Rule 506(c) Unchained? The SEC Loosens Requirements for Advertising in Private Capital Raises
On 12 March 2025, the US Securities and Exchange Commission (SEC) staff issued a no-action letter that provides private fund sponsors with a concrete, streamlined approach to relying on Rule 506(c),1 based on minimum investment amounts and investor representations. This guidance has the potential to unlock Rule 506(c)’s advantages for private fund sponsors more than a decade after its passage.
Background on Rule 506(c)
Implemented in 2013 pursuant to the Jumpstart Our Business Startups Act, Rule 506(c) provides an alternative to the traditional prohibition on general solicitation in private offerings. Specifically, Rule 506(c) permits issuers to engage in general solicitation and advertising when selling securities, provided they take “reasonable steps” to verify that all purchasers are accredited investors. While enacted in order to give issuers the opportunity to increase their fundraising abilities through marketing to a public audience, Rule 506(c) has been only sparingly used over the last decade. This past November, SEC Commissioner Hester Peirce commented that issuers had “raised around $169 billion annually under Rule 506(c) compared to $2.7 trillion under 506(b), which does not permit general solicitation.”2
The “reasonable steps” verification requirement has presented operational challenges for many issuers. Prior methods qualifying as “reasonable steps” included reviewing tax returns, bank statements, or obtaining verification letters from professionals such as lawyers or accountants. Because of the additional administrative burdens imposed by these verification methods, Rule 506(c) has not been widely utilized, despite its potential to access a much wider audience for capital raising.
The Alternative Verification Method
The no-action letter provides a far less labor-intensive approach to satisfying Rule 506(c)’s verification requirements by streamlining the process issuers must follow to verify an investor’s accredited investor status. Specifically, the SEC mandates that an issuer relying on the no-action letter:
Impose minimum investment amounts of US$200,000 for individuals and US$1 million for legal entities;3
Receive written, self-certified representations from an investor that they are an accredited investor and that their investment is not financed by a third party for the specific purpose of making the particular investment;4 and
Have no actual knowledge of facts contrary to the two above bullets.
This test for determining whether an issuer has taken reasonable steps to verify accredited investor status is objective and depends on the specific facts and circumstances of each investor and transaction.
Practical Considerations for Private Fund Sponsors and Other Issuers
What are the practical implications for private fund sponsors now that the SEC has loosened the verification restrictions? Will private fund sponsors now jump into the fray and begin to advertise on social media, at sporting events, and elsewhere? There remain a number of considerations notwithstanding the less burdensome verification process. The SEC’s no-action letter addressed only this aspect of using Rule 506(c). The Marketing Rule (defined below), antifraud provisions, and other provisions of the Investment Advisers Act of 1940 the (Advisers Act) of course remain in full force and effect. Private fund sponsors considering an offering under Rule 506(c) will need to not only comply with the Advisers Act’s requirements, but be prepared to do so in front of a much wider investor and regulator audience.
Private fund sponsors considering Rule 506(c) offerings should note several additional considerations:
Update Policies and Procedures
Managers should adopt policies and procedures to accommodate Rule 506(c) offerings.
Marketing Rule
Registered investment advisers must continue to consider Rule 206(4)-15 under the Advisers Act the (Marketing Rule) when marketing their funds. While advisers may widely distribute marketing materials, such materials must comply with the Marketing Rule. For example, under the Marketing Rule, advisers are generally prohibited from including hypothetical performance, such as performance targets and projected returns, in advertisements to the general public.6
Switching Exemptions
Managers that want to change to a Rule 506(c) offering should file an updated Form D with the SEC and review offering materials for any necessary updates (e.g., remove representations regarding no general solicitation from subscription agreements and other documents).
What Is Next for Private Fund Sponsors and Rule 506(c)?
The easing of the investor verification process under Rule 506(c) will undoubtedly renew interest in pursuing this alternative path to capital raising. It is no secret that the fundraising environment over the last several years has been challenging, particularly for mid-market and emerging manager sponsors. For those managers, there are good reasons to explore general solicitation under Rule 506(c), bearing in mind the need to comply with the SEC’s recent guidance on verification and the requirements of the Advisers Act. Time will tell whether the SEC’s no-action letter will actually open the floodgates of advertising for private fund sponsors. Watch this space for further insights as the industry’s approach to using Rule 506(c) unfolds.
