov
• Date of Birth: September 7, 1971
• Nationality: Russian Federation
• SDN Entry ID: 47218
• Program: RUSSIA-EO14024
OFAC identified Kadyrov as a Russian industrialist with diversified business interests spanning the energy, commodities trading, and technology sectors. According to OFAC's designation narrative, Kadyrov had been determined to operate in the technology sector of the Russian Federation economy and to be involved in sanctions evasion networks that facilitated the procurement of restricted technology and dual-use goods for Russian state-affiliated entities.
At the time of his designation, OFAC identified Kadyrov as the ultimate beneficial owner of multiple shell entities and corporate structures, including entities in the UAE, Cyprus, and the British Virgin Islands. Critically, however, OFAC's SDN List entry at the time of designation listed Kadyrov's personal identifying information but did not expressly identify Caspian Star Commodities DMCC as an entity owned or controlled by him. The SDN List entry referenced several other entities by name, but Caspian Star was not among them.
Under OFAC's 50 Percent Rule, codified at 31 C.F.R. § 587.309, any entity that is owned, directly or indirectly, fifty percent or more by one or more blocked persons is itself considered a blocked person, regardless of whether that entity appears on the SDN List by name. The policy rationale underlying this rule is well established: OFAC has consistently taken the position that blocked persons should not be permitted to evade sanctions by operating through corporate entities that do not themselves appear on the SDN List. Accordingly, the obligation to identify and block such entities falls on transacting parties, who must conduct sufficient due diligence to determine whether a counterparty is owned or controlled by an SDN.
In the present case, identifying Caspian Star as subject to the 50 Percent Rule required knowledge of Kadyrov's beneficial ownership of the entity — information that was not publicly available in corporate registry records at the time of the transactions. Caspian Star's corporate records in the DMCC registry continued to reflect Mammadov as the 100% owner and sole director of the company. No publicly available commercial database — including those relied upon by HCS ScreenPro's beneficial ownership module — reflected the Kadyrov–Caspian Star ownership link during the September 2022 to January 2023 transaction period.
The beneficial ownership connection between Kadyrov and Caspian Star was not reflected in any widely available commercial database or public corporate registry until OFAC issued a supplemental update to the SDN List on May 12, 2023, at which time OFAC expressly identified Caspian Star Commodities DMCC as an entity owned or controlled by Kadyrov. This supplemental update was the first publicly available identification of the Kadyrov–Caspian Star link.
C. The Subject Transactions
Between September 12, 2022, and January 23, 2023, DTI executed five physical sale transactions with Caspian Star, each involving the sale of low-sulfur fuel oil ("LSFO"), 380 CST grade. The five transactions were documented through ISDA-form trade confirmations and corresponding commercial invoices. All five transactions specified delivery on FOB terms at Fujairah, UAE, a major global bunkering and fuel oil storage hub.
The following table sets forth the material terms of each transaction:
The aggregate volume of LSFO transacted across the five deals was 10,600 metric tons, with an aggregate value of $4,726,500. Each transaction was priced on a per-metric-ton basis, with prices reflecting prevailing market rates for LSFO 380 CST grade at Fujairah during the relevant period. The C&H team reviewed the pricing against publicly available Platts benchmark data for the corresponding delivery windows and found no anomalies — the transaction prices were consistent with market levels, further supporting the conclusion that these were routine, arm's-length commercial transactions.
Payment for all five transactions was made in U.S. dollars via wire transfer. The payment flows were structured as follows: Caspian Star made payments from its corporate account at Emirates Gulf Commercial Bank in Dubai, which were routed through the U.S. correspondent banking system via Ridgeline National Bank, N.A. (700 Louisiana Street, Suite 4800, Houston, TX 77002) and credited to DTI's USD-denominated account held at Ridgeline. Ridgeline processed three outgoing and two incoming USD wire transfers in connection with the Caspian Star transactions through its Houston operations center. The specific breakdown of outgoing versus incoming transfers corresponds to the netting arrangements applicable to certain of the transactions; however, the critical point is that all five payments transited through a U.S. financial institution.
