1016-00009 · Dunmore Energy Holdings · OFAC Voluntary Self-Disclosure

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PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 1750 Pennsylvania Avenue NW, Suite 800 Washington, DC 20006

MEMORANDUM

FROM: Conrad Reeves, Senior Counsel, Export Controls & Sanctions, Calderwood & Harkness LLP

TO: Victoria Chambers, Responsible Partner, White Collar & Investigations Jasmine Thornton, Lead Associate, White Collar & Investigations

DATE: May 20, 2023

RE: OFAC Economic Sanctions Enforcement Guidelines — Penalty Framework & Mitigating Factors Analysis Applicable to Dunmore Energy Holdings Ltd.

MATTER NO.: 1016-00009

CLIENT: Dunmore Energy Holdings Ltd. ("Dunmore" or "DEH")

COPIES TO FILE: Howard Quinn (Billing Partner); Liam Donahue (Working Associate)

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I. Executive Summary

The purpose of this memorandum is to analyze the Office of Foreign Assets Control ("OFAC") Economic Sanctions Enforcement Guidelines (the "Guidelines") and the applicable civil penalty framework as they bear upon the apparent violations committed by Dunmore Energy Holdings Ltd. ("Dunmore" or "DEH") and its subsidiaries, and to assess the mitigating factors that support a favorable enforcement outcome — ideally the issuance of a Cautionary Letter or a No Action Letter rather than the imposition of a civil monetary penalty.

Dunmore is preparing to file a voluntary self-disclosure ("VSD") with OFAC's Office of Compliance and Enforcement. The VSD is anticipated to be submitted on or about June 1, 2023, in connection with transactions conducted by Dunmore Trading International Ltd. ("DTI"), Dunmore's Dubai-based subsidiary (DIFC License No. CL-4827). The transactions at issue involved counterparties with ties to Volkhov Industrial Group JSC ("Volkhov" or "VIG"), an entity that was subject to OFAC Directive 2 sectoral sanctions under Executive Order 13662, as designated on November 15, 2019, and subsequently made subject to full blocking sanctions when it was added to the Specially Designated Nationals and blocked Persons List ("SDN List") on April 6, 2022, pursuant to Executive Order 14024.

It is important to note that the OFAC matter proceeds in parallel with a Department of Justice ("DOJ") National Security Division inquiry that was opened on April 19, 2022, following issuance of grand jury subpoena GJ No. 22-418 in the U.S. District Court for the District of Columbia (Grand Jury 22-2). Dunmore has been cooperating fully with DOJ since an initial proffer session held on July 15, 2022, and continues to do so. Coordination between the OFAC VSD and the DOJ cooperation strategy is essential and is addressed in this memorandum.

Bottom-Line Assessment. Based on our analysis of the Guidelines and the applicable General Factors, multiple significant mitigating factors strongly favor a favorable OFAC outcome for Dunmore. These include: (1) the filing of a voluntary self-disclosure; (2) extensive, proactive cooperation with both OFAC and DOJ; (3) comprehensive remediation of compliance deficiencies, including the adoption of an Enhanced Sanctions & Export Controls Compliance Program; (4) voluntary disgorgement of $8.75 million in estimated profits derived from the tainted transactions; and (5) the prompt separation of the individuals most directly responsible for the misconduct. We recommend that Dunmore proceed with filing the VSD on the planned date of June 1, 2023. Based on our assessment, the most likely outcome is a Cautionary Letter with no civil monetary penalty. Even in an adverse scenario where OFAC elects to impose a penalty, the mitigating factors and VSD credit should reduce any such penalty substantially.

II. Factual Background Relevant to OFAC Analysis

A. The Sanctions Programs at Issue

The apparent violations implicate two principal U.S. economic sanctions programs targeting the Russian Federation, both administered by OFAC.

Directive 2 Under Executive Order 13662. On March 20, 2014, the President issued Executive Order 13662, which authorized the imposition of sectoral sanctions on certain sectors of the Russian economy, including the energy sector. OFAC subsequently issued Directive 2 under E.O. 13662, which prohibits, among other things, certain dealings in new debt of longer than 90 days maturity, as well as new equity, of persons determined to be operating in the energy sector of the Russian Federation and designated on OFAC's Sectoral Sanctions Identifications List ("SSI List"). Volkhov Industrial Group JSC was designated under Directive 2 on November 15, 2019, as an entity operating in the energy sector of the Russian Federation. The restrictions imposed under Directive 2 are narrower in scope than full SDN blocking sanctions; they do not impose a comprehensive prohibition on all dealings with the designated entity, but rather target specific categories of transactions and financial instruments.

Executive Order 14024. On April 15, 2021, the President issued Executive Order 14024, entitled "Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation," which authorized the imposition of full blocking sanctions on a broader range of Russian persons and entities. On April 6, 2022 — in the wake of Russia's full-scale invasion of Ukraine on February 24, 2022 — OFAC added Volkhov Industrial Group JSC to the SDN List pursuant to E.O. 14024. Upon designation on the SDN List, all property and interests in property of Volkhov that are in the United States, or within the possession or control of U.S. persons, became blocked, and U.S. persons became generally prohibited from engaging in any transactions or dealings with Volkhov.

Implementing Regulations and Statutory Authority. The implementing regulations for the Russia-related sanctions programs are set forth at 31 C.F.R. Part 589 (Ukraine/Russia-Related Sanctions Regulations). The statutory authority for both E.O. 13662 and E.O. 14024 derives from the International Emergency Economic Powers Act ("IEEPA"), 50 U.S.C. §§ 1701–1706, which grants the President broad authority to deal with unusual and extraordinary threats to the national security, foreign policy, and economy of the United States. IEEPA also provides the statutory basis for the civil and criminal penalties associated with violations of the sanctions programs, as discussed in greater detail in Section III below.

B. The Apparent Violations

Based on Calderwood & Harkness's internal investigation, supplemented by the forensic accounting analysis conducted by Ridgeline Advisory Group LLC (Engagement No. RAG-2022-0319; final report delivered April 1, 2023), we have identified three categories of apparent violations.

1. Crude Oil Swap Transactions

Between June 2020 and February 2022, DTI's Dubai trading desk executed fourteen (14) crude oil swap transactions with a combined notional value of approximately $218.7 million. These transactions were executed with two counterparties:

(a) Petronova Trading FZE, managed by Sergei Volkov, registered at Office 1407, Al Shafar Tower, Dubai Internet City, Dubai, UAE; and

(b) Zenith Petroleum DMCC, managed by Farhan Qureshi, registered at Unit 2201, Jumeirah Bay Tower X2, Cluster X, Jumeirah Lakes Towers, Dubai, UAE.

The Ridgeline Advisory Group forensic analysis determined that nine (9) of the fourteen (14) crude oil swap transactions — representing approximately $156.3 million in aggregate notional value — involved crude oil that was ultimately sourced from, or destined for, entities controlled by or affiliated with Volkhov Industrial Group JSC. These nine transactions potentially violated the prohibitions set forth in Directive 2 under E.O. 13662, which restricted certain financial dealings with Volkhov during the relevant period. The remaining five transactions, totaling approximately $62.4 million in notional value, involved counterparties and crude oil cargoes that the forensic analysis was unable to trace to Volkhov-connected entities, although the due diligence deficiencies surrounding these transactions remain a concern.

Sergei Volkov — the principal of Petronova Trading FZE — is the nephew of Alexei Volkov, the Chairman of Volkhov Industrial Group JSC. This familial relationship was identified during the forensic investigation and appears not to have been detected by DTI's compliance function prior to the April 11, 2022 screening refresh, a fact that underscores the deficiencies in DTI's third-party due diligence processes.

2. Oilfield Equipment Exports

Between August 2020 and January 2022, DTI facilitated the export of approximately $12.4 million in oilfield drilling equipment and components to end users in the Russian Federation. The equipment at issue is classified under Export Administration Regulations ("EAR") Export Control Classification Numbers ("ECCNs") 2B350 and 2B999, both of which are controlled items subject to export licensing requirements. The exports were routed through Caspian Logistik GmbH, a German logistics intermediary managed by Klaus Weidemann and registered at Mönckebergstraße 22, 20095 Hamburg, Germany.

These exports potentially implicate both OFAC prohibitions on certain dealings involving the Russian energy sector and EAR §746.5 restrictions on exports to Russia administered by the Bureau of Industry and Security ("BIS"). The BIS-related aspects of these transactions are addressed in a companion memorandum dated May 1, 2023, which analyzes whether a separate VSD to BIS is warranted. For purposes of this OFAC-focused analysis, the oilfield equipment exports are relevant primarily insofar as they involve items that flowed to Volkhov-affiliated end users, potentially in contravention of the Directive 2 restrictions.

3. Structured Payments

Between March 2020 and March 2022, DTI routed approximately $34.2 million across 127 individual wire transfers through intermediary accounts maintained at Crescent Commercial Bank PJSC, a financial institution headquartered in Dubai. The Ridgeline Advisory Group forensic analysis concluded that these wire transfers were structured in a manner designed to obscure the ultimate beneficial ownership of the receiving parties, which included entities connected to Volkhov Industrial Group JSC.

The structured nature of these payments is particularly concerning from an enforcement perspective. The use of multiple smaller transfers routed through intermediary accounts suggests a deliberate effort to evade detection by compliance screening systems. The structuring pattern is documented in detail in the Ridgeline Advisory Group final report at Section 4.3, which identifies several hallmarks of deliberate sanctions evasion, including the use of shell companies, layered transactions, and obscured beneficial ownership chains.

C. Responsible Individuals

Our investigation has identified the following individuals as bearing primary responsibility for the apparent violations:

Derek Hargrave, Former President of DTI. Mr. Hargrave supervised DTI's trading desk operations in Dubai and bore ultimate management responsibility for the trading relationships with Petronova Trading FZE and Zenith Petroleum DMCC. He was placed on administrative leave by Dunmore on July 1, 2022, following the conclusion of his initial interview with Calderwood & Harkness. He was formally separated from the company effective October 1, 2022. Mr. Hargrave has retained personal counsel, James Overstreet of Overstreet & McClain PLLC (Dallas, Texas).

Natasha Sorokin, Former Senior Trader at DTI. Ms. Sorokin served as the primary point of contact between DTI and Sergei Volkov at Petronova Trading FZE. Documentary evidence — including email communications, Meridian Services Inc. messages, and calendar entries recovered during the e-discovery process — indicates that Ms. Sorokin was aware of the Volkhov connection to the crude oil swap transactions. She was placed on administrative leave on May 16, 2022, and formally separated from Dunmore effective September 15, 2022. Ms. Sorokin has retained personal counsel, Philip Keane of Wexford Keane LLP (Washington, D.C.).

Gerald Fisk, Former Chief Compliance Officer. Mr. Fisk served as Dunmore's Chief Compliance Officer during the relevant period and was responsible for overseeing the company's sanctions compliance program, including OFAC screening protocols and third-party due diligence. Our investigation revealed significant supervisory compliance failures attributable to Mr. Fisk, including the failure to implement adequate screening of DTI's counterparties, the failure to investigate red flags that should have been detected through routine due diligence, and the failure to ensure that DTI's trading desk personnel received adequate sanctions compliance training. These failures are documented in detail in the August 15, 2022 memorandum prepared by Nicholas Ferreira. Mr. Fisk departed Dunmore on June 10, 2022. He has retained personal counsel, Catherine Blackthorn of Blackthorn & Associates LLP (Houston, Texas).

Omar Al-Rashidi, Head of Middle East Operations at DTI. Mr. Al-Rashidi served as the Head of Middle East Operations and had oversight of DTI's regional business activities. He has been cooperating with the internal investigation as a cooperating witness and has provided valuable information regarding the trading desk operations and the relationships with Petronova Trading FZE and Zenith Petroleum DMCC.

Yves Leclerc, Director of Logistics & Shipping at DTI. Mr. Leclerc facilitated the oilfield equipment shipments routed through Caspian Logistik GmbH to end users in Russia. His role in the logistics chain is a subject of ongoing investigation.

Rajesh Malhotra, Controller at DTI. Mr. Malhotra was involved in the payment structuring identified in the Ridgeline Advisory Group analysis. The extent of his awareness of the sanctions implications of the structured payment arrangements is a matter under investigation.

D. Discovery of the Violations

The timeline of events leading to the discovery and investigation of the apparent violations is as follows:

April 6, 2022. OFAC added Volkhov Industrial Group JSC to the SDN List pursuant to E.O. 14024, as part of a broader package of sanctions imposed in response to Russia's invasion of Ukraine.