Footnotes
1 17 C.F.R. § 230.506(c) (1933).
2 https://www.sec.gov/newsroom/speeches-statements/peirce-remarks-sbcfac-111324
3 For an entity investor accredited solely through its beneficial owners, the minimum investment amount is US$1 million, or US$200,000 for each beneficial owner if the entity has fewer than five natural person owners.
4 These representations must be made for each beneficial owner for entities that are accredited solely through the accredited investor status of each beneficial owner.
5 17 C.F.R. § 275.206(4)-1 (●).
6 The Marketing Rule requires that investment advisers only present hypothetical performance to audiences if it is relevant to their likely financial situation and investment objectives, limiting an adviser’s ability to include such performance in advertisements to the public. In the Marketing Rule’s adopting release, the SEC specifically noted that advisers “generally would not be able to include hypothetical performance in advertisements directed to a mass audience or intended for general circulation.” Investment Adviser Marketing, Release No. IA-5653, SEC Dec. 22, 2020 effective May 4, 2021, at 220.
How to Protect Your ESOP from Lawsuits Over Cash Holdings
At least five lawsuits have recently been filed against employee stock ownership plan (ESOP) fiduciaries alleging a failure to prudently invest cash held in the ESOP trust. While scrutiny of investments in company stock has long been common, the focus on cash holdings represents a significant and novel shift. These cases signal a potential trend, and ESOP fiduciaries should take steps to mitigate risk, as outlined below.
Why Are ESOP Cash Holdings Becoming Litigation Targets?
One recent case, Schultz v. Aerotech, sheds light on this issue. In this lawsuit, the plaintiffs argue that Aerotech’s ESOP held nearly 20% of its total assets in cash equivalents, yielding a return of less than 1.5% over five years. Aerotech counters that the cash-heavy approach was necessary to meet future repurchase obligations. The plaintiffs, however, claim the company could have pursued higher-yield investments while maintaining adequate liquidity.
The court reviewing Aerotech’s motion to dismiss pointed to the “vast disparity” between Aerotech’s cash-heavy approach and the practices of similar plans as raising plausible inference that the company, as a plan fiduciary, failed to meet its fiduciary obligations. While Aerotech may later demonstrate that its investment strategy was justified under the specific circumstances, the allegations of imprudence were sufficient for the case to survive a motion to dismiss and proceed to costly discovery.
What Actions Can ESOP Fiduciaries Take?
Although the courts have not yet fully addressed these claims, ESOP fiduciaries can take the following measures to reduce risk and align their actions with their fiduciary obligations:
1. Assess Cash Holdings and Prepare for Increased Scrutiny
Evaluate the rationale behind the ESOP’s cash holdings. For instance:
Are large cash reserves an intentional strategy to buffer repurchase obligations?
Or are they the unintended result of segregating accounts of terminated participants over extended periods (which raises other compliance issues)?
Prepare for increased scrutiny from employees, plaintiff’s lawyers, and regulators by documenting the reasoning behind your investment strategies.
2. Reevaluate Investment Strategies
Ensure the ESOP’s investment approach aligns with fiduciary duties under ERISA. Unlike investments in company stock, cash holdings and other non-stock assets do not enjoy the same protective standards. Consider whether reallocating cash into low-risk, higher-yield assets could achieve better returns without compromising liquidity. Ultimately, an ESOP is a retirement plan, and the fiduciaries responsible for investment of the plan assets need to evaluate the prudence of those investments. This is separate in certain respects to the company’s need to satisfy the repurchase obligation.
3. Engage an Investment Advisor or Investment Manager
Appointing an investment advisor or investment manager can help reduce fiduciary liability. An investment advisor could make recommendations to the plan administrator or ESOP committee on appropriate investments of cash for the ESOP. However, the ultimate fiduciary responsibility for the investment of plan assets would rest with the plan administrator or ESOP committee. The plan administrator or ESOP committee could also appoint an investment manager who would take on the primary fiduciary obligation for the management of the assets. However, the plan administrator or ESOP committee would still have to act prudently with respect to the selection and monitoring of the investment manager.
4. Invest in Fiduciary Training
Formal training on fiduciary duties, particularly on selecting and managing investments, is increasingly common for 401(k) plans and can be equally beneficial for ESOP fiduciaries. This is especially important if an investment manager is not engaged.