The USD denomination and clearing of these wire transfers through Ridgeline National Bank in Houston establishes the requisite U.S.-person nexus under the applicable sanctions framework. Specifically, the processing of these transactions by Ridgeline constitutes dealings by or through a U.S. financial institution with property in which a blocked person (Caspian Star, as an entity owned or controlled by SDN-listed Kadyrov) had an interest, in violation of the prohibitions set forth in Executive Order 14024 and 31 C.F.R. Part 587.
D. Re-Screening Failure
DTI's Global Sanctions Compliance Policy (Version 3.2, effective January 1, 2022) required annual re-screening of all active counterparties against applicable sanctions lists. The re-screening was to be conducted through the HCS ScreenPro platform and was triggered automatically based on the counterparty's original onboarding date. For Caspian Star, which was onboarded on July 8, 2021, the first annual re-screening was due by July 8, 2022.
However, the re-screening was not performed by the July 2022 deadline. According to Derek Huang, the delay was attributable to a staffing vacancy on DTI's London-based compliance team. A compliance analyst who had been primarily responsible for managing the re-screening queue had departed DTI in May 2022, and a replacement was not hired until September 2022. During the interim period, the remaining compliance staff prioritized new counterparty onboarding over re-screening of existing counterparties, resulting in a backlog that affected Caspian Star and approximately thirty other active counterparties.
The re-screening of Caspian Star was ultimately conducted in October 2022 — approximately three months after the scheduled date. By the time of the October 2022 re-screening, one of the five subject transactions had already been executed (the September 12, 2022 transaction, Invoice CS-DTI-0091, for $1,135,000).
The October 2022 re-screening through HCS ScreenPro returned no hits for "Caspian Star Commodities DMCC" or "Farid Mammadov." This result was attributable to two interrelated factors:
(i) The SDN List entry for Kadyrov, while in effect since March 18, 2022, did not at that time reference Caspian Star Commodities DMCC by name. The screening platform matched counterparty names and identifiers against SDN List entries, but because Caspian Star was not identified as an alias or associated entity in Kadyrov's SDN List entry, no match was generated.
(ii) HCS ScreenPro's beneficial ownership module — which was designed to identify entities that might be subject to OFAC's 50 Percent Rule based on ownership data — relied on corporate registry data and commercial database feeds that continued to reflect Mammadov as the 100% owner of Caspian Star. The beneficial ownership data linking Caspian Star to Kadyrov was not incorporated into the HCS ScreenPro data feed until after OFAC's May 12, 2023 SDN supplemental update. Harborview Compliance Solutions Inc., the provider of HCS ScreenPro, drew its beneficial ownership data from public corporate registries and selected third-party data aggregators; none of these sources reflected the Kadyrov–Caspian Star link during the relevant period.
As a consequence of the re-screening failure, all five subject transactions — including the four that were executed after the October 2022 re-screening — were completed without any sanctions flag being raised. The DTI compliance team did not receive any alert, warning, or indication that Caspian Star was, or might be, a blocked entity.
It bears noting that DTI's Global Sanctions Compliance Policy (Version 3.2) did not require the re-collection of beneficial ownership declarations from counterparties as part of the annual re-screening process, absent a counterparty-reported change in ownership. The policy relied on the initial KYC documentation and the automated screening platform to detect any sanctions-related changes. This procedural gap contributed to the failure to identify the Kadyrov link, as Caspian Star's nominee ownership structure through Mammadov remained unchanged in all publicly available records throughout the transaction period.
E. Discovery
The chain of events leading to the discovery of the SDN link began with the external audit process. On January 30, 2023, Borwick & Thatcher LLP (1 More London Place, London SE1 2AF, UK), DEH's external auditors, issued their FY 2022 management letter to the DEH Board of Directors. The management letter identified Caspian Star among a group of counterparties flagged as "high-risk" on the basis of counterparty credit risk — specifically, the fact that Caspian Star had not provided audited financial statements as part of the annual review process. The management letter did not reference sanctions compliance; the flag was exclusively related to credit risk assessment and the adequacy of DTI's trade receivables provisioning.