April 11, 2022. Then-Chief Compliance Officer Gerald Fisk conducted a routine OFAC screening refresh following the April 6, 2022 SDN List update. The refresh identified potential Volkhov exposure through DTI's trading relationship with Petronova Trading FZE. Fisk immediately notified Dunmore's General Counsel, Marcus Wellbourne, of the potential exposure.

April 14, 2022. Calderwood & Harkness LLP was retained by Dunmore to conduct an internal investigation and provide legal advice regarding sanctions compliance. Victoria Chambers was assigned as the responsible partner for the engagement.

April 19, 2022. The DOJ National Security Division issued grand jury subpoena GJ No. 22-418 in the U.S. District Court for the District of Columbia (Grand Jury 22-2), formally opening the DOJ inquiry into Dunmore's transactions. The subpoena sought records relating to DTI's transactions with Petronova Trading FZE, Zenith Petroleum DMCC, and Caspian Logistik GmbH, among other entities.

April 20, 2022. Calderwood & Harkness issued a litigation hold notice to Dunmore and all relevant custodians, directing the preservation of all documents, communications, and electronically stored information potentially relevant to the investigation.

May 2, 2022. Ridgeline Advisory Group LLC was retained to conduct a forensic accounting analysis of the transactions at issue (Engagement No. RAG-2022-0319).

May 2022 – April 2023. Calderwood & Harkness, in coordination with Ridgeline Advisory Group and Nexagen Analytics Inc. (e-discovery, Project No. NX-DEH-2204), conducted a comprehensive internal investigation. The investigation included the review of approximately 1.8 million documents, 47 witness interviews, and an extensive forensic analysis of DTI's financial records and transaction data.

April 1, 2023. Ridgeline Advisory Group delivered its final forensic accounting report, which formed the factual basis for the VSD narrative.

III. OFAC Penalty Framework — Legal Analysis

A. Statutory Maximum Penalties

The statutory authority for civil monetary penalties in connection with violations of OFAC-administered sanctions programs derives from IEEPA, 50 U.S.C. § 1705. As amended by the International Emergency Economic Powers Enhancement Act of 2007, IEEPA authorizes the imposition of civil penalties for violations of sanctions regulations at amounts up to the greater of: (i) $356,579 per violation (as adjusted for inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015), or (ii) twice the amount of the transaction that is the basis of the violation.

The theoretical maximum penalty exposure for Dunmore is substantial. If each of the nine tainted crude oil swap transactions is treated as a separate violation, and the "twice the transaction value" measure is applied, the aggregate theoretical maximum for the crude oil swap violations alone would be approximately $312.6 million (i.e., 2 × $156.3 million). If each of the 127 structured wire transfers is treated as a separate violation, the per-violation penalty exposure multiplies further, potentially adding an additional $68.4 million (i.e., 2 × $34.2 million) to the theoretical maximum. The oilfield equipment exports ($12.4 million) would add approximately $24.8 million to the theoretical exposure (i.e., 2 × $12.4 million).

In total, the theoretical statutory maximum penalty exposure could exceed $400 million. However, it is critical to note that OFAC rarely, if ever, assesses penalties at or near the theoretical statutory maximum. OFAC exercises substantial discretion under the Guidelines in determining the appropriate enforcement response, and the actual penalty — if any — is typically a small fraction of the theoretical maximum, particularly in cases involving voluntary self-disclosures and significant mitigating factors. The theoretical maximum serves primarily as a ceiling against which the actual penalty calculus is performed.

B. The OFAC Economic Sanctions Enforcement Guidelines

OFAC's approach to enforcement and penalty calculation is governed by the Economic Sanctions Enforcement Guidelines, codified at 31 C.F.R. Part 501, Appendix A. The Guidelines establish a comprehensive framework for determining the appropriate enforcement response to apparent violations of U.S. economic sanctions, ranging from no action to the imposition of substantial civil monetary penalties.

Overview of the Framework. Under the Guidelines, OFAC determines the appropriate enforcement response based on a two-step process. First, OFAC calculates a "base penalty amount" using the methodology described below. Second, OFAC adjusts the base penalty amount upward or downward based on its consideration of the 11 "General Factors" enumerated in the Guidelines, which are discussed in detail in Section IV of this memorandum. The Guidelines are intended to provide transparency regarding OFAC's enforcement process and to encourage voluntary compliance, self-disclosure, and cooperation.

Two-Track Framework. The Guidelines establish a bifurcated penalty framework that turns on two critical determinations: (1) whether the subject of the enforcement action filed a voluntary self-disclosure, and (2) whether the case is classified as "egregious" or "non-egregious." These two variables define four potential tracks:

Track 1 — With VSD (Non-Egregious Case): The base penalty amount is one-half of the "transaction value" of the apparent violation(s), capped at the applicable statutory maximum per violation. In non-egregious cases involving a VSD, OFAC will typically not pursue a civil monetary penalty. Instead, OFAC will typically issue a Cautionary Letter or a No Action Letter. This is the most favorable outcome track and the one we are targeting for Dunmore.

Track 2 — With VSD (Egregious Case): The base penalty amount is the applicable statutory maximum per violation. However, the VSD results in a 50% reduction in the base penalty amount, which provides significant credit even in the most serious cases.

Track 3 — Without VSD (Non-Egregious Case): The base penalty is the "applicable schedule amount," which is determined based on a sliding scale set forth in the Guidelines keyed to the transaction value. Penalties under this track are typically more substantial than under Track 1.

Track 4 — Without VSD (Egregious Case): The base penalty is the applicable statutory maximum per violation. This track yields the most severe penalties and applies in cases where the apparent violation is egregious and the subject has not filed a VSD.

Egregious vs. Non-Egregious Classification. The determination of whether an apparent violation is "egregious" or "non-egregious" is a threshold assessment that has an outsized impact on the penalty calculus. OFAC makes this determination by weighing the 11 General Factors on balance. No single factor is necessarily dispositive. The Guidelines describe an "egregious case" as one in which the General Factors, on balance, present a situation in which the apparent violation represents a particularly serious threat to U.S. national security or foreign policy objectives, or involves willful or reckless conduct.

Application to Dunmore. Based on our analysis of the 11 General Factors, set forth in detail in Section IV below, we conclude that the weight of the factors supports a non-egregious classification for Dunmore's case. While certain factors present aggravating elements — particularly the structured payment activity and the apparent awareness of certain individuals on the trading desk — the preponderance of factors, taken as a whole, weigh in Dunmore's favor. The company's corporate-level leadership was not complicit in the violations, the company promptly self-reported and cooperated extensively, it implemented comprehensive remediation, it voluntarily disgorged profits, and it separated the responsible individuals. These considerations, taken together, strongly support a non-egregious classification.

Combined with the filing of a voluntary self-disclosure, a non-egregious classification would place Dunmore on Track 1 — the most favorable enforcement track — under which OFAC would typically not pursue a civil monetary penalty and would instead issue a Cautionary Letter or No Action Letter.

C. Settlement Framework and OFAC Dispositions

The Guidelines contemplate a range of possible enforcement dispositions, from the most favorable to the most severe:

(1) No Action. OFAC determines that the apparent violation either did not occur, does not warrant further action, or is de minimis. OFAC takes no enforcement action and may or may not issue a formal letter so indicating.

(2) Cautionary Letter. OFAC issues a letter informing the subject of the apparent violation and cautioning the subject regarding future compliance. A Cautionary Letter does not constitute a final agency determination that a violation occurred. It is not a penalty. The issuance of a Cautionary Letter is the most common outcome in cases involving voluntary self-disclosures of non-egregious violations.

(3) Finding of Violation. OFAC issues a formal finding that a violation occurred, but does not impose a civil monetary penalty. A Finding of Violation is a more serious enforcement response than a Cautionary Letter, as it constitutes an official agency determination that a violation occurred.

(4) Civil Monetary Penalty. OFAC imposes a monetary penalty, either through settlement or through contested administrative litigation. Settlement is by far the more common path; contested proceedings are rare.

In cases involving a VSD where the violations are classified as non-egregious, OFAC has historically resolved matters with Cautionary Letters or No Action Letters in the substantial majority of cases. This pattern is documented in OFAC's published enforcement actions and annual enforcement statistics. While past enforcement outcomes do not guarantee a particular result in any individual case, they provide useful benchmarks for assessing the likely outcome. We analyze relevant enforcement precedents in Section VI below.

IV. Analysis of the 11 General Factors

The Guidelines set forth 11 General Factors that OFAC considers in determining the appropriate enforcement response and in classifying an apparent violation as egregious or non-egregious. Below, we analyze each factor as applied to Dunmore's case, assessing whether each factor weighs as mitigating, aggravating, or neutral.

A. Factor 1 — Willful or Reckless Disregard vs. Mere Negligence

The first General Factor considers whether the apparent violation involved willful or reckless conduct, or whether it resulted from mere negligence or inadvertence. This factor is often the most significant in the egregious/non-egregious determination.

Analysis. The conduct of the individuals on DTI's trading desk — particularly Derek Hargrave and Natasha Sorokin — may rise above mere negligence. Documentary evidence recovered during the investigation suggests that Sorokin was aware of Sergei Volkov's connection to Volkhov Industrial Group JSC and may have deliberately structured certain transactions to avoid triggering compliance screening protocols. Similarly, Hargrave, as President of DTI, exercised supervisory authority over the trading desk and appears to have been at least recklessly indifferent to the sanctions risks associated with the Petronova and Zenith trading relationships.

However, it is essential to distinguish between the culpability of individual actors and the institutional culpability of Dunmore as an entity. As an institutional matter, Dunmore's senior management at corporate headquarters — including CEO James Renshaw, CFO Eleanor Whitfield, and General Counsel Marcus Wellbourne — were not aware of the Volkhov connections underlying the DTI trading relationships. The compliance failures were concentrated within DTI's Dubai operations and the compliance function under Gerald Fisk. Once Dunmore's corporate leadership became aware of the potential violations (following Fisk's screening refresh on April 11, 2022, and the subsequent notification to General Counsel Wellbourne), the company acted promptly to investigate, retain outside counsel, and prepare for voluntary disclosure.

Mitigating Characterization. We recommend that the VSD narrative characterize the institutional conduct as negligent — reflecting a failure of compliance systems and supervisory controls — rather than willful or reckless. The willfulness or recklessness of individual actors (Hargrave, Sorokin, and possibly Fisk) should be distinguished from the corporate-level posture. OFAC's assessment of this factor should focus on the entity as a whole, and the entity's prompt, good-faith response upon discovery strongly supports a characterization closer to negligence at the institutional level. We acknowledge, however, that OFAC may attribute some degree of institutional responsibility based on the individual actors' knowledge, which presents a risk factor that we must address forthrightly in the VSD narrative.

Assessment: Slightly Aggravating to Neutral at the institutional level, depending on how OFAC weighs the individual actors' knowledge.

B. Factor 2 — Awareness of Conduct at Issue

The second General Factor considers whether the entity's management was aware of the conduct at issue, including whether the conduct was part of a pattern or practice, and whether there were prior red flags.

Analysis. Dunmore's corporate headquarters, located at 1200 McKinney Street, Suite 3400, Houston, Texas, was not aware of the Volkhov connections underlying the DTI trading relationships until Gerald Fisk conducted the OFAC screening refresh on April 11, 2022, and notified General Counsel Marcus Wellbourne. Prior to that date, the Volkhov exposure was not reported to or known by Dunmore's Board of Directors, C-suite executives, or General Counsel.

This is not to say that red flags were entirely absent. Gerald Fisk's compliance failures included, among other things, a failure to investigate and escalate certain indicators that should have prompted further scrutiny of the Petronova and Zenith trading relationships. These failures are documented in detail in the August 15, 2022 memorandum prepared by Nicholas Ferreira, which catalogues several instances in which Fisk received information that could have led to earlier detection of the Volkhov connections but failed to act on it. These include: (i) a September 2020 request from DTI's back office for guidance on an unusual payment routing that Fisk dismissed without investigation; (ii) a December 2020 adverse media hit on Sergei Volkov that was flagged by the automated screening tool but cleared by Fisk without further review; and (iii) a March 2021 inquiry from Crescent Commercial Bank PJSC regarding the beneficial ownership structure of certain payment recipients that Fisk failed to follow up on.