5. Evaluate Transferring Cash to a 401(k) Plan
One way to mitigate liability for investing cash allocated to the account of a terminated participant who no longer holds any stock is to transfer the cash out of the ESOP and into the employer’s 401(k) plan. This option is most useful when the accounts of terminated participants are segregated (i.e., the stock is exchanged for cash to maximize the investments in stock for active participants) and immediate distributions are not permitted. While there are complex pros and cons to this approach, reducing the fiduciary obligations on the ESOP fiduciaries is a clear benefit.
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New SEC Guidance May Increase Use of Generally Solicited Rule 506(c) Offerings
Highlights
The SEC issued new guidance on how an issuer wishing to engage in general solicitation under Rule 506(c) may satisfy the rule’s accredited investor verification requirement
The guidance clarifies that in appropriate circumstances, a minimum investment amount coupled with the receipt of investor representations may constitute reasonable verification steps
Corporate issuers and private fund sponsors now have a clearer path to engage in broad outreach to prospective investors without imperiling an offering’s exemption from Securities Act registration
On March 12, 2025, the staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance issued new guidance on the accredited investor verification steps an issuer must take in order to make an unregistered offering in reliance on Rule 506(c) under the Securities Act. The guidance indicates that issuers may fulfill the Rule 506(c) accredited investor verification requirement by imposing relatively high minimum investment requirements and obtaining related purchaser representations.
The SEC staff thus has opened a clearer path for issuers – including both operating companies and private funds – to engage in broad outreach to prospective investors without endangering an offering’s exemption from Securities Act registration.
Background
Section 4(a)(2) of the Securities Act exempts from registration “transactions by an issuer not involving any public offering.” Regulation D is a safe harbor under Section 4(a)(2), compliance with which ensures that an offering satisfies the statutory exemption. For most private issuers, the key traditional component of Regulation D has been Rule 506(b). That rule permits unregistered offerings of any size to accredited investors (and a limited number of non-accredited investors), on the condition that, among other things, the issuer refrains from “general solicitation” in connection with the offering.
In the JOBS Act of 2012, Congress directed the SEC to expand Regulation D to permit general solicitation in certain unregistered offerings. The SEC did that by adopting Rule 506(c). Rule 506(c) states that an issuer may use general solicitation when conducting an unregistered offering of any size, provided that all purchasers in the offering are accredited investors and the issuer takes “reasonable steps to verify” each purchaser’s accredited investor status.
Since the rule’s adoption in 2013, issuers have not engaged in Rule 506(c) offerings to the extent many observers had initially predicted, primarily because issuers have viewed the accredited investor verification requirement as unwieldy in practice. While Rule 506(c)(2)(ii) sets forth a list of “non-exclusive, non-mandatory” verification methods that are deemed sufficient, issuers generally have seen these as burdensome to use and uncomfortably intrusive for investors.
At the same time, issuers have been concerned that relying on the principles-based verification approach noted in the 2013 adopting release might not provide unambiguous grounds to conclude that Rule 506(c) has been satisfied, in part because the release makes clear that a mere representation by a prospective purchaser as to its accredited investor status generally would not fulfill the verification requirement.
Private issuers, including private fund sponsors, therefore have largely foregone the allure of general solicitation and continued their traditional reliance on Rule 506(b).
New SEC Guidance
The Division of Corporation Finance staff now has issued fresh guidance concerning what can constitute “reasonable steps to verify” a purchaser’s accredited investor status for purposes of Rule 506(c). The guidance, issued on March 12, takes the form of new Compliance and Disclosure Interpretations (CDI) 256.35 and 256.36, as well as a related no-action letter addressed to Latham & Watkins LLP. The staff’s initiative has the potential to revive the appeal of Rule 506(c).
Minimum Investment Amount Is a Relevant Verification Factor
CDI 256.35 advises that if an issuer does not take any of the non-exclusive, non-mandatory accredited investor verification steps outlined in Rule 506(c)(2)(ii), it can apply a reasonableness standard directly to the specific facts and circumstances of the offering and its investors. Reprising the principles expressed in the 2013 adopting release, the guidance notes that in determining what constitute reasonable verification steps, the issuer should consider factors such as the nature of the purchaser and the type of accredited investor it claims to be; the amount and type of information that the issuer has about the purchaser; and the nature and terms of the offering, including any minimum investment amount.