Notwithstanding the credit-risk focus of the Borwick & Thatcher flag, Derek Huang, DEH's Chief Compliance Officer, elected to initiate an enhanced compliance review of Caspian Star on March 6, 2023. Huang testified during his interview that his decision to conduct the enhanced review was motivated by a desire to ensure that all high-risk counterparties identified by the external auditors were subject to updated sanctions screening and due diligence, even where the original flag related solely to credit risk. This decision reflected Huang's professional judgment and a "belt and suspenders" approach to compliance oversight — a decision that, in retrospect, proved critical to the ultimate discovery of the sanctions violation.
The enhanced compliance review entailed, among other steps, the re-collection of KYC documentation from Caspian Star, a request for updated corporate registry extracts, and a manual review of OFAC's publicly available resources, including the SDN List and associated supplemental data.
On May 12, 2023, OFAC updated the SDN List supplemental information to expressly identify Caspian Star Commodities DMCC as an entity owned or controlled by Timur R. Kadyrov. This was the first time that the Kadyrov–Caspian Star link was reflected in any publicly available OFAC resource.
On June 2, 2023, during the course of the enhanced compliance review, Huang manually accessed OFAC's website and reviewed the SDN List and its supplemental materials. It was during this manual review that Huang discovered the updated annotation linking Caspian Star to Kadyrov. Huang immediately recognized the significance of the discovery and reported the finding to Marcus Whitfield, SVP & General Counsel of DEH, via email on the same day. In his email, Huang recommended that DTI immediately block Caspian Star as a counterparty and that DEH engage external sanctions counsel to evaluate the implications of the finding and advise on next steps, including the potential need for a voluntary self-disclosure to OFAC.
On June 5, 2023 — within three business days of Huang's discovery — DTI issued a formal account block memorandum, blocking Caspian Star as a trading counterparty and directing the DTI trading desk to freeze all pending transactions with Caspian Star. At that time, no transactions with Caspian Star were pending, as the last transaction had been completed on January 23, 2023. The blocking was implemented in DTI's counterparty management system and confirmed by the compliance team.
Following the blocking of Caspian Star, DEH's management and Board undertook an assessment of the Company's options for external counsel engagement. On the recommendation of Grandview Capital Partners LLC — the majority equity holder of DEH, holding 68.4% of DEH's equity via Grandview Energy Fund IV, LP, with Managing Partner Helena Reeves overseeing the investment — DEH engaged Calderwood & Harkness LLP on August 14, 2023, to conduct the internal investigation that is the subject of this memorandum.
IV. Legal Analysis
A. Applicable Sanctions Framework
The five subject transactions must be analyzed under the sanctions framework established by Executive Order 14024, its implementing regulations, and the International Emergency Economic Powers Act ("IEEPA").
Executive Order 14024 was signed by the President on April 15, 2021, and is titled "Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation." Among other things, the Order authorizes the Secretary of the Treasury, in consultation with the Secretary of State, to impose blocking sanctions on persons determined to operate or have operated in certain sectors of the Russian Federation economy, including the technology sector, the defense and related materiel sector, and other sectors as the Secretary of the Treasury may subsequently determine.
Section 1(a)(i) of E.O. 14024 provides that all property and interests in property of any designated person that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.
OFAC has promulgated implementing regulations under E.O. 14024 at 31 C.F.R. Part 587 — the Russian Harmful Foreign Activities Sanctions Regulations. These regulations set forth the prohibitions applicable to U.S. persons and, in certain circumstances, to non-U.S. persons engaging in transactions with blocked persons or involving blocked property. The regulations also set forth the definitions, licensing authorities, and reporting requirements applicable to the program.
Of particular relevance to this matter is OFAC's 50 Percent Rule, codified at 31 C.F.R. § 587.309. The 50 Percent Rule provides that any entity that is owned, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered a blocked person under the applicable sanctions program, regardless of whether that entity has been expressly listed on the SDN List. OFAC has published detailed guidance on the application of the 50 Percent Rule, including its "Revised Guidance on Entities Owned by Persons Whose Property and Interests in Property Are blocked" (August 13, 2014, as updated), which clarifies the methodology for calculating direct and indirect ownership interests and the obligations of persons who may be dealing with entities potentially subject to the Rule.