Mitigating. Despite the existence of these red flags at the compliance function level, Dunmore's senior management took immediate and decisive action upon learning of the potential violations. Within three days of Fisk's notification to General Counsel, Dunmore had retained outside counsel (Calderwood & Harkness LLP), and the company subsequently initiated a comprehensive internal investigation, engaged forensic accountants and e-discovery specialists, placed responsible individuals on administrative leave, and began preparing for voluntary disclosure. This prompt and thorough response demonstrates that Dunmore's senior leadership had no tolerance for sanctions violations once the issue came to their attention.

Assessment: Mitigating on the whole, given the prompt response by senior management upon discovery, despite the red flags that Fisk failed to escalate.

C. Factor 3 — Harm to Sanctions Program Objectives

The third General Factor considers the actual or potential harm to the objectives of the sanctions program at issue.

Analysis. This factor requires a nuanced assessment, as the nature and severity of the harm varies across the three categories of apparent violations.

Crude Oil Swap Transactions ($156.3 million tainted notional). The transactions at issue occurred during a period (June 2020 through February 2022) when Volkhov was subject to Directive 2 sectoral sanctions — not full SDN blocking sanctions. The Directive 2 restrictions are narrower in scope and target specific financial instruments and transactions rather than imposing a comprehensive prohibition on all commercial dealings. The crude oil swap transactions were commercial in nature and did not involve weapons, military materiel, or other items with direct military end uses. While any violation of sanctions undermines the integrity of the sanctions regime, the harm to U.S. foreign policy objectives is less severe in the case of sectoral sanctions violations than in cases involving full blocking sanctions or military-related transactions.

Only a narrow period — April 6 through approximately April 19, 2022 — implicated the stricter SDN blocking sanctions that took effect when Volkhov was added to the SDN List. Our investigation has identified no transactions that were executed by DTI with Volkhov-connected counterparties during this narrow window, although the Ridgeline analysis did identify one crude oil cargo that was in transit during this period and may not have been fully wound down in compliance with the blocking requirements. This is addressed separately in the VSD narrative.

Oilfield Equipment Exports ($12.4 million). The oilfield equipment exports are more concerning from a harm perspective, as they involved dual-use items classified under ECCNs 2B350 and 2B999 that flowed to end users in Russia. While these items are primarily commercial in nature (drilling equipment and components), they have potential dual-use applications and are subject to export controls for reasons related to regional stability, anti-terrorism, and foreign policy. The harm to sanctions program objectives is heightened by the routing of these exports through an intermediary (Caspian Logistik GmbH) in a manner that may have been designed to obscure the ultimate end users. However, it bears noting that the oilfield equipment exports fall primarily within BIS jurisdiction under the EAR, and OFAC's assessment of harm may be tempered by the fact that the principal regulatory authority for export controls on these items resides with BIS rather than OFAC.

Structured Payments ($34.2 million). The structured payment activity is the most concerning element from a harm-to-program-objectives perspective. The deliberate structuring of 127 wire transfers to obscure beneficial ownership suggests an intentional effort to circumvent sanctions compliance mechanisms. Such conduct directly undermines the effectiveness of the U.S. sanctions regime by frustrating the screening and due diligence processes that financial institutions and commercial entities rely upon to identify prohibited transactions. OFAC is likely to view the structured payments as an aggravating factor under this General Factor.

Assessment: Mixed. The crude oil swap transactions present moderate harm (sectoral sanctions, commercial nature), the oilfield equipment exports present moderate-to-elevated harm (dual-use items, obfuscated end users), and the structured payments present elevated harm (deliberate concealment). On balance, this factor is likely to be viewed as slightly aggravating.

D. Factor 4 — Individual Characteristics of the Subject

The fourth General Factor considers the individual characteristics of the entity, including its size, sophistication, commercial experience, and history with OFAC.

Analysis. Dunmore Energy Holdings Ltd. is a large, commercially sophisticated enterprise. The company reported $4.87 billion in revenue for fiscal year 2021 and employs approximately 3,200 people worldwide. Dunmore is domiciled in the Cayman Islands and maintains operational headquarters in Houston, Texas. The company is privately held, with ownership distributed among Greystone Capital Partners Fund IV, L.P. (62.5%), management (22.5%), and Thornbury Infrastructure Fund II, L.P. (15%).

As a large, sophisticated commercial enterprise with significant international operations — including subsidiaries and operations in the Cayman Islands, the United Arab Emirates, the United States, Germany, and Nigeria — Dunmore is the type of entity that OFAC would expect to maintain a robust, well-resourced sanctions compliance program. OFAC may weigh Dunmore's size and sophistication as an aggravating factor, reasoning that a company of this scale and international reach should have had the resources and expertise to implement adequate compliance controls and detect the Volkhov connections earlier.

Counter-Argument. While Dunmore's size and sophistication raise expectations regarding compliance, the company has demonstrated its commitment to meeting those expectations through its extensive post-discovery remediation. Dunmore has invested over $31 million in investigation and remediation costs (discussed further under Factor 10) and has engaged leading compliance consultants to design and implement an Enhanced Sanctions & Export Controls Compliance Program that meets the highest industry standards. The company's remedial response reflects the actions of a sophisticated entity that takes its compliance obligations seriously and is willing to invest substantial resources to correct identified deficiencies.

Additionally, Dunmore has no prior history of OFAC violations or enforcement actions, which is a significant mitigating consideration. This is the company's first encounter with OFAC enforcement, and the absence of prior violations suggests that the compliance failures at DTI were aberrational rather than systemic or reflective of a broader culture of non-compliance.

Assessment: Slightly Aggravating (due to size and sophistication creating heightened expectations), tempered by the absence of prior violations and the significant remedial response.

E. Factor 5 — Compliance Program

The fifth General Factor considers the existence, nature, and adequacy of the entity's compliance program at the time of the apparent violation, and any steps taken to enhance the compliance program after the violation.

1. Pre-Existing Compliance Program (As of April 2022)

The pre-existing compliance program in place at Dunmore and DTI during the relevant period was assessed in the November 15, 2022 memorandum prepared by Conrad Reeves and Jasmine Thornton. That assessment identified significant deficiencies in the following areas:

(a) OFAC Screening Protocols. DTI's screening protocols were inadequate in several respects. The automated screening tool was not calibrated to capture indirect ownership relationships or to flag potential beneficial ownership connections to sanctioned parties. The fuzzy-matching algorithms employed by the screening software used thresholds that were insufficiently sensitive to detect transliterated Russian names. Screening was conducted only at the point of onboarding new counterparties and was not systematically refreshed when OFAC updated the SDN or SSI Lists.

(b) Third-Party Due Diligence. DTI's third-party due diligence procedures were deficient. The company relied primarily on counterparty self-certification of beneficial ownership, without conducting independent verification. There was no systematic process for investigating adverse media hits or for escalating potential red flags identified during the onboarding process. The due diligence files for Petronova Trading FZE and Zenith Petroleum DMCC, reviewed during the investigation, were incomplete and reflected only superficial inquiry.

(c) Training. DTI's Dubai trading desk personnel received minimal sanctions compliance training. The investigation found no evidence that traders received any formal training on Russian sectoral sanctions, Directive 2 requirements, or the identification of sanctions evasion techniques. Gerald Fisk, as CCO, was responsible for organizing compliance training but failed to develop or deliver a training program tailored to the specific sanctions risks faced by DTI's trading operations.

(d) Escalation Mechanisms. There was no formal escalation mechanism or protocol for DTI personnel to report potential sanctions red flags to Dunmore's corporate compliance function or to outside counsel. Red flags that were identified at the operational level were handled informally by Fisk, without documentation or escalation.

These deficiencies are aggravating under Factor 5, as they reflect a compliance program that was materially inadequate to address the sanctions risks inherent in DTI's business activities. The failure to maintain an effective compliance program is a significant consideration in OFAC's enforcement analysis.

2. Enhanced Compliance Program (Post-discovery)

Dunmore has taken comprehensive steps to remediate the identified compliance deficiencies. In December 2022, Dunmore retained Pemberton Investors Solutions LLC, led by Dr. Anton Bremer — a former OFAC senior compliance officer — to design and implement an Enhanced Sanctions & Export Controls Compliance Program (the "Enhanced Program"). Dr. Bremer's team delivered a comprehensive remediation report on September 15, 2023, and Dunmore's Board of Directors formally adopted the Enhanced Program on October 1, 2023.

The Enhanced Program includes, among other things:

(a) A restructured compliance organization reporting directly to the CEO and the Board's Audit and Compliance Committee;

(b) Deployment of advanced sanctions screening technology with enhanced fuzzy-matching, transliteration capabilities, and automated SDN/SSI List update integration;

(c) A comprehensive third-party due diligence program requiring independent verification of beneficial ownership, adverse media screening, and ongoing monitoring;

(d) Mandatory annual sanctions compliance training for all trading desk personnel, with supplemental training on Russian sectoral sanctions and sanctions evasion red flags;

(e) A formal escalation protocol requiring the immediate reporting of potential sanctions red flags to the General Counsel and outside counsel;

(f) An annual independent compliance audit conducted by an external compliance firm;

(g) Integration of sanctions compliance into the company's enterprise risk management framework; and

(h) Appointment of a new Chief Compliance Officer, Priya Nayar (appointed August 1, 2022), with direct reporting lines to the CEO and the Board.

A supplemental remediation report documenting the full implementation of the Enhanced Program was submitted to DOJ on January 15, 2024. The same report will be made available to OFAC as part of the VSD submission.

Mitigating. While the pre-existing compliance program was deficient, Dunmore's post-discovery remediation is comprehensive, well-resourced, and has been fully implemented. The appointment of a new CCO, the engagement of leading compliance consultants, and the adoption of an Enhanced Program that addresses each identified deficiency in detail demonstrate Dunmore's commitment to preventing future violations. OFAC's enforcement guidance specifically encourages companies to implement meaningful remediation, and Dunmore's efforts in this regard are among the strongest mitigating factors in its case.

Assessment: Mitigating on balance. The pre-existing deficiencies are aggravating, but the comprehensive remediation strongly counterbalances this factor.

F. Factor 6 — Remedial Response

The sixth General Factor considers the nature and quality of the entity's remedial response upon learning of the apparent violation. This factor overlaps to some degree with Factor 5 (compliance program), but focuses more broadly on the totality of the entity's response.

Analysis. Dunmore's remedial response has been prompt, thorough, and comprehensive, encompassing the following actions:

Immediate Steps (April 2022). Upon notification of the potential Volkhov exposure on April 11, 2022, Dunmore's General Counsel Marcus Wellbourne immediately engaged outside counsel (Calderwood & Harkness LLP, retained April 14, 2022). A litigation hold was issued on April 20, 2022, directing the preservation of all potentially relevant documents and electronically stored information across all relevant custodians and data sources. Ridgeline Advisory Group LLC (forensic accounting) was retained on May 2, 2022, and Nexagen Analytics Inc. (e-discovery) was engaged shortly thereafter. A comprehensive internal investigation was initiated and has been ongoing.

Personnel Actions. Dunmore took prompt and decisive personnel actions against the individuals identified as most directly responsible for the apparent violations:

• Natasha Sorokin was placed on administrative leave on May 16, 2022, and formally separated from the company effective September 15, 2022.

• Gerald Fisk departed Dunmore on June 10, 2022, following the identification of his supervisory compliance failures.

• Derek Hargrave was placed on administrative leave on July 1, 2022, and formally separated from the company effective October 1, 2022.

New Chief Compliance Officer. Priya Nayar was appointed as Dunmore's new Chief Compliance Officer on August 1, 2022. Ms. Nayar brings extensive experience in sanctions compliance, having previously served as the Director of Global Sanctions Compliance at a major international energy company. Her appointment reflects Dunmore's commitment to ensuring that the compliance function is led by a qualified, experienced professional with direct access to senior management and the Board.

Enhanced Compliance Program. As discussed in connection with Factor 5, Dunmore adopted a comprehensive Enhanced Sanctions & Export Controls Compliance Program on October 1, 2023, following an extensive design and implementation process led by Pemberton Investors Solutions LLC.

Voluntary Disgorgement. On November 30, 2023, Dunmore voluntarily disgorged $8.75 million to the U.S. Treasury, representing the estimated net profits derived from the nine tainted crude oil swap transactions. The disgorgement amount was calculated as follows: $156.3 million in tainted notional value × 5.6% estimated net margin = $8.7528 million, rounded to $8.75 million. This calculation was performed by Ridgeline Advisory Group LLC and was reviewed and validated by Calderwood & Harkness. The voluntary disgorgement was not required by OFAC or DOJ but was undertaken proactively by Dunmore to demonstrate the company's commitment to disgorging any benefit derived from the unlawful transactions.