High Minimum Investment Amount Plus Purchaser Representations May Equal Reasonable Steps to Verify
CDI 256.36 and the no-action letter address in more detail the possible significance of a minimum investment amount in the accredited investor verification context. The guidance here advises that, depending on the facts and circumstances, an issuer may be able to conclude that it has taken reasonable steps to verify purchasers’ accredited investor status when the offering “requires a high minimum investment amount.” In amplification of that thought, the no-action letter states that an issuer generally could conclude that it has taken reasonable steps to verify a purchaser’s accredited investor status if:
the offering requires a minimum investment of $200,000 for a natural person or $1,000,000 for an entity
the issuer obtains written representations that:
the purchaser is an accredited investor
the purchaser’s minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer
the issuer has no actual knowledge of any facts indicating that the foregoing purchaser representations are not true
The idea that a minimum investment amount can be a key factor in the analysis of reasonable verification steps is not completely new. As noted, the Rule 506(c) adopting release raised this concept in general terms. The new guidance, though, is more specific and thus may inspire more confidence on the part of issuers who decide to follow it. In particular, the staff’s position now essentially permits a form of “self-certification” of accredited investor status in Rule 506(c) offerings akin to the procedure on which issuers have long relied in traditional Rule 506(b) accredited investor offerings. This is a welcome development and should reduce uncertainty for issuers conducting or considering generally solicited offerings.
Takeaways
The SEC staff now may have reinvigorated the original promise of Rule 506(c). By providing a clear explanation of how minimum investment amounts and related investor representations may satisfy the accredited investor verification requirement, the guidance offers a means of using Rule 506(c) that is more straightforward and less intrusive than issuers previously have seen the rule to be. At least for well-established corporations and private fund sponsors (for which imposing significant minimum investment amounts is typically not a problem), new and fruitful forms of offering-related publicity now may become a practical option.
Of course, an issuer that decides to engage in general solicitation under Rule 506(c) must take care that its public statements are truthful, properly vetted, and consistent with its offering materials, in order to avoid anti-fraud issues under Rule 10b-5 or state law. In addition, where an offering also is being made outside the United States, the issuer must ensure that any public marketing done in reliance on Rule 506(c) does not conflict with relevant foreign regulations.
SEC Staff Clarifies Stance on Crypto Mining
On March 20, 2025, the U.S. Securities and Exchange Commission took a step towards clarifying its position on crypto mining activities. In a recent statement, the SEC’s Division of Corporation Finance provided non-binding guidance on the application of federal securities laws to proof-of-work (PoW) mining activities, stating that such activities are beyond the SEC’s purview. This move aims to offer greater clarity to the market amidst ongoing regulatory uncertainties surrounding crypto assets.
The statement addresses crypto asset mining on public, permissionless networks using the PoW consensus mechanism. PoW mining involves using computational resources to validate transactions and add new blocks to a blockchain network. Miners are rewarded with newly minted crypto assets for their efforts.
The Division of Corporation Finance concluded that PoW mining activities do not involve the offer and sale of securities under the Securities Act or the Exchange Act, although it qualified its conclusion with footnoted statements indicating that any specific determination remains reliant on the facts and circumstances of a particular arrangement.
The statement applies the Howey test to determine whether general mining activities constitute investment contracts. The test evaluates whether there is an investment of money in an enterprise with a reasonable expectation of profits derived from others’ efforts. The SEC found that PoW mining does not meet these criteria, as miners rely on their own efforts to earn rewards. The statement further explained that combining computational resources in mining pools does not change the nature of the activity, as miners in pools still rely on their own efforts to earn rewards, not on others’ efforts. Therefore, participants in these activities do not need to register such transactions with the SEC under the Securities Act or fall within its exemptions.
Lone Democrat Commissioner Caroline Crenshaw expressed concerns about the statement, cautioning against interpreting it as a “wholesale exemption for mining.” She emphasized that the statement employs arguably circular reasoning, is non-binding, and that the SEC will continue to evaluate mining activities on a case-by-case basis. Crenshaw compared the mining statement to a previous statement on meme coins, which she believed was also misinterpreted as a broad exemption.