The practical consequence of the 50 Percent Rule is that parties are obligated to conduct sufficient due diligence to determine whether a counterparty may be owned 50 percent or more by an SDN. When such ownership exists, the counterparty is a blocked entity, and all the same prohibitions that apply to dealings with SDN-listed persons apply to dealings with that entity, even if the entity does not appear on the SDN List by name.
In the present case, the application of these principles is straightforward:
• Timur R. Kadyrov was designated as an SDN under E.O. 14024 effective March 18, 2022 (SDN Entry ID 47218; Program: RUSSIA-EO14024).
• At the time of the five subject transactions (September 12, 2022 – January 23, 2023), Kadyrov was the ultimate beneficial owner of Caspian Star Commodities DMCC, holding his ownership interest through a network of nominee shareholders, including Farid Mammadov.
• Because Kadyrov beneficially owned Caspian Star at the time of the five subject transactions, and because Kadyrov was a designated SDN as of March 18, 2022, Caspian Star was itself a blocked entity under the 50 Percent Rule (31 C.F.R. § 587.309) during the entire period of the subject transactions.
• All property and interests in property of Caspian Star that were in the United States, or that came within the possession or control of U.S. persons, were blocked and could not lawfully be transferred, paid, exported, withdrawn, or otherwise dealt in.
B. Apparent Violations
Against the foregoing legal framework, the five subject transactions constitute apparent violations of the sanctions prohibitions established by E.O. 14024 and 31 C.F.R. Part 587.
Each of the five transactions involved dealings with a blocked entity — Caspian Star, as an entity owned or controlled by SDN-listed Kadyrov. Specifically, DTI sold physical fuel oil to Caspian Star and received payment from Caspian Star in U.S. dollars, thereby engaging in transactions with property in which a blocked person had an interest.
The five USD wire transfers processed through Ridgeline National Bank, N.A. in Houston, Texas, constitute dealings by or through a U.S. financial institution with property in which a blocked person had an interest. The processing of USD-denominated wire transfers through the U.S. correspondent banking system subjects these transactions to U.S. jurisdiction, even though both the seller (DTI, a UK-registered entity) and the buyer (Caspian Star, a UAE-registered entity) are non-U.S. persons. OFAC has consistently taken the position that USD-denominated transactions that clear through U.S. financial institutions establish a sufficient U.S. nexus to support OFAC jurisdiction, and federal courts have upheld this position.
Based on the foregoing, the five transactions are apparent violations of E.O. 14024 and 31 C.F.R. Part 587. We count five apparent violations — one for each transaction involving a separate sale of fuel oil, a separate invoice, and a separate USD wire transfer through the U.S. financial system.
We note that the term "apparent violation" is used advisedly: DTI has not been formally charged with a violation by OFAC, and the ultimate determination of whether a violation has occurred rests with OFAC. However, based on the facts and the applicable law, we believe that OFAC would conclude that these transactions constitute violations of the sanctions prohibitions.
C. Penalty Exposure
The governing statute for civil penalties in this context is the International Emergency Economic Powers Act ("IEEPA"), 50 U.S.C. § 1705. IEEPA authorizes OFAC to impose civil monetary penalties for violations of sanctions administered under executive orders and regulations promulgated pursuant to the Act.
Under IEEPA, the maximum civil penalty for each violation is the greater of $356,579 (as adjusted for inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015) or twice the value of the transaction that is the basis of the violation. For the five subject transactions, the penalty calculation is as follows:
• Aggregate transaction value: $4,726,500
• Maximum statutory penalty (2 × transaction value): $9,453,000
• Per-violation maximum (inflation-adjusted): $356,579 × 5 = $1,782,895
• The "twice the transaction value" calculation yields a higher figure than the per-violation maximum, and therefore the aggregate statutory maximum is $9,453,000.