Assessment: Strongly Mitigating. Dunmore's remedial response is among the strongest mitigating factors in its case. The promptness of the response, the decisiveness of the personnel actions, the appointment of a new CCO, the comprehensive compliance remediation, and the voluntary disgorgement of profits collectively demonstrate a remedial posture that OFAC has historically credited favorably in its enforcement decisions.

G. Factor 7 — Cooperation with OFAC

The seventh General Factor considers the nature and extent of the entity's cooperation with OFAC's investigation.

Analysis. Dunmore has cooperated fully and proactively with OFAC since becoming aware of the apparent violations. The company has not yet formally engaged with OFAC's enforcement staff (the VSD has not yet been filed as of the date of this memorandum), but the VSD filing planned for June 1, 2023, will constitute the initial touchpoint with OFAC's Office of Compliance and Enforcement.

The VSD narrative is being prepared by Conrad Reeves and Jasmine Thornton and will provide a comprehensive account of the apparent violations, the underlying facts, the responsible individuals, and the remedial actions taken by Dunmore. The VSD will be accompanied by supporting documentation, including the Ridgeline Advisory Group forensic accounting report (Engagement No. RAG-2022-0319), the Enhanced Program documentation, and relevant transactional records.

Dunmore has separately cooperated extensively with DOJ since the initial proffer session on July 15, 2022. Dunmore's cooperation with DOJ has included a supplemental proffer on November 20, 2022, and the submission of a 176-page investigation report on May 15, 2023. This cooperation with DOJ is relevant to OFAC's assessment of Factor 7, as OFAC routinely considers a subject's cooperation with parallel enforcement agencies in evaluating the cooperation factor.

Going forward, Dunmore is prepared to respond promptly and completely to any OFAC information requests or follow-up inquiries. Based on our experience with OFAC's enforcement process, we anticipate that follow-up requests will likely be directed by OFAC Compliance Analyst Erin Matsuda or her colleagues in the Office of Compliance and Enforcement, and we have advised Dunmore to be prepared to devote the necessary resources to ensure timely and comprehensive responses.

Assessment: Strongly Mitigating. The filing of a VSD, combined with Dunmore's demonstrated willingness to cooperate fully with both OFAC and DOJ, weighs strongly in the company's favor.

H. Factor 8 — Timing of the Apparent Violation in Relation to Imposition of Sanctions

The eighth General Factor considers the temporal relationship between the apparent violation and the imposition of the sanctions at issue.

Analysis. This factor is particularly relevant to Dunmore's case because of the evolution of the sanctions regime applicable to Volkhov during the period of the apparent violations. Volkhov was designated under Directive 2 (sectoral sanctions) on November 15, 2019. The suspect transactions — spanning from approximately March 2020 through April 2022 — thus occurred largely during the period when Volkhov was subject only to the narrower Directive 2 restrictions, not the comprehensive SDN blocking sanctions that were imposed on April 6, 2022.

The Directive 2 sectoral sanctions are complex and have been widely acknowledged — including by OFAC itself — as presenting significant compliance challenges for market participants, particularly in the energy sector. The precise contours of the Directive 2 prohibitions, including the scope of restricted financial instruments and the application of the 50% ownership rule to entities in which designated persons hold a controlling interest, have been the subject of extensive FAQs, guidance, and industry confusion. While this complexity does not excuse non-compliance, it provides relevant context for OFAC's assessment of the timing factor.

Only a narrow window — April 6, 2022 (when Volkhov was added to the SDN List) through approximately April 19, 2022 (when the DOJ subpoena was issued and Dunmore began winding down DTI's relevant activities) — implicated the full SDN blocking sanctions. Our investigation has not identified any transactions that DTI executed with Volkhov-connected counterparties during this narrow window, although one crude oil cargo that was in transit during this period may not have been fully wound down in compliance with the blocking requirements. This is a relatively minor exposure in the context of the broader matter.

Assessment: Mitigating. The fact that the vast majority of the suspect transactions occurred during the Directive 2 sectoral sanctions period — rather than under the stricter SDN blocking regime — weighs in Dunmore's favor. The complexity and evolving nature of the Russian sectoral sanctions provide additional contextual mitigation.

I. Factor 9 — Other Enforcement Action

The ninth General Factor considers whether other enforcement agencies have taken or are taking action against the entity in connection with the same or related conduct.

Analysis. As noted above, the DOJ National Security Division has an open inquiry into Dunmore's transactions, initiated by grand jury subpoena GJ No. 22-418, issued on April 19, 2022. Dunmore has been cooperating fully with DOJ since July 15, 2022, and is currently seeking a declination from DOJ under the DOJ Corporate Enforcement Policy. A comprehensive white paper supporting the declination request was submitted to DOJ on March 1, 2023.

OFAC typically coordinates with DOJ in matters involving parallel enforcement proceedings. OFAC may defer to or credit DOJ's enforcement response when determining its own enforcement posture. If DOJ grants a declination or resolves the matter through a non-prosecution agreement or deferred prosecution agreement, OFAC may be inclined to adopt a similarly favorable posture. Conversely, if DOJ brings criminal charges or imposes substantial financial penalties, OFAC may calibrate its response accordingly, though it will also seek to avoid duplicative penalties.

Dunmore's cooperation with DOJ — including the initial proffer, supplemental proffer, and submission of the 176-page investigation report — should be credited by OFAC as demonstrating the company's good-faith commitment to transparency and accountability. The voluntary disgorgement of $8.75 million already paid to the U.S. Treasury should also be credited by OFAC to avoid duplicative financial consequences.

No separate BIS enforcement action has been initiated to date, but Dunmore is evaluating whether to file a VSD with BIS in connection with the oilfield equipment exports. This analysis is addressed in the companion memorandum dated May 1, 2023.

Assessment: Neutral to Slightly Mitigating. The existence of the DOJ parallel proceeding is neutral from a sanctions-specific perspective, but Dunmore's extensive cooperation with DOJ and its pursuit of a declination may signal to OFAC the seriousness and good faith of Dunmore's overall compliance posture.

J. Factor 10 — Future Compliance / Deterrent Effect

The tenth General Factor considers the need for the enforcement response to promote future compliance and provide a deterrent effect.

Analysis. OFAC considers whether the enforcement response is necessary to incentivize future compliance, both by the subject and by similarly situated entities. In Dunmore's case, several considerations are relevant.

The Enhanced Sanctions & Export Controls Compliance Program adopted by Dunmore on October 1, 2023, was designed to meet or exceed the benchmarks set forth in the DOJ Evaluation of Corporate Compliance Programs (as updated in March 2023). This program was assessed in a memorandum prepared by Jasmine Thornton dated September 1, 2023, which concluded that the Enhanced Program is well-designed, adequately resourced, and appropriately implemented. An ongoing monitoring and testing framework has been established (as documented in a supplemental memorandum dated December 15, 2023 by Jasmine Thornton), which provides for continuous assessment of the Enhanced Program's effectiveness and ensures that identified gaps are remediated promptly.

Dunmore's significant financial expenditure on investigation and remediation provides substantial deterrent effect. The total matter cost incurred by Dunmore to date is approximately $31.275 million, comprising outside counsel fees, forensic accounting costs, e-discovery expenses, compliance consultant fees, the voluntary disgorgement payment, and related expenditures. Of this total, Dunmore has recovered approximately $7.2 million from its directors and officers liability insurance carrier, Garrison Mutual Insurance Co., under Policy No. GM-DO-2021-08734, resulting in a net out-of-pocket cost to Dunmore of approximately $24.075 million. This substantial financial impact — in addition to the reputational consequences, personnel disruptions, and management attention diverted to the matter — provides a powerful incentive for Dunmore to maintain rigorous compliance going forward.

Assessment: Mitigating. Dunmore's comprehensive compliance remediation and substantial financial expenditure on investigation and remediation provide a strong basis for OFAC to conclude that the deterrent objectives of enforcement have already been substantially achieved, even without the imposition of a civil monetary penalty.

K. Factor 11 — Other Relevant Factors

The eleventh General Factor is a catch-all provision that allows OFAC to consider any other factors relevant to the appropriate enforcement response.

Analysis. Several additional considerations are relevant to Dunmore's case:

Private Company Status. Dunmore is a privately held company and is not subject to SEC reporting obligations or the public disclosure requirements that apply to publicly traded companies. While this means that the enforcement matter will not receive the same level of public attention that would accompany an action against a public company, it also means that the financial impact of the matter is borne directly by Dunmore's equity holders (Greystone Capital Partners Fund IV, L.P., management, and Thornbury Infrastructure Fund II, L.P.) and is a meaningful internal deterrent.

Multi-Jurisdictional Operations. Dunmore's global operations, with subsidiaries and offices in the Cayman Islands, the United Arab Emirates, the United States, Germany, and Nigeria, necessitated a comprehensive, multi-jurisdictional remediation effort. The Enhanced Program was designed to address the compliance risks inherent in this geographically dispersed operational footprint, including the challenges of implementing consistent compliance standards across different legal jurisdictions and regulatory environments.

External Audit Consultation. Dunmore's outside auditors, Ashford & Whitmore LLP (engagement partner Kenneth Ashford), have been consulted regarding the implications of the apparent violations for Dunmore's internal controls over trade finance transactions. This consultation resulted in recommendations for strengthening internal controls, which have been incorporated into the Enhanced Program.

Assessment: Neutral to Slightly Mitigating. The additional factors considered under Factor 11 do not significantly move the needle in either direction, but the multi-jurisdictional scope of the remediation effort and the engagement of external auditors reflect positively on Dunmore's commitment to comprehensive compliance reform.

V. Voluntary Self-Disclosure — Impact on Penalty Calculus

A. OFAC Credit for VSD

Under the OFAC Economic Sanctions Enforcement Guidelines, the filing of a voluntary self-disclosure is the single most impactful mitigating factor in the penalty calculus. The Guidelines explicitly provide that OFAC will generally not pursue civil monetary penalties in cases involving voluntary self-disclosures where the violations are classified as non-egregious. Instead, in such cases, OFAC will typically issue a Cautionary Letter or a No Action Letter. This policy reflects OFAC's strong institutional preference for encouraging voluntary disclosure and cooperation, which serve the broader objectives of the sanctions regime by promoting transparency, facilitating timely detection and remediation of violations, and enabling OFAC to allocate its enforcement resources efficiently.

Even in cases where the violations are classified as egregious, a voluntary self-disclosure results in a reduction of the base penalty by 50%. This provides significant credit to the disclosing entity even in the most serious cases.

Dunmore's planned VSD filing, scheduled for June 1, 2023, is therefore a critical mitigating factor. The VSD will provide OFAC with a comprehensive narrative of the apparent violations, the factual basis for the disclosures, the company's remedial actions, and the supporting documentation, including the Ridgeline Advisory Group forensic accounting report and the Enhanced Program materials.

Timeliness Consideration. An important threshold question is whether Dunmore's VSD will qualify as "voluntary" under OFAC's definition, given that the DOJ grand jury subpoena was issued on April 19, 2022, prior to the planned VSD filing date. Under the Guidelines, a disclosure is considered "voluntary" if: (i) the entity did not receive an OFAC administrative subpoena, penalty notice, or other formal demand for information or documentation prior to the disclosure; and (ii) the entity was not otherwise obligated by agreement or regulation to report the apparent violation to OFAC.

In Dunmore's case, the DOJ subpoena was directed to the Department of Justice — not to OFAC. OFAC has not contacted Dunmore, issued a subpoena, or made any formal or informal inquiry regarding the transactions at issue. Dunmore is not under any legal obligation to report the apparent violations to OFAC specifically (as distinct from its obligations under the DOJ subpoena). Accordingly, the VSD to OFAC should qualify as voluntary under the Guidelines.

We acknowledge a potential risk that OFAC could take the position that the VSD is not truly "voluntary" because Dunmore was already on notice of the potential violations by virtue of the DOJ subpoena and could be said to have been motivated by the desire to mitigate DOJ-related exposure rather than by a genuine desire to self-report to OFAC. However, we believe this risk is low. OFAC has consistently treated the voluntariness determination as turning on whether OFAC itself (not another agency) had contacted the entity or issued a demand for information. The Guidelines do not condition the voluntariness determination on the absence of any government investigation whatsoever — only on the absence of an OFAC-specific inquiry. We recommend that the VSD narrative address this issue forthrightly, acknowledging the existence of the DOJ inquiry while emphasizing that Dunmore is voluntarily coming forward to OFAC of its own accord.