As the crypto industry continues to evolve, regulatory clarity remains crucial for fostering innovation while protecting investors. Crypto enthusiasts may believe the SEC’s latest statement is a step in the right direction, but market participants should remain vigilant and stay informed about ongoing regulatory developments.
Will Texas Become the First State to Enact a “Mini-CFIUS” Review Process?
On March 13, 2025, the Texas Legislature introduced HB 5007, which, if enacted, could establish the first US state regime tasked with screening foreign investments on national security grounds.[1]
To be sure, this is not the first attempt by Texas to regulate acquisitions by foreign buyers within the state. The Lone Star Infrastructure Protection Act[2] (LIPA), which took effect in June 2021, prohibits Texas businesses from contracting with entities owned or controlled by individuals from China, Russia, North Korea and Iran if the contracting relates to critical infrastructure.[3] In addition, many other states have passed legislation limiting certain foreign investments into agricultural land within their borders.[4] Others are debating similar legislation.
HB 5007 is wholly different. It calls for the formation of a Texas Committee on Foreign Investment (TCFI). Modeled on the federal government’s interagency Committee on Foreign Investment in the United States or CFIUS, TCFI would be comprised of representatives from various Texas state agencies and charged with overseeing the pre-closing review and regulation of foreign acquisitions effecting “critical infrastructure” in Texas, agricultural land in Texas, or the sensitive personal data of Texas residents.[5] Subject to a monetary threshold to be determined by the governor, such transactions would require notification to the Texas Attorney General at least 90 days before closing, with penalties for non-compliance of up to $50,000 per violation.
While there is still uncertainty on whether and when Texas may implement the TCFI, companies considering transactions not only in Texas, but in other states rapidly enacting similar laws, should make sure to perform the necessary due diligence to identify and comply with these regulations, and also build in adequate time for closing delays based on mandatory notification periods that may vary by state.
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[1] TX HB5007, accessible at: https://capitol.texas.gov/BillLookup/History.aspx?LegSess=89R&Bill=HB5007
[2] Lone Star Infrastructure Protection Act, 87th Leg., R.S., S.B. 2116 (codified as Tex. Bus. & Com. Code § 113.001, et seq.)
[3] LIPA defines critical infrastructure as: 1) communication infrastructure systems; 2) cybersecurity system; 3) electric grid; 4) hazardous waste treatment systems; and 5) water treatment facilities.
[4] https://nationalaglawcenter.org/state-compilations/aglandownership/
[5] “Critical infrastructure” is defined more broadly under HB 5007 than LIPA and includes, among other categories: critical manufacturing, dams, defense industrial bases, emergency services, communications facilities, energy, health care, food, financial services, information technology, transportation systems, nuclear materials, water systems, and government facilities.
HMRC Supports a UK Restructuring Plan with its Change in Approach – Good News for Future RPs?
You may have read our previous blog about the Outside Clinic Restructuring Plan (RP) which asked whether 5p was enough to cram down HMRC and thought, well surely if that’s not enough, 10p would work? The Enzen Restructuring Plans (RPs) that were sanctioned this week also sought to compromise HMRC’s secondary preferential debt proposing a payment that would see HMRC recover 10p in the £ compared to nil in the relevant alternative. The Enzen RPs were not only sanctioned but also supported by HMRC – does this signal a change in attitude by HMRC?
In 2022 and 2023 we saw a number of RPs seeking to compromise HMRC secondary preferential debt in one way or another, and HMRC opposing those. Their reasons for not supporting often centered around the fact that HMRC is an involuntary creditor and that it has preferential status (in respect of certain of its debts) in an insolvency and therefore should be treated differently to other unsecured creditors in an RP.
The risk of HMRC challenge seemed to dissuade many (at least in the mid-market) from using the RP as a tool to restructure after plans proposed by the Great Annual Savings (GAS), Nasmyth and Prezzo were all opposed by HMRC. It was following those cases that HMRC then issued guidance outlining its expectations. Other RPs that have involved HMRC debt included Fitness First where HMRC’s debt was rescheduled, rather than compromised, and Clinton Cards, where HMRC’s debt also remained intact. It is perhaps not therefore surprising we haven’t seen many “HMRC” RPs since these due to the risk (and not to mention the cost) of a potential challenge from HMRC.