However, the statutory maximum represents the ceiling, and OFAC exercises discretion in setting actual penalty amounts. OFAC's Economic Sanctions Enforcement Guidelines, published in the Federal Register at 74 Fed. Reg. 57,593 (November 9, 2009), as amended, set forth the framework OFAC uses to determine appropriate enforcement responses, including the factors considered in aggravation and mitigation, and the methodology for calculating base penalty amounts.
Under the Enforcement Guidelines, OFAC classifies potential enforcement matters along two axes: (1) whether the matter involves a voluntary self-disclosure ("VSD") or was identified by OFAC through its own investigative efforts or other means, and (2) whether the violation is "egregious" or "non-egregious." The classification has a significant impact on the expected penalty:
• For a non-egregious case that is voluntarily self-disclosed, the base penalty amount is typically capped at one-half of the transaction value, subject to the statutory maximum. In this case, the base penalty would be calculated as: $4,726,500 × 0.50 = $2,363,250.
• The Enforcement Guidelines further provide that the settlement amount for a non-egregious, voluntarily disclosed case will generally not exceed 25% of the applicable schedule amount (i.e., the base penalty). On this basis, the calculated penalty cap would be: $4,726,500 × 0.25 = $1,181,625.
• By contrast, for a non-egregious case that is not voluntarily self-disclosed, the base penalty amount is typically the full transaction value, and the settlement amount may be significantly higher.
Based on the foregoing analysis, the Company's maximum realistic penalty exposure in a voluntary self-disclosure scenario is $1,181,625, assuming OFAC classifies the matter as non-egregious — a classification we believe is strongly supported by the facts of this case.
However, given the strength of the mitigating factors present in this case (discussed in Section V below), we believe that OFAC is likely to resolve this matter at a level substantially below the calculated penalty cap. Specifically, we believe this matter is a strong candidate for resolution through one of the following outcomes:
• A Finding of Violation without imposition of a civil monetary penalty;
• A cautionary letter; or
• A no-action determination (the most favorable outcome, but less commonly issued in cases involving multiple transactions with aggregate values exceeding $4 million).
Our assessment of the likely outcome is based on precedent involving comparable OFAC enforcement actions and settlements, the strength of the mitigating factors, and the absence of any aggravating factors. We discuss the mitigating factors in detail in Section V.
V. Mitigating Factors
The following mitigating factors are present in this matter and should weigh significantly in OFAC's assessment of the appropriate enforcement response. We present these factors in approximate order of their weight under OFAC's Enforcement Guidelines:
1. Voluntary Self-Disclosure. The Company intends to file a voluntary self-disclosure ("VSD") with OFAC before OFAC independently discovers or initiates an investigation into the violations. Under the Enforcement Guidelines, voluntary self-disclosure is explicitly identified as the single most significant mitigating factor in OFAC's enforcement calculus. OFAC has consistently rewarded voluntary self-disclosure with significantly reduced penalties, and in many cases, the filing of a VSD has resulted in the issuance of a cautionary letter or a Finding of Violation without monetary penalty in lieu of a civil penalty. The Company's decision to self-disclose reflects a genuine commitment to compliance and transparency, and we expect OFAC to accord substantial weight to this factor.
2. No Actual Knowledge. DTI had no actual knowledge of Kadyrov's beneficial ownership of Caspian Star at the time any of the five transactions were executed. DTI's counterparty records identified Farid Mammadov as the sole owner and managing director of Caspian Star, and no information available to DTI during the transaction period contradicted this representation. The beneficial ownership link between Kadyrov and Caspian Star was not publicly discoverable through commercial databases, corporate registries, or the OFAC SDN List until OFAC's May 12, 2023 supplemental update. The absence of actual knowledge is a significant mitigating factor under the Enforcement Guidelines, as it bears directly on the question of willfulness and the egregiousness of the conduct.
3. Inadvertent Conduct. The five subject transactions were routine physical commodity trades executed in the ordinary course of DTI's trading operations. The transactions involved the sale of LSFO 380 CST grade — a standard commodity in global energy markets — at market prices, on standard commercial terms, and through normal delivery channels at Fujairah, UAE. There is no indication that any of the transactions were structured or designed to evade U.S. sanctions or to obscure the involvement of a blocked person. There are no indicia of sanctions evasion, willful blindness, or any other form of intentional or reckless conduct.