B. Coordination Between OFAC and DOJ

OFAC and DOJ frequently

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 1750 Pennsylvania Avenue NW, Suite 800 Washington, DC 20006
MEMORANDUM
FROM: Conrad Reeves, Senior Counsel, Export Controls & Sanctions, Calderwood & Harkness LLP
TO: Victoria Chambers, Responsible Partner, White Collar & Investigations Jasmine Thornton, Lead Associate, White Collar & Investigations
DATE: May 20, 2023
RE: OFAC Economic Sanctions Enforcement Guidelines — Penalty Framework & Mitigating Factors Analysis Applicable to Dunmore Energy Holdings Ltd.
MATTER NO.: 1016-00009
CLIENT: Dunmore Energy Holdings Ltd. ("Dunmore" or "DEH")
COPIES TO FILE: Howard Quinn (Billing Partner); Liam Donahue (Working Associate)
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I. Executive Summary
The purpose of this memorandum is to analyze the Office of Foreign Assets Control ("OFAC") Economic Sanctions Enforcement Guidelines (the "Guidelines") and the applicable civil penalty framework as they bear upon the apparent violations committed by Dunmore Energy Holdings Ltd. ("Dunmore" or "DEH") and its subsidiaries, and to assess the mitigating factors that support a favorable enforcement outcome — ideally the issuance of a Cautionary Letter or a No Action Letter rather than the imposition of a civil monetary penalty.
Dunmore is preparing to file a voluntary self-disclosure ("VSD") with OFAC's Office of Compliance and Enforcement. The VSD is anticipated to be submitted on or about June 1, 2023, in connection with transactions conducted by Dunmore Trading International Ltd. ("DTI"), Dunmore's Dubai-based subsidiary (DIFC License No. CL-4827). The transactions at issue involved counterparties with ties to Volkhov Industrial Group JSC ("Volkhov" or "VIG"), an entity that was subject to OFAC Directive 2 sectoral sanctions under Executive Order 13662, as designated on November 15, 2019, and subsequently made subject to full blocking sanctions when it was added to the Specially Designated Nationals and blocked Persons List ("SDN List") on April 6, 2022, pursuant to Executive Order 14024.
It is important to note that the OFAC matter proceeds in parallel with a Department of Justice ("DOJ") National Security Division inquiry that was opened on April 19, 2022, following issuance of grand jury subpoena GJ No. 22-418 in the U.S. District Court for the District of Columbia (Grand Jury 22-2). Dunmore has been cooperating fully with DOJ since an initial proffer session held on July 15, 2022, and continues to do so. Coordination between the OFAC VSD and the DOJ cooperation strategy is essential and is addressed in this memorandum.
Bottom-Line Assessment. Based on our analysis of the Guidelines and the applicable General Factors, multiple significant mitigating factors strongly favor a favorable OFAC outcome for Dunmore. These include: (1) the filing of a voluntary self-disclosure; (2) extensive, proactive cooperation with both OFAC and DOJ; (3) comprehensive remediation of compliance deficiencies, including the adoption of an Enhanced Sanctions & Export Controls Compliance Program; (4) voluntary disgorgement of $8.75 million in estimated profits derived from the tainted transactions; and (5) the prompt separation of the individuals most directly responsible for the misconduct. We recommend that Dunmore proceed with filing the VSD on the planned date of June 1, 2023. Based on our assessment, the most likely outcome is a Cautionary Letter with no civil monetary penalty. Even in an adverse scenario where OFAC elects to impose a penalty, the mitigating factors and VSD credit should reduce any such penalty substantially.
II. Factual Background Relevant to OFAC Analysis
A. The Sanctions Programs at Issue
The apparent violations implicate two principal U.S. economic sanctions programs targeting the Russian Federation, both administered by OFAC.
Directive 2 Under Executive Order 13662. On March 20, 2014, the President issued Executive Order 13662, which authorized the imposition of sectoral sanctions on certain sectors of the Russian economy, including the energy sector. OFAC subsequently issued Directive 2 under E.O. 13662, which prohibits, among other things, certain dealings in new debt of longer than 90 days maturity, as well as new equity, of persons determined to be operating in the energy sector of the Russian Federation and designated on OFAC's Sectoral Sanctions Identifications List ("SSI List"). Volkhov Industrial Group JSC was designated under Directive 2 on November 15, 2019, as an entity operating in the energy sector of the Russian Federation. The restrictions imposed under Directive 2 are narrower in scope than full SDN blocking sanctions; they do not impose a comprehensive prohibition on all dealings with the designated entity, but rather target specific categories of transactions and financial instruments.
Executive Order 14024. On April 15, 2021, the President issued Executive Order 14024, entitled "Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation," which authorized the imposition of full blocking sanctions on a broader range of Russian persons and entities. On April 6, 2022 — in the wake of Russia's full-scale invasion of Ukraine on February 24, 2022 — OFAC added Volkhov Industrial Group JSC to the SDN List pursuant to E.O. 14024. Upon designation on the SDN List, all property and interests in property of Volkhov that are in the United States, or within the possession or control of U.S. persons, became blocked, and U.S. persons became generally prohibited from engaging in any transactions or dealings with Volkhov.
Implementing Regulations and Statutory Authority. The implementing regulations for the Russia-related sanctions programs are set forth at 31 C.F.R. Part 589 (Ukraine/Russia-Related Sanctions Regulations). The statutory authority for both E.O. 13662 and E.O. 14024 derives from the International Emergency Economic Powers Act ("IEEPA"), 50 U.S.C. §§ 1701–1706, which grants the President broad authority to deal with unusual and extraordinary threats to the national security, foreign policy, and economy of the United States. IEEPA also provides the statutory basis for the civil and criminal penalties associated with violations of the sanctions programs, as discussed in greater detail in Section III below.
B. The Apparent Violations
Based on Calderwood & Harkness's internal investigation, supplemented by the forensic accounting analysis conducted by Ridgeline Advisory Group LLC (Engagement No. RAG-2022-0319; final report delivered April 1, 2023), we have identified three categories of apparent violations.
1. Crude Oil Swap Transactions
Between June 2020 and February 2022, DTI's Dubai trading desk executed fourteen (14) crude oil swap transactions with a combined notional value of approximately $218.7 million. These transactions were executed with two counterparties:
(a) Petronova Trading FZE, managed by Sergei Volkov, registered at Office 1407, Al Shafar Tower, Dubai Internet City, Dubai, UAE; and
(b) Zenith Petroleum DMCC, managed by Farhan Qureshi, registered at Unit 2201, Jumeirah Bay Tower X2, Cluster X, Jumeirah Lakes Towers, Dubai, UAE.
The Ridgeline Advisory Group forensic analysis determined that nine (9) of the fourteen (14) crude oil swap transactions — representing approximately $156.3 million in aggregate notional value — involved crude oil that was ultimately sourced from, or destined for, entities controlled by or affiliated with Volkhov Industrial Group JSC. These nine transactions potentially violated the prohibitions set forth in Directive 2 under E.O. 13662, which restricted certain financial dealings with Volkhov during the relevant period. The remaining five transactions, totaling approximately $62.4 million in notional value, involved counterparties and crude oil cargoes that the forensic analysis was unable to trace to Volkhov-connected entities, although the due diligence deficiencies surrounding these transactions remain a concern.
Sergei Volkov — the principal of Petronova Trading FZE — is the nephew of Alexei Volkov, the Chairman of Volkhov Industrial Group JSC. This familial relationship was identified during the forensic investigation and appears not to have been detected by DTI's compliance function prior to the April 11, 2022 screening refresh, a fact that underscores the deficiencies in DTI's third-party due diligence processes.
2. Oilfield Equipment Exports
Between August 2020 and January 2022, DTI facilitated the export of approximately $12.4 million in oilfield drilling equipment and components to end users in the Russian Federation. The equipment at issue is classified under Export Administration Regulations ("EAR") Export Control Classification Numbers ("ECCNs") 2B350 and 2B999, both of which are controlled items subject to export licensing requirements. The exports were routed through Caspian Logistik GmbH, a German logistics intermediary managed by Klaus Weidemann and registered at Mönckebergstraße 22, 20095 Hamburg, Germany.
These exports potentially implicate both OFAC prohibitions on certain dealings involving the Russian energy sector and EAR §746.5 restrictions on exports to Russia administered by the Bureau of Industry and Security ("BIS"). The BIS-related aspects of these transactions are addressed in a companion memorandum dated May 1, 2023, which analyzes whether a separate VSD to BIS is warranted. For purposes of this OFAC-focused analysis, the oilfield equipment exports are relevant primarily insofar as they involve items that flowed to Volkhov-affiliated end users, potentially in contravention of the Directive 2 restrictions.
3. Structured Payments
Between March 2020 and March 2022, DTI routed approximately $34.2 million across 127 individual wire transfers through intermediary accounts maintained at Crescent Commercial Bank PJSC, a financial institution headquartered in Dubai. The Ridgeline Advisory Group forensic analysis concluded that these wire transfers were structured in a manner designed to obscure the ultimate beneficial ownership of the receiving parties, which included entities connected to Volkhov Industrial Group JSC.
The structured nature of these payments is particularly concerning from an enforcement perspective. The use of multiple smaller transfers routed through intermediary accounts suggests a deliberate effort to evade detection by compliance screening systems. The structuring pattern is documented in detail in the Ridgeline Advisory Group final report at Section 4.3, which identifies several hallmarks of deliberate sanctions evasion, including the use of shell companies, layered transactions, and obscured beneficial ownership chains.
C. Responsible Individuals
Our investigation has identified the following individuals as bearing primary responsibility for the apparent violations:
Derek Hargrave, Former President of DTI. Mr. Hargrave supervised DTI's trading desk operations in Dubai and bore ultimate management responsibility for the trading relationships with Petronova Trading FZE and Zenith Petroleum DMCC. He was placed on administrative leave by Dunmore on July 1, 2022, following the conclusion of his initial interview with Calderwood & Harkness. He was formally separated from the company effective October 1, 2022. Mr. Hargrave has retained personal counsel, James Overstreet of Overstreet & McClain PLLC (Dallas, Texas).
Natasha Sorokin, Former Senior Trader at DTI. Ms. Sorokin served as the primary point of contact between DTI and Sergei Volkov at Petronova Trading FZE. Documentary evidence — including email communications, Meridian Services Inc. messages, and calendar entries recovered during the e-discovery process — indicates that Ms. Sorokin was aware of the Volkhov connection to the crude oil swap transactions. She was placed on administrative leave on May 16, 2022, and formally separated from Dunmore effective September 15, 2022. Ms. Sorokin has retained personal counsel, Philip Keane of Wexford Keane LLP (Washington, D.C.).
Gerald Fisk, Former Chief Compliance Officer. Mr. Fisk served as Dunmore's Chief Compliance Officer during the relevant period and was responsible for overseeing the company's sanctions compliance program, including OFAC screening protocols and third-party due diligence. Our investigation revealed significant supervisory compliance failures attributable to Mr. Fisk, including the failure to implement adequate screening of DTI's counterparties, the failure to investigate red flags that should have been detected through routine due diligence, and the failure to ensure that DTI's trading desk personnel received adequate sanctions compliance training. These failures are documented in detail in the August 15, 2022 memorandum prepared by Nicholas Ferreira. Mr. Fisk departed Dunmore on June 10, 2022. He has retained personal counsel, Catherine Blackthorn of Blackthorn & Associates LLP (Houston, Texas).
Omar Al-Rashidi, Head of Middle East Operations at DTI. Mr. Al-Rashidi served as the Head of Middle East Operations and had oversight of DTI's regional business activities. He has been cooperating with the internal investigation as a cooperating witness and has provided valuable information regarding the trading desk operations and the relationships with Petronova Trading FZE and Zenith Petroleum DMCC.
Yves Leclerc, Director of Logistics & Shipping at DTI. Mr. Leclerc facilitated the oilfield equipment shipments routed through Caspian Logistik GmbH to end users in Russia. His role in the logistics chain is a subject of ongoing investigation.
Rajesh Malhotra, Controller at DTI. Mr. Malhotra was involved in the payment structuring identified in the Ridgeline Advisory Group analysis. The extent of his awareness of the sanctions implications of the structured payment arrangements is a matter under investigation.
D. Discovery of the Violations
The timeline of events leading to the discovery and investigation of the apparent violations is as follows:
April 6, 2022. OFAC added Volkhov Industrial Group JSC to the SDN List pursuant to E.O. 14024, as part of a broader package of sanctions imposed in response to Russia's invasion of Ukraine.
April 11, 2022. Then-Chief Compliance Officer Gerald Fisk conducted a routine OFAC screening refresh following the April 6, 2022 SDN List update. The refresh identified potential Volkhov exposure through DTI's trading relationship with Petronova Trading FZE. Fisk immediately notified Dunmore's General Counsel, Marcus Wellbourne, of the potential exposure.
April 14, 2022. Calderwood & Harkness LLP was retained by Dunmore to conduct an internal investigation and provide legal advice regarding sanctions compliance. Victoria Chambers was assigned as the responsible partner for the engagement.