The Enzen RPs therefore seem to signal a change in attitude by HMRC who, for the first time, positively supported the plans. But why the change?
There were two plans proposed by Enzen entities, (Enzen Global Limited (EGL) and Enzen Limited (EL). HMRC was owed £5,286,674 by EGL in respect of preferential debts, and £4,319,890 by EL.
The EGL plan proposed to pay HMRC £250,000 in cash, equivalent to a return of 4.2p in the £ compared to 0.1p in the relevant alternative (in this case administration). Under the EL plan HMRC was also to receive a £250,000 cash payment resulting in a return of 5.6p in the £ compared to nil in the relevant alternative – which would also be administration. Essentially HMRC would receive a payment of approximately 10p in the £ under both plans.
Certain other preferential debts (VAT, NIC and PAYE) which were being paid when they fell due, were treated as critical payments under the RPs so were not compromised.
Although HMRC made noises at the convening stage suggesting that it might oppose the RPs there was no indication as to the basis on which it would do so. At this point HMRC’s position was governed by the fact that it hadn’t had enough time to consider its stance ahead of the convening hearing, given the substantial amount of material they had to review.
Between the convening hearing and sanction, HMRC raised its concerns in correspondence with the plan companies (although there is no specific detail about those concerns) save that they highlighted:
that the court should not cram down HMRC without good reason (following Naysmyth)
HMRC has a critical public function, and its views should carry considerable weight (following GAS).
Following this HMRC negotiated an additional £100,000 payment from both EGL and EL which increased its returns under the RPs to 6.6p under the EGL plan and to 8.1p under the EL plan. On that basis HMRC voted in favour of the RPs.
At the sanction hearing HMRC made their position on the RP clear and made the following statements indicating a new approach:
HMRC told the court that they knew they had opposed plans in the past (referencing Naysmith and GAS in particular), but they wanted their stance to the Enzen plan to prove indicative of a more proactive approach in relation to RPs.
HMRC also made it clear it is looking to participate as fully as possible with RPs where it can in the future.
The main reason HMRC supported in this case was because of the increased payment EML and EL were willing to give them, which meant there was a material increase to them.
There are at least two more plans that are coming before the court for sanction soon – Outside Clinic and Capricorn – that include an element of HMRC debt. Following the Enzen RPs it will be interesting to see, in light of HMRC’s positive engagement on Enzen, whether HMRC will support those.
The Enzen RPs will no doubt spark interest from the mid-market given HMRC’s stance to date has arguably been a blocker on mid-market RPs, but the costs of tabling an RP are still likely to be a concern given the litigious nature of many. Also if it is HMRC’s policy to now participate in restructuring plan hearings (even if they support) who bears those costs?
Annabelle McKeeve also contributed to this article.
FCA Review of Private Fund Market Valuation Practices
Go-To Guide:
The United Kingdom’s Financial Conduct Authority (FCA) is increasing its scrutiny of private fund market valuation practices, highlighting the need for stronger governance, transparency, and conflict-of-interest management across fund managers.
Fund managers are expected to apply consistent valuation methodologies, maintain functional independence in valuation processes, and address gaps in ad hoc valuation procedures.
The FCA has emphasised the importance of engaging third-party valuation advisers and has reminded fund managers of the importance of ensuring the independence of valuers.
Private fund managers should consider conducting gap analyses and strengthening their valuation frameworks to align with the FCA’s expectations.
Background
The FCA has embarked on a level of engagement with the private funds sector not seen since the consultation and engagement exercises surrounding the implementation of the Alternative Investment Fund Managers Directive (AIFMD) in 2013.
On 26 February 2025, the FCA issued a letter to the CEOs of all asset management and alternative firms, setting out its priorities for the year and informing them that it intends to:
engage with the UK fund management industry in a review of the UK’s implementation of the AIFMD, with a view to streamlining certain UK regulatory requirements (i.e. after maintaining a post-Brexit status quo, the FCA is now finally considering how UK private fund managers and their affiliated entities should be regulated); and
launch a review of conflict of interest management within UK fund managers. As part of this, the FCA will assess how firms oversee the application of their conflict of interest frameworks through their governance bodies and evaluate how investor outcomes are protected. (Note that the FCA will likely expect to see actual living processes deployed to prevent conflicts at all levels of a fund’s structure, with the efficiency of those processes tested by UK managers).