4. Prompt Remediation. Upon discovering the SDN link on June 2, 2023, DTI acted with commendable speed. Derek Huang reported the finding to Marcus Whitfield, SVP & General Counsel, on the same day. DTI blocked Caspian Star as a counterparty and froze all pending transactions (though none were then pending) within three business days, on June 5, 2023. The Company engaged external counsel (Calderwood & Harkness LLP) promptly thereafter to conduct the investigation and prepare the VSD. The rapidity and decisiveness of the Company's response upon discovery of the violation demonstrates a compliance-oriented culture and a commitment to rectifying the situation without delay.
5. No Direct Benefit to the SDN. All five payments were made to Caspian Star's corporate account at Emirates Gulf Commercial Bank, Dubai. The investigation has uncovered no evidence that Kadyrov personally received any funds directly from any of the five transactions. While we acknowledge that, under OFAC's framework, the identity of the ultimate recipient is not a precondition for finding a violation, the absence of a direct personal benefit to the SDN is a relevant mitigating factor in OFAC's penalty assessment, as it reduces the severity of the harm associated with the violations.
6. Existing Compliance Program. DEH maintained a sanctions compliance program prior to the discovery of the violations, which included the following elements: (a) an automated screening platform (HCS ScreenPro) operated by a recognized compliance technology provider (Harborview Compliance Solutions Inc.); (b) a policy requiring annual re-screening of all active counterparties (DTI's Global Sanctions Compliance Policy, Version 3.2, effective January 1, 2022); (c) a designated senior compliance officer (Derek Huang, CCO) with authority and responsibility for sanctions compliance across all DEH subsidiaries; and (d) engagement of outside trade compliance counsel (Ashworth & Kline LLP) to support onboarding and due diligence functions. While the compliance program had deficiencies — including the delayed re-screening, the limitations of the HCS ScreenPro beneficial ownership module, and the absence of a requirement to re-collect beneficial ownership declarations — the existence of a pre-existing, good-faith compliance infrastructure is a recognized mitigating factor under the Enforcement Guidelines. Moreover, the Company has already undertaken significant remedial enhancements to its compliance program, which will be detailed in a separate Compliance Enhancement Memorandum.
7. Cooperation. The Company has committed to full cooperation with OFAC throughout the VSD process and any subsequent enforcement proceedings. This commitment includes the voluntary production of all relevant documents, timely and complete responses to any supplemental information requests from OFAC, and the availability of Company personnel for interviews or other information-gathering activities as may be requested by OFAC. Cooperation is a recognized mitigating factor under the Enforcement Guidelines and is expected to be accorded significant weight by OFAC.
We note that the foregoing mitigating factors are, in the aggregate, exceptionally strong. The case presents the combination of voluntary self-disclosure, absence of actual knowledge, inadvertent conduct, prompt remediation, and a pre-existing compliance program — a constellation of factors that, in our experience and based on publicly available OFAC settlement data, has historically resulted in favorable outcomes for disclosing parties. We are not aware of any significant aggravating factors that would weigh against a favorable resolution.
VI. Root Cause Summary
Our investigation has identified three root causes that, individually and in combination, contributed to the failure to detect the SDN link between Caspian Star and Kadyrov before or during the period of the subject transactions:
1. Timing Gap. DTI's initial counterparty onboarding screening of Caspian Star was conducted in July 2021, approximately eight months before OFAC's designation of Kadyrov on March 18, 2022. At the time of onboarding, Kadyrov was not designated as an SDN, and no sanctions screening — regardless of its sophistication or comprehensiveness — would have identified a Kadyrov-related risk. The timing gap between the onboarding screening and the subsequent OFAC designation is a structural limitation inherent in any compliance program that relies on point-in-time screening at onboarding; it underscores the importance of robust ongoing monitoring and re-screening processes, which are discussed further in the third root cause below.