April 19, 2022. The DOJ National Security Division issued grand jury subpoena GJ No. 22-418 in the U.S. District Court for the District of Columbia (Grand Jury 22-2), formally opening the DOJ inquiry into Dunmore's transactions. The subpoena sought records relating to DTI's transactions with Petronova Trading FZE, Zenith Petroleum DMCC, and Caspian Logistik GmbH, among other entities.
April 20, 2022. Calderwood & Harkness issued a litigation hold notice to Dunmore and all relevant custodians, directing the preservation of all documents, communications, and electronically stored information potentially relevant to the investigation.
May 2, 2022. Ridgeline Advisory Group LLC was retained to conduct a forensic accounting analysis of the transactions at issue (Engagement No. RAG-2022-0319).
May 2022 – April 2023. Calderwood & Harkness, in coordination with Ridgeline Advisory Group and Nexagen Analytics Inc. (e-discovery, Project No. NX-DEH-2204), conducted a comprehensive internal investigation. The investigation included the review of approximately 1.8 million documents, 47 witness interviews, and an extensive forensic analysis of DTI's financial records and transaction data.
April 1, 2023. Ridgeline Advisory Group delivered its final forensic accounting report, which formed the factual basis for the VSD narrative.
III. OFAC Penalty Framework — Legal Analysis
A. Statutory Maximum Penalties
The statutory authority for civil monetary penalties in connection with violations of OFAC-administered sanctions programs derives from IEEPA, 50 U.S.C. § 1705. As amended by the International Emergency Economic Powers Enhancement Act of 2007, IEEPA authorizes the imposition of civil penalties for violations of sanctions regulations at amounts up to the greater of: (i) $356,579 per violation (as adjusted for inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015), or (ii) twice the amount of the transaction that is the basis of the violation.
The theoretical maximum penalty exposure for Dunmore is substantial. If each of the nine tainted crude oil swap transactions is treated as a separate violation, and the "twice the transaction value" measure is applied, the aggregate theoretical maximum for the crude oil swap violations alone would be approximately $312.6 million (i.e., 2 × $156.3 million). If each of the 127 structured wire transfers is treated as a separate violation, the per-violation penalty exposure multiplies further, potentially adding an additional $68.4 million (i.e., 2 × $34.2 million) to the theoretical maximum. The oilfield equipment exports ($12.4 million) would add approximately $24.8 million to the theoretical exposure (i.e., 2 × $12.4 million).
In total, the theoretical statutory maximum penalty exposure could exceed $400 million. However, it is critical to note that OFAC rarely, if ever, assesses penalties at or near the theoretical statutory maximum. OFAC exercises substantial discretion under the Guidelines in determining the appropriate enforcement response, and the actual penalty — if any — is typically a small fraction of the theoretical maximum, particularly in cases involving voluntary self-disclosures and significant mitigating factors. The theoretical maximum serves primarily as a ceiling against which the actual penalty calculus is performed.
B. The OFAC Economic Sanctions Enforcement Guidelines
OFAC's approach to enforcement and penalty calculation is governed by the Economic Sanctions Enforcement Guidelines, codified at 31 C.F.R. Part 501, Appendix A. The Guidelines establish a comprehensive framework for determining the appropriate enforcement response to apparent violations of U.S. economic sanctions, ranging from no action to the imposition of substantial civil monetary penalties.
Overview of the Framework. Under the Guidelines, OFAC determines the appropriate enforcement response based on a two-step process. First, OFAC calculates a "base penalty amount" using the methodology described below. Second, OFAC adjusts the base penalty amount upward or downward based on its consideration of the 11 "General Factors" enumerated in the Guidelines, which are discussed in detail in Section IV of this memorandum. The Guidelines are intended to provide transparency regarding OFAC's enforcement process and to encourage voluntary compliance, self-disclosure, and cooperation.
Two-Track Framework. The Guidelines establish a bifurcated penalty framework that turns on two critical determinations: (1) whether the subject of the enforcement action filed a voluntary self-disclosure, and (2) whether the case is classified as "egregious" or "non-egregious." These two variables define four potential tracks:
Track 1 — With VSD (Non-Egregious Case): The base penalty amount is one-half of the "transaction value" of the apparent violation(s), capped at the applicable statutory maximum per violation. In non-egregious cases involving a VSD, OFAC will typically not pursue a civil monetary penalty. Instead, OFAC will typically issue a Cautionary Letter or a No Action Letter. This is the most favorable outcome track and the one we are targeting for Dunmore.
Track 2 — With VSD (Egregious Case): The base penalty amount is the applicable statutory maximum per violation. However, the VSD results in a 50% reduction in the base penalty amount, which provides significant credit even in the most serious cases.
Track 3 — Without VSD (Non-Egregious Case): The base penalty is the "applicable schedule amount," which is determined based on a sliding scale set forth in the Guidelines keyed to the transaction value. Penalties under this track are typically more substantial than under Track 1.
Track 4 — Without VSD (Egregious Case): The base penalty is the applicable statutory maximum per violation. This track yields the most severe penalties and applies in cases where the apparent violation is egregious and the subject has not filed a VSD.
Egregious vs. Non-Egregious Classification. The determination of whether an apparent violation is "egregious" or "non-egregious" is a threshold assessment that has an outsized impact on the penalty calculus. OFAC makes this determination by weighing the 11 General Factors on balance. No single factor is necessarily dispositive. The Guidelines describe an "egregious case" as one in which the General Factors, on balance, present a situation in which the apparent violation represents a particularly serious threat to U.S. national security or foreign policy objectives, or involves willful or reckless conduct.
Application to Dunmore. Based on our analysis of the 11 General Factors, set forth in detail in Section IV below, we conclude that the weight of the factors supports a non-egregious classification for Dunmore's case. While certain factors present aggravating elements — particularly the structured payment activity and the apparent awareness of certain individuals on the trading desk — the preponderance of factors, taken as a whole, weigh in Dunmore's favor. The company's corporate-level leadership was not complicit in the violations, the company promptly self-reported and cooperated extensively, it implemented comprehensive remediation, it voluntarily disgorged profits, and it separated the responsible individuals. These considerations, taken together, strongly support a non-egregious classification.
Combined with the filing of a voluntary self-disclosure, a non-egregious classification would place Dunmore on Track 1 — the most favorable enforcement track — under which OFAC would typically not pursue a civil monetary penalty and would instead issue a Cautionary Letter or No Action Letter.
C. Settlement Framework and OFAC Dispositions
The Guidelines contemplate a range of possible enforcement dispositions, from the most favorable to the most severe:
(1) No Action. OFAC determines that the apparent violation either did not occur, does not warrant further action, or is de minimis. OFAC takes no enforcement action and may or may not issue a formal letter so indicating.
(2) Cautionary Letter. OFAC issues a letter informing the subject of the apparent violation and cautioning the subject regarding future compliance. A Cautionary Letter does not constitute a final agency determination that a violation occurred. It is not a penalty. The issuance of a Cautionary Letter is the most common outcome in cases involving voluntary self-disclosures of non-egregious violations.
(3) Finding of Violation. OFAC issues a formal finding that a violation occurred, but does not impose a civil monetary penalty. A Finding of Violation is a more serious enforcement response than a Cautionary Letter, as it constitutes an official agency determination that a violation occurred.
(4) Civil Monetary Penalty. OFAC imposes a monetary penalty, either through settlement or through contested administrative litigation. Settlement is by far the more common path; contested proceedings are rare.
In cases involving a VSD where the violations are classified as non-egregious, OFAC has historically resolved matters with Cautionary Letters or No Action Letters in the substantial majority of cases. This pattern is documented in OFAC's published enforcement actions and annual enforcement statistics. While past enforcement outcomes do not guarantee a particular result in any individual case, they provide useful benchmarks for assessing the likely outcome. We analyze relevant enforcement precedents in Section VI below.
IV. Analysis of the 11 General Factors
The Guidelines set forth 11 General Factors that OFAC considers in determining the appropriate enforcement response and in classifying an apparent violation as egregious or non-egregious. Below, we analyze each factor as applied to Dunmore's case, assessing whether each factor weighs as mitigating, aggravating, or neutral.
A. Factor 1 — Willful or Reckless Disregard vs. Mere Negligence
The first General Factor considers whether the apparent violation involved willful or reckless conduct, or whether it resulted from mere negligence or inadvertence. This factor is often the most significant in the egregious/non-egregious determination.
Analysis. The conduct of the individuals on DTI's trading desk — particularly Derek Hargrave and Natasha Sorokin — may rise above mere negligence. Documentary evidence recovered during the investigation suggests that Sorokin was aware of Sergei Volkov's connection to Volkhov Industrial Group JSC and may have deliberately structured certain transactions to avoid triggering compliance screening protocols. Similarly, Hargrave, as President of DTI, exercised supervisory authority over the trading desk and appears to have been at least recklessly indifferent to the sanctions risks associated with the Petronova and Zenith trading relationships.
However, it is essential to distinguish between the culpability of individual actors and the institutional culpability of Dunmore as an entity. As an institutional matter, Dunmore's senior management at corporate headquarters — including CEO James Renshaw, CFO Eleanor Whitfield, and General Counsel Marcus Wellbourne — were not aware of the Volkhov connections underlying the DTI trading relationships. The compliance failures were concentrated within DTI's Dubai operations and the compliance function under Gerald Fisk. Once Dunmore's corporate leadership became aware of the potential violations (following Fisk's screening refresh on April 11, 2022, and the subsequent notification to General Counsel Wellbourne), the company acted promptly to investigate, retain outside counsel, and prepare for voluntary disclosure.
Mitigating Characterization. We recommend that the VSD narrative characterize the institutional conduct as negligent — reflecting a failure of compliance systems and supervisory controls — rather than willful or reckless. The willfulness or recklessness of individual actors (Hargrave, Sorokin, and possibly Fisk) should be distinguished from the corporate-level posture. OFAC's assessment of this factor should focus on the entity as a whole, and the entity's prompt, good-faith response upon discovery strongly supports a characterization closer to negligence at the institutional level. We acknowledge, however, that OFAC may attribute some degree of institutional responsibility based on the individual actors' knowledge, which presents a risk factor that we must address forthrightly in the VSD narrative.
Assessment: Slightly Aggravating to Neutral at the institutional level, depending on how OFAC weighs the individual actors' knowledge.
B. Factor 2 — Awareness of Conduct at Issue
The second General Factor considers whether the entity's management was aware of the conduct at issue, including whether the conduct was part of a pattern or practice, and whether there were prior red flags.
Analysis. Dunmore's corporate headquarters, located at 1200 McKinney Street, Suite 3400, Houston, Texas, was not aware of the Volkhov connections underlying the DTI trading relationships until Gerald Fisk conducted the OFAC screening refresh on April 11, 2022, and notified General Counsel Marcus Wellbourne. Prior to that date, the Volkhov exposure was not reported to or known by Dunmore's Board of Directors, C-suite executives, or General Counsel.
This is not to say that red flags were entirely absent. Gerald Fisk's compliance failures included, among other things, a failure to investigate and escalate certain indicators that should have prompted further scrutiny of the Petronova and Zenith trading relationships. These failures are documented in detail in the August 15, 2022 memorandum prepared by Nicholas Ferreira, which catalogues several instances in which Fisk received information that could have led to earlier detection of the Volkhov connections but failed to act on it. These include: (i) a September 2020 request from DTI's back office for guidance on an unusual payment routing that Fisk dismissed without investigation; (ii) a December 2020 adverse media hit on Sergei Volkov that was flagged by the automated screening tool but cleared by Fisk without further review; and (iii) a March 2021 inquiry from Crescent Commercial Bank PJSC regarding the beneficial ownership structure of certain payment recipients that Fisk failed to follow up on.
Mitigating. Despite the existence of these red flags at the compliance function level, Dunmore's senior management took immediate and decisive action upon learning of the potential violations. Within three days of Fisk's notification to General Counsel, Dunmore had retained outside counsel (Calderwood & Harkness LLP), and the company subsequently initiated a comprehensive internal investigation, engaged forensic accountants and e-discovery specialists, placed responsible individuals on administrative leave, and began preparing for voluntary disclosure. This prompt and thorough response demonstrates that Dunmore's senior leadership had no tolerance for sanctions violations once the issue came to their attention.
Assessment: Mitigating on the whole, given the prompt response by senior management upon discovery, despite the red flags that Fisk failed to escalate.
C. Factor 3 — Harm to Sanctions Program Objectives