Subsequently, on 5 March 2025, the FCA published its findings from its review of private market valuation practices (the “Review’s Findings”).
Context of the FCA Review
The FCA’s review stemmed from its concern that private market assets, unlike public market assets, are not subject to frequent trading or regular price discovery. This necessitates firms to estimate values using judgment-based approaches, which can pose risks of inappropriate valuations due to conflicts of interest or insufficient expertise.
Private fund managers in the UK deploy a variety of different structures:
many of the valuation-related issues are more pronounced for open-ended funds that permit redemptions during the fund’s life, compared to closed-ended funds, where the true value and performance can only be determined at the end of the fund’s life when assets are sold.
funds that invest into a variety of assets, from relatively liquid ones (as is common with many hedge funds) to illiquid assets whose value may evolve as managers improve the asset (e.g. real estate funds and certain private equity funds).
We expect that the FCA will continue to focus on this area and will likely require all compliance teams across UK fund managers – regardless of their fund strategies – to conduct a gap analysis against the Review’s Findings.
The Review’s Findings
The FCA identified examples of good practice in firms’ valuation processes, including:
high-quality reporting to investors;
comprehensive documentation of valuations; and
use of third-party valuation advisers to enhance independence, expertise, and the consistent application of established valuation methodologies.
Overall, the FCA found that firms recognised the importance of robust valuation processes that prioritise independence, expertise, transparency and consistency.
The Review’s Findings, however, also identified areas requiring improvement, particularly in managing conflicts of interest. For example, conflicts can arise between a manager and its investors in the valuation process, such as when fees charged to investors depend on asset valuations. While firms acknowledged conflicts relating to fee structures and remuneration policies, the FCA found that other potential valuation-related conflicts were inadequately recognised or documented. These include:
conflicts in investor marketing, where unrealised performance of existing funds may be used to market new funds;
secured borrowing, where valuations may be inflated to secure higher borrowing levels; and
pricing of redemptions and subscriptions based on a fund’s net asset value.
The FCA expects firms to identify, document, and assess all potential and relevant valuation-related conflicts, determine their materiality, and take actions needed to mitigate or manage them.
The Review’s Findings also highlighted variations in firms’ approaches to independence within valuation processes. The FCA noted that functional independence within valuation functions and voting membership of valuation committees are critical for effective control and expert challenge. Additionally, the FCA found that many firms lacked clearly defined processes or consistent approaches for conducting ad hoc valuations during market or asset-specific events. Given the importance of ad hoc valuations in mitigating the risk of stale valuations, the FCA encouraged firms to consider the types of events and quantitative thresholds that could trigger such valuations and document how they are to be conducted.
The FCA flagged the following key areas for managers to consider reviewing and potentially improving:
the governance of their valuation processes;
the identification, documentation, and management of potential conflicts within valuation processes;
ensuring functional independence for their valuation process; and
incorporating defined processes for ad hoc valuations.
Breakdown of the Review’s Findings
Governance arrangements
The FCA found that while most firms had specific governance arrangements in place for valuations, including valuation committees responsible for making valuation decisions or recommendations, there were instances where committee meeting minutes lacked sufficient detail on how valuation decisions were reached. The FCA emphasised that firms must keep detailed records to enhance confidence in the effectiveness of oversight for valuation decisions.
Conflicts of interest
The FCA expects firms to identify, avoid, manage and, when relevant, disclose conflicts of interest. The Review’s Findings identified specific areas where conflicts are likely to arise, including investor fees, asset transfers, redemptions and subscriptions, investor marketing, secured borrowing, uplifts and volatility and employee remuneration. While the FCA found that conflicts around fees and remuneration were typically identified and mitigated through fee structures and remuneration policies, other potential conflicts were only partially identified and documented. Many managers had not sufficiently considered or documented these conflicts, often relying on generic descriptions.
The FCA expects firms to thoroughly assess whether valuation-related conflicts are relevant and, if so, to properly document them and the actions taken to mitigate or manage them. This may include engaging third-party valuation advisers.
Functional independence and expertise
The FCA reviewed the extent to which firms maintained independent judgment within their valuation processes, by looking at independent functions and the expertise of valuation committee members.
Only a