2. Screening Platform Limitations. HCS ScreenPro's beneficial ownership module did not generate an alert for Caspian Star during the October 2022 re-screening cycle, or at any other time prior to OFAC's May 12, 2023 SDN supplemental update. This failure was attributable to gaps in the underlying data feed from public corporate registries and third-party data aggregators. The HCS ScreenPro platform relied on corporate registry data from the DMCC Free Zone Authority and selected commercial databases to populate its beneficial ownership fields; however, none of these sources reflected the Kadyrov–Caspian Star ownership link, because Caspian Star's corporate records continued to show Mammadov as the 100% owner. The platform did not incorporate intelligence from non-public or proprietary sources — such as media reports, leaked documents, or classified intelligence — that might have revealed the true beneficial ownership structure. While the limitations of the HCS ScreenPro platform were not unique to DTI (other users of the same platform would have experienced the same data gap), this root cause highlights the inherent limitations of automated screening tools that rely on public data feeds, and the need for supplementary manual due diligence procedures, particularly for counterparties operating in high-risk jurisdictions or sectors.
3. Delayed Re-Screening and Procedural Gaps. The annual re-screening of Caspian Star, which was due by July 8, 2022 under DTI's Global Sanctions Compliance Policy (Version 3.2), was delayed until October 2022 due to staffing shortages on DTI's London-based compliance team. While the delay itself did not alter the outcome — the October 2022 re-screening also returned no hits, for the reasons discussed above — it represents a departure from the Company's own compliance policies and is indicative of broader resource constraints within the compliance function. Additionally, even during the October 2022 re-screening, no match was generated because the SDN List at that time listed Kadyrov individually but did not expressly identify Caspian Star as an entity owned or controlled by him. Furthermore, DTI's policy (Version 3.2) did not require the re-collection of beneficial ownership declarations from counterparties absent a counterparty-reported change in ownership. This procedural gap meant that DTI continued to rely on the original July 2021 KYC documentation — including Mammadov's representation that he was the sole owner of Caspian Star — without any mechanism for independently verifying that the ownership structure had not changed. The absence of a periodic beneficial ownership re-verification requirement is a significant procedural deficiency that should be addressed in the Company's remedial compliance enhancements.
It is worth noting that the Borwick & Thatcher audit flag in the FY 2022 management letter (dated January 30, 2023) was related exclusively to counterparty credit risk, not to sanctions compliance. The flag was prompted by Caspian Star's failure to provide audited financial statements, a factor relevant to DTI's credit exposure but not directly relevant to sanctions screening. Nevertheless, the audit flag fortuitously triggered the enhanced compliance review that Derek Huang initiated on March 6, 2023, which in turn led to his manual discovery of the OFAC SDN supplemental update on June 2, 2023. The discovery was thus the product of Huang's prudent decision to extend the scope of the enhanced review beyond credit risk to encompass sanctions compliance — a decision that, while not required by DTI's existing policies, reflected sound professional judgment.
The root causes identified above should inform the development of the Company's remedial compliance program enhancements, which will be addressed in a separate Compliance Enhancement Memorandum. We anticipate that the remedial measures will include, at a minimum: (a) implementation of a more frequent (semi-annual or event-driven) re-screening cycle; (b) adoption of enhanced beneficial ownership verification procedures, including periodic re-collection of beneficial ownership declarations from active counterparties; (c) supplementation of the HCS ScreenPro platform with additional data sources and, potentially, evaluation of alternative screening providers; and (d) augmentation of the compliance team's staffing levels to ensure timely performance of re-screening and other compliance functions.
VII. Recommendation
Based on the findings of this investigation and the legal analysis set forth above, we make the following recommendations:
1. File a Voluntary Self-Disclosure with OFAC. We recommend that the Company proceed with filing a VSD with OFAC as soon as practicable, targeting a filing date of no later than October 15, 2023. The VSD should be prepared in accordance with OFAC's published guidance on voluntary self-disclosures, including the requirements set forth in 31 C.F.R. Part 501, Appendix A. The VSD should provide a comprehensive narrative of the relevant facts, including the transaction details, the circumstances of discovery, and the remedial measures undertaken and planned. The initial VSD may be filed as an "initial notification," with a more detailed "final narrative" to follow within a reasonable time thereafter, consistent with OFAC's procedural expectations. The combination of voluntary self-disclosure and the strong mitigating factors present in this matter makes this case a strong candidate for resolution without a civil monetary penalty, or with a substantially reduced penalty. In our assessment, the most likely outcomes include a Finding of Violation without a penalty, a cautionary letter, or a no-action determination.