The third General Factor considers the actual or potential harm to the objectives of the sanctions program at issue.
Analysis. This factor requires a nuanced assessment, as the nature and severity of the harm varies across the three categories of apparent violations.
Crude Oil Swap Transactions ($156.3 million tainted notional). The transactions at issue occurred during a period (June 2020 through February 2022) when Volkhov was subject to Directive 2 sectoral sanctions — not full SDN blocking sanctions. The Directive 2 restrictions are narrower in scope and target specific financial instruments and transactions rather than imposing a comprehensive prohibition on all commercial dealings. The crude oil swap transactions were commercial in nature and did not involve weapons, military materiel, or other items with direct military end uses. While any violation of sanctions undermines the integrity of the sanctions regime, the harm to U.S. foreign policy objectives is less severe in the case of sectoral sanctions violations than in cases involving full blocking sanctions or military-related transactions.
Only a narrow period — April 6 through approximately April 19, 2022 — implicated the stricter SDN blocking sanctions that took effect when Volkhov was added to the SDN List. Our investigation has identified no transactions that were executed by DTI with Volkhov-connected counterparties during this narrow window, although the Ridgeline analysis did identify one crude oil cargo that was in transit during this period and may not have been fully wound down in compliance with the blocking requirements. This is addressed separately in the VSD narrative.
Oilfield Equipment Exports ($12.4 million). The oilfield equipment exports are more concerning from a harm perspective, as they involved dual-use items classified under ECCNs 2B350 and 2B999 that flowed to end users in Russia. While these items are primarily commercial in nature (drilling equipment and components), they have potential dual-use applications and are subject to export controls for reasons related to regional stability, anti-terrorism, and foreign policy. The harm to sanctions program objectives is heightened by the routing of these exports through an intermediary (Caspian Logistik GmbH) in a manner that may have been designed to obscure the ultimate end users. However, it bears noting that the oilfield equipment exports fall primarily within BIS jurisdiction under the EAR, and OFAC's assessment of harm may be tempered by the fact that the principal regulatory authority for export controls on these items resides with BIS rather than OFAC.
Structured Payments ($34.2 million). The structured payment activity is the most concerning element from a harm-to-program-objectives perspective. The deliberate structuring of 127 wire transfers to obscure beneficial ownership suggests an intentional effort to circumvent sanctions compliance mechanisms. Such conduct directly undermines the effectiveness of the U.S. sanctions regime by frustrating the screening and due diligence processes that financial institutions and commercial entities rely upon to identify prohibited transactions. OFAC is likely to view the structured payments as an aggravating factor under this General Factor.
Assessment: Mixed. The crude oil swap transactions present moderate harm (sectoral sanctions, commercial nature), the oilfield equipment exports present moderate-to-elevated harm (dual-use items, obfuscated end users), and the structured payments present elevated harm (deliberate concealment). On balance, this factor is likely to be viewed as slightly aggravating.
D. Factor 4 — Individual Characteristics of the Subject
The fourth General Factor considers the individual characteristics of the entity, including its size, sophistication, commercial experience, and history with OFAC.
Analysis. Dunmore Energy Holdings Ltd. is a large, commercially sophisticated enterprise. The company reported $4.87 billion in revenue for fiscal year 2021 and employs approximately 3,200 people worldwide. Dunmore is domiciled in the Cayman Islands and maintains operational headquarters in Houston, Texas. The company is privately held, with ownership distributed among Greystone Capital Partners Fund IV, L.P. (62.5%), management (22.5%), and Thornbury Infrastructure Fund II, L.P. (15%).
As a large, sophisticated commercial enterprise with significant international operations — including subsidiaries and operations in the Cayman Islands, the United Arab Emirates, the United States, Germany, and Nigeria — Dunmore is the type of entity that OFAC would expect to maintain a robust, well-resourced sanctions compliance program. OFAC may weigh Dunmore's size and sophistication as an aggravating factor, reasoning that a company of this scale and international reach should have had the resources and expertise to implement adequate compliance controls and detect the Volkhov connections earlier.
Counter-Argument. While Dunmore's size and sophistication raise expectations regarding compliance, the company has demonstrated its commitment to meeting those expectations through its extensive post-discovery remediation. Dunmore has invested over $31 million in investigation and remediation costs (discussed further under Factor 10) and has engaged leading compliance consultants to design and implement an Enhanced Sanctions & Export Controls Compliance Program that meets the highest industry standards. The company's remedial response reflects the actions of a sophisticated entity that takes its compliance obligations seriously and is willing to invest substantial resources to correct identified deficiencies.
Additionally, Dunmore has no prior history of OFAC violations or enforcement actions, which is a significant mitigating consideration. This is the company's first encounter with OFAC enforcement, and the absence of prior violations suggests that the compliance failures at DTI were aberrational rather than systemic or reflective of a broader culture of non-compliance.
Assessment: Slightly Aggravating (due to size and sophistication creating heightened expectations), tempered by the absence of prior violations and the significant remedial response.
E. Factor 5 — Compliance Program
The fifth General Factor considers the existence, nature, and adequacy of the entity's compliance program at the time of the apparent violation, and any steps taken to enhance the compliance program after the violation.
1. Pre-Existing Compliance Program (As of April 2022)
The pre-existing compliance program in place at Dunmore and DTI during the relevant period was assessed in the November 15, 2022 memorandum prepared by Conrad Reeves and Jasmine Thornton. That assessment identified significant deficiencies in the following areas:
(a) OFAC Screening Protocols. DTI's screening protocols were inadequate in several respects. The automated screening tool was not calibrated to capture indirect ownership relationships or to flag potential beneficial ownership connections to sanctioned parties. The fuzzy-matching algorithms employed by the screening software used thresholds that were insufficiently sensitive to detect transliterated Russian names. Screening was conducted only at the point of onboarding new counterparties and was not systematically refreshed when OFAC updated the SDN or SSI Lists.
(b) Third-Party Due Diligence. DTI's third-party due diligence procedures were deficient. The company relied primarily on counterparty self-certification of beneficial ownership, without conducting independent verification. There was no systematic process for investigating adverse media hits or for escalating potential red flags identified during the onboarding process. The due diligence files for Petronova Trading FZE and Zenith Petroleum DMCC, reviewed during the investigation, were incomplete and reflected only superficial inquiry.
(c) Training. DTI's Dubai trading desk personnel received minimal sanctions compliance training. The investigation found no evidence that traders received any formal training on Russian sectoral sanctions, Directive 2 requirements, or the identification of sanctions evasion techniques. Gerald Fisk, as CCO, was responsible for organizing compliance training but failed to develop or deliver a training program tailored to the specific sanctions risks faced by DTI's trading operations.
(d) Escalation Mechanisms. There was no formal escalation mechanism or protocol for DTI personnel to report potential sanctions red flags to Dunmore's corporate compliance function or to outside counsel. Red flags that were identified at the operational level were handled informally by Fisk, without documentation or escalation.
These deficiencies are aggravating under Factor 5, as they reflect a compliance program that was materially inadequate to address the sanctions risks inherent in DTI's business activities. The failure to maintain an effective compliance program is a significant consideration in OFAC's enforcement analysis.
2. Enhanced Compliance Program (Post-discovery)
Dunmore has taken comprehensive steps to remediate the identified compliance deficiencies. In December 2022, Dunmore retained Pemberton Investors Solutions LLC, led by Dr. Anton Bremer — a former OFAC senior compliance officer — to design and implement an Enhanced Sanctions & Export Controls Compliance Program (the "Enhanced Program"). Dr. Bremer's team delivered a comprehensive remediation report on September 15, 2023, and Dunmore's Board of Directors formally adopted the Enhanced Program on October 1, 2023.
The Enhanced Program includes, among other things:
(a) A restructured compliance organization reporting directly to the CEO and the Board's Audit and Compliance Committee;
(b) Deployment of advanced sanctions screening technology with enhanced fuzzy-matching, transliteration capabilities, and automated SDN/SSI List update integration;
(c) A comprehensive third-party due diligence program requiring independent verification of beneficial ownership, adverse media screening, and ongoing monitoring;
(d) Mandatory annual sanctions compliance training for all trading desk personnel, with supplemental training on Russian sectoral sanctions and sanctions evasion red flags;
(e) A formal escalation protocol requiring the immediate reporting of potential sanctions red flags to the General Counsel and outside counsel;
(f) An annual independent compliance audit conducted by an external compliance firm;
(g) Integration of sanctions compliance into the company's enterprise risk management framework; and
(h) Appointment of a new Chief Compliance Officer, Priya Nayar (appointed August 1, 2022), with direct reporting lines to the CEO and the Board.
A supplemental remediation report documenting the full implementation of the Enhanced Program was submitted to DOJ on January 15, 2024. The same report will be made available to OFAC as part of the VSD submission.
Mitigating. While the pre-existing compliance program was deficient, Dunmore's post-discovery remediation is comprehensive, well-resourced, and has been fully implemented. The appointment of a new CCO, the engagement of leading compliance consultants, and the adoption of an Enhanced Program that addresses each identified deficiency in detail demonstrate Dunmore's commitment to preventing future violations. OFAC's enforcement guidance specifically encourages companies to implement meaningful remediation, and Dunmore's efforts in this regard are among the strongest mitigating factors in its case.
Assessment: Mitigating on balance. The pre-existing deficiencies are aggravating, but the comprehensive remediation strongly counterbalances this factor.
F. Factor 6 — Remedial Response
The sixth General Factor considers the nature and quality of the entity's remedial response upon learning of the apparent violation. This factor overlaps to some degree with Factor 5 (compliance program), but focuses more broadly on the totality of the entity's response.
Analysis. Dunmore's remedial response has been prompt, thorough, and comprehensive, encompassing the following actions:
Immediate Steps (April 2022). Upon notification of the potential Volkhov exposure on April 11, 2022, Dunmore's General Counsel Marcus Wellbourne immediately engaged outside counsel (Calderwood & Harkness LLP, retained April 14, 2022). A litigation hold was issued on April 20, 2022, directing the preservation of all potentially relevant documents and electronically stored information across all relevant custodians and data sources. Ridgeline Advisory Group LLC (forensic accounting) was retained on May 2, 2022, and Nexagen Analytics Inc. (e-discovery) was engaged shortly thereafter. A comprehensive internal investigation was initiated and has been ongoing.
Personnel Actions. Dunmore took prompt and decisive personnel actions against the individuals identified as most directly responsible for the apparent violations:
• Natasha Sorokin was placed on administrative leave on May 16, 2022, and formally separated from the company effective September 15, 2022.
• Gerald Fisk departed Dunmore on June 10, 2022, following the identification of his supervisory compliance failures.
• Derek Hargrave was placed on administrative leave on July 1, 2022, and formally separated from the company effective October 1, 2022.
New Chief Compliance Officer. Priya Nayar was appointed as Dunmore's new Chief Compliance Officer on August 1, 2022. Ms. Nayar brings extensive experience in sanctions compliance, having previously served as the Director of Global Sanctions Compliance at a major international energy company. Her appointment reflects Dunmore's commitment to ensuring that the compliance function is led by a qualified, experienced professional with direct access to senior management and the Board.
Enhanced Compliance Program. As discussed in connection with Factor 5, Dunmore adopted a comprehensive Enhanced Sanctions & Export Controls Compliance Program on October 1, 2023, following an extensive design and implementation process led by Pemberton Investors Solutions LLC.
Voluntary Disgorgement. On November 30, 2023, Dunmore voluntarily disgorged $8.75 million to the U.S. Treasury, representing the estimated net profits derived from the nine tainted crude oil swap transactions. The disgorgement amount was calculated as follows: $156.3 million in tainted notional value × 5.6% estimated net margin = $8.7528 million, rounded to $8.75 million. This calculation was performed by Ridgeline Advisory Group LLC and was reviewed and validated by Calderwood & Harkness. The voluntary disgorgement was not required by OFAC or DOJ but was undertaken proactively by Dunmore to demonstrate the company's commitment to disgorging any benefit derived from the unlawful transactions.