2. Implement Remedial Compliance Measures. We recommend that the Company implement the remedial compliance measures to be outlined in a separate Compliance Enhancement Memorandum, which will be provided under separate cover. As noted above, we anticipate that the remedial measures will address the root causes identified in Section VI, including enhanced re-screening frequency, improved beneficial ownership verification procedures, augmented screening data sources, and additional compliance staffing. The implementation of robust remedial measures will be an important component of the VSD, as OFAC places significant weight on the adequacy of remedial steps taken by disclosing parties.
3. Preserve All Relevant Documents. We recommend that the Company implement and maintain a document preservation protocol for all documents related to the Caspian Star counterparty relationship, including all screening records, wire transfer records, KYC documentation, internal communications, compliance reports, and any other documents relevant to the five subject transactions or the subsequent discovery and remediation process. Preservation should be maintained consistent with OFAC's recordkeeping requirements under 31 C.F.R. § 501.601, which generally require the maintenance of records for at least five years from the date of the transaction or other relevant event. The Company should issue a litigation hold notice to all relevant custodians to ensure that no documents are destroyed or altered.
4. Coordinate with Grandview Capital Partners. DEH's parent context requires careful consideration of any reputational or portfolio-level implications. Grandview Capital Partners LLC (600 Lexington Avenue, Suite 2200, New York, NY 10022) holds 68.4% of DEH's equity via Grandview Energy Fund IV, LP. Managing Partner Helena Reeves should be briefed on the findings of this investigation and the Company's intended course of action at the appropriate time, consistent with privilege considerations and subject to Priya Anand's direction on the scope and timing of such communications. Any disclosure to Grandview should be structured to preserve the attorney-client privilege and should be limited to information necessary for Grandview to fulfill its obligations as majority equity holder.
We are available to discuss the findings and recommendations set forth in this memorandum at your convenience and stand ready to assist in the preparation of the VSD filing and the implementation of the recommended remedial measures.
Appendix: Key Factual Reference
The following reference information is compiled for the convenience of the engagement team and summarizes key identifying details for the principal entities involved in this matter.
Dunmore Energy Holdings Ltd. ("DEH")
• Registered Address: 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002, Cayman Islands
• Principal Office: 1200 Travis Street, Suite 3400, Houston, TX 77002
• Employer Identification Number (EIN): 98-1347562
• FY 2022 Revenue: $2.14 billion
• Employees: Approximately 3,800 worldwide
• Industry: Oil & gas exploration and production; renewable energy development (Upstream and midstream assets across Gulf of Mexico, West Africa, Southeast Asia; solar and wind projects in U.S. Southwest)
• Majority Equity Holder: Grandview Capital Partners LLC (68.4% via Grandview Energy Fund IV, LP)
Dunmore Trading International Ltd. ("DTI")
• Registered Address: 25 Finsbury Square, London EC2A 1PQ, United Kingdom
• Companies House No.: 12849371
• Principal Activity: Physical crude oil and refined products trading (crude oil, fuel oil, gasoil, LNG)
• Relationship to DEH: Wholly owned subsidiary
Caspian Star Commodities DMCC ("Caspian Star")
• Registered Address: Unit 4412, Jumeirah Business Centre 1, Cluster G, Jumeirah Lakes Towers, Dubai, UAE
• DMCC Commercial License No.: JLT-11847
• Nominal Owner (per corporate records): Farid Mammadov (100%)
• Ultimate Beneficial Owner: Timur R. Kadyrov (SDN Entry ID 47218)
Timur R. Kadyrov
• Date of Birth: September 7, 1971
• Nationality: Russian Federation
• SDN Entry ID: 47218
• Program: RUSSIA-EO14024
• Designation Date: March 18, 2022
Ridgeline National Bank, N.A.
• Address: 700 Louisiana Street, Suite 4800, Houston, TX 77002
•