Assessment: Strongly Mitigating. Dunmore's remedial response is among the strongest mitigating factors in its case. The promptness of the response, the decisiveness of the personnel actions, the appointment of a new CCO, the comprehensive compliance remediation, and the voluntary disgorgement of profits collectively demonstrate a remedial posture that OFAC has historically credited favorably in its enforcement decisions.
G. Factor 7 — Cooperation with OFAC
The seventh General Factor considers the nature and extent of the entity's cooperation with OFAC's investigation.
Analysis. Dunmore has cooperated fully and proactively with OFAC since becoming aware of the apparent violations. The company has not yet formally engaged with OFAC's enforcement staff (the VSD has not yet been filed as of the date of this memorandum), but the VSD filing planned for June 1, 2023, will constitute the initial touchpoint with OFAC's Office of Compliance and Enforcement.
The VSD narrative is being prepared by Conrad Reeves and Jasmine Thornton and will provide a comprehensive account of the apparent violations, the underlying facts, the responsible individuals, and the remedial actions taken by Dunmore. The VSD will be accompanied by supporting documentation, including the Ridgeline Advisory Group forensic accounting report (Engagement No. RAG-2022-0319), the Enhanced Program documentation, and relevant transactional records.
Dunmore has separately cooperated extensively with DOJ since the initial proffer session on July 15, 2022. Dunmore's cooperation with DOJ has included a supplemental proffer on November 20, 2022, and the submission of a 176-page investigation report on May 15, 2023. This cooperation with DOJ is relevant to OFAC's assessment of Factor 7, as OFAC routinely considers a subject's cooperation with parallel enforcement agencies in evaluating the cooperation factor.
Going forward, Dunmore is prepared to respond promptly and completely to any OFAC information requests or follow-up inquiries. Based on our experience with OFAC's enforcement process, we anticipate that follow-up requests will likely be directed by OFAC Compliance Analyst Erin Matsuda or her colleagues in the Office of Compliance and Enforcement, and we have advised Dunmore to be prepared to devote the necessary resources to ensure timely and comprehensive responses.
Assessment: Strongly Mitigating. The filing of a VSD, combined with Dunmore's demonstrated willingness to cooperate fully with both OFAC and DOJ, weighs strongly in the company's favor.
H. Factor 8 — Timing of the Apparent Violation in Relation to Imposition of Sanctions
The eighth General Factor considers the temporal relationship between the apparent violation and the imposition of the sanctions at issue.
Analysis. This factor is particularly relevant to Dunmore's case because of the evolution of the sanctions regime applicable to Volkhov during the period of the apparent violations. Volkhov was designated under Directive 2 (sectoral sanctions) on November 15, 2019. The suspect transactions — spanning from approximately March 2020 through April 2022 — thus occurred largely during the period when Volkhov was subject only to the narrower Directive 2 restrictions, not the comprehensive SDN blocking sanctions that were imposed on April 6, 2022.
The Directive 2 sectoral sanctions are complex and have been widely acknowledged — including by OFAC itself — as presenting significant compliance challenges for market participants, particularly in the energy sector. The precise contours of the Directive 2 prohibitions, including the scope of restricted financial instruments and the application of the 50% ownership rule to entities in which designated persons hold a controlling interest, have been the subject of extensive FAQs, guidance, and industry confusion. While this complexity does not excuse non-compliance, it provides relevant context for OFAC's assessment of the timing factor.
Only a narrow window — April 6, 2022 (when Volkhov was added to the SDN List) through approximately April 19, 2022 (when the DOJ subpoena was issued and Dunmore began winding down DTI's relevant activities) — implicated the full SDN blocking sanctions. Our investigation has not identified any transactions that DTI executed with Volkhov-connected counterparties during this narrow window, although one crude oil cargo that was in transit during this period may not have been fully wound down in compliance with the blocking requirements. This is a relatively minor exposure in the context of the broader matter.
Assessment: Mitigating. The fact that the vast majority of the suspect transactions occurred during the Directive 2 sectoral sanctions period — rather than under the stricter SDN blocking regime — weighs in Dunmore's favor. The complexity and evolving nature of the Russian sectoral sanctions provide additional contextual mitigation.
I. Factor 9 — Other Enforcement Action
The ninth General Factor considers whether other enforcement agencies have taken or are taking action against the entity in connection with the same or related conduct.
Analysis. As noted above, the DOJ National Security Division has an open inquiry into Dunmore's transactions, initiated by grand jury subpoena GJ No. 22-418, issued on April 19, 2022. Dunmore has been cooperating fully with DOJ since July 15, 2022, and is currently seeking a declination from DOJ under the DOJ Corporate Enforcement Policy. A comprehensive white paper supporting the declination request was submitted to DOJ on March 1, 2023.
OFAC typically coordinates with DOJ in matters involving parallel enforcement proceedings. OFAC may defer to or credit DOJ's enforcement response when determining its own enforcement posture. If DOJ grants a declination or resolves the matter through a non-prosecution agreement or deferred prosecution agreement, OFAC may be inclined to adopt a similarly favorable posture. Conversely, if DOJ brings criminal charges or imposes substantial financial penalties, OFAC may calibrate its response accordingly, though it will also seek to avoid duplicative penalties.
Dunmore's cooperation with DOJ — including the initial proffer, supplemental proffer, and submission of the 176-page investigation report — should be credited by OFAC as demonstrating the company's good-faith commitment to transparency and accountability. The voluntary disgorgement of $8.75 million already paid to the U.S. Treasury should also be credited by OFAC to avoid duplicative financial consequences.
No separate BIS enforcement action has been initiated to date, but Dunmore is evaluating whether to file a VSD with BIS in connection with the oilfield equipment exports. This analysis is addressed in the companion memorandum dated May 1, 2023.
Assessment: Neutral to Slightly Mitigating. The existence of the DOJ parallel proceeding is neutral from a sanctions-specific perspective, but Dunmore's extensive cooperation with DOJ and its pursuit of a declination may signal to OFAC the seriousness and good faith of Dunmore's overall compliance posture.
J. Factor 10 — Future Compliance / Deterrent Effect
The tenth General Factor considers the need for the enforcement response to promote future compliance and provide a deterrent effect.
Analysis. OFAC considers whether the enforcement response is necessary to incentivize future compliance, both by the subject and by similarly situated entities. In Dunmore's case, several considerations are relevant.
The Enhanced Sanctions & Export Controls Compliance Program adopted by Dunmore on October 1, 2023, was designed to meet or exceed the benchmarks set forth in the DOJ Evaluation of Corporate Compliance Programs (as updated in March 2023). This program was assessed in a memorandum prepared by Jasmine Thornton dated September 1, 2023, which concluded that the Enhanced Program is well-designed, adequately resourced, and appropriately implemented. An ongoing monitoring and testing framework has been established (as documented in a supplemental memorandum dated December 15, 2023 by Jasmine Thornton), which provides for continuous assessment of the Enhanced Program's effectiveness and ensures that identified gaps are remediated promptly.
Dunmore's significant financial expenditure on investigation and remediation provides substantial deterrent effect. The total matter cost incurred by Dunmore to date is approximately $31.275 million, comprising outside counsel fees, forensic accounting costs, e-discovery expenses, compliance consultant fees, the voluntary disgorgement payment, and related expenditures. Of this total, Dunmore has recovered approximately $7.2 million from its directors and officers liability insurance carrier, Garrison Mutual Insurance Co., under Policy No. GM-DO-2021-08734, resulting in a net out-of-pocket cost to Dunmore of approximately $24.075 million. This substantial financial impact — in addition to the reputational consequences, personnel disruptions, and management attention diverted to the matter — provides a powerful incentive for Dunmore to maintain rigorous compliance going forward.
Assessment: Mitigating. Dunmore's comprehensive compliance remediation and substantial financial expenditure on investigation and remediation provide a strong basis for OFAC to conclude that the deterrent objectives of enforcement have already been substantially achieved, even without the imposition of a civil monetary penalty.
K. Factor 11 — Other Relevant Factors
The eleventh General Factor is a catch-all provision that allows OFAC to consider any other factors relevant to the appropriate enforcement response.
Analysis. Several additional considerations are relevant to Dunmore's case:
Private Company Status. Dunmore is a privately held company and is not subject to SEC reporting obligations or the public disclosure requirements that apply to publicly traded companies. While this means that the enforcement matter will not receive the same level of public attention that would accompany an action against a public company, it also means that the financial impact of the matter is borne directly by Dunmore's equity holders (Greystone Capital Partners Fund IV, L.P., management, and Thornbury Infrastructure Fund II, L.P.) and is a meaningful internal deterrent.
Multi-Jurisdictional Operations. Dunmore's global operations, with subsidiaries and offices in the Cayman Islands, the United Arab Emirates, the United States, Germany, and Nigeria, necessitated a comprehensive, multi-jurisdictional remediation effort. The Enhanced Program was designed to address the compliance risks inherent in this geographically dispersed operational footprint, including the challenges of implementing consistent compliance standards across different legal jurisdictions and regulatory environments.
External Audit Consultation. Dunmore's outside auditors, Ashford & Whitmore LLP (engagement partner Kenneth Ashford), have been consulted regarding the implications of the apparent violations for Dunmore's internal controls over trade finance transactions. This consultation resulted in recommendations for strengthening internal controls, which have been incorporated into the Enhanced Program.
Assessment: Neutral to Slightly Mitigating. The additional factors considered under Factor 11 do not significantly move the needle in either direction, but the multi-jurisdictional scope of the remediation effort and the engagement of external auditors reflect positively on Dunmore's commitment to comprehensive compliance reform.
V. Voluntary Self-Disclosure — Impact on Penalty Calculus
A. OFAC Credit for VSD
Under the OFAC Economic Sanctions Enforcement Guidelines, the filing of a voluntary self-disclosure is the single most impactful mitigating factor in the penalty calculus. The Guidelines explicitly provide that OFAC will generally not pursue civil monetary penalties in cases involving voluntary self-disclosures where the violations are classified as non-egregious. Instead, in such cases, OFAC will typically issue a Cautionary Letter or a No Action Letter. This policy reflects OFAC's strong institutional preference for encouraging voluntary disclosure and cooperation, which serve the broader objectives of the sanctions regime by promoting transparency, facilitating timely detection and remediation of violations, and enabling OFAC to allocate its enforcement resources efficiently.
Even in cases where the violations are classified as egregious, a voluntary self-disclosure results in a reduction of the base penalty by 50%. This provides significant credit to the disclosing entity even in the most serious cases.
Dunmore's planned VSD filing, scheduled for June 1, 2023, is therefore a critical mitigating factor. The VSD will provide OFAC with a comprehensive narrative of the apparent violations, the factual basis for the disclosures, the company's remedial actions, and the supporting documentation, including the Ridgeline Advisory Group forensic accounting report and the Enhanced Program materials.
Timeliness Consideration. An important threshold question is whether Dunmore's VSD will qualify as "voluntary" under OFAC's definition, given that the DOJ grand jury subpoena was issued on April 19, 2022, prior to the planned VSD filing date. Under the Guidelines, a disclosure is considered "voluntary" if: (i) the entity did not receive an OFAC administrative subpoena, penalty notice, or other formal demand for information or documentation prior to the disclosure; and (ii) the entity was not otherwise obligated by agreement or regulation to report the apparent violation to OFAC.
In Dunmore's case, the DOJ subpoena was directed to the Department of Justice — not to OFAC. OFAC has not contacted Dunmore, issued a subpoena, or made any formal or informal inquiry regarding the transactions at issue. Dunmore is not under any legal obligation to report the apparent violations to OFAC specifically (as distinct from its obligations under the DOJ subpoena). Accordingly, the VSD to OFAC should qualify as voluntary under the Guidelines.
We acknowledge a potential risk that OFAC could take the position that the VSD is not truly "voluntary" because Dunmore was already on notice of the potential violations by virtue of the DOJ subpoena and could be said to have been motivated by the desire to mitigate DOJ-related exposure rather than by a genuine desire to self-report to OFAC. However, we believe this risk is low. OFAC has consistently treated the voluntariness determination as turning on whether OFAC itself (not another agency) had contacted the entity or issued a demand for information. The Guidelines do not condition the voluntariness determination on the absence of any government investigation whatsoever — only on the absence of an OFAC-specific inquiry. We recommend that the VSD narrative address this issue forthrightly, acknowledging the existence of the DOJ inquiry while emphasizing that Dunmore is voluntarily coming forward to OFAC of its own accord.
B. Coordination Between OFAC and DOJ
OFAC and DOJ frequently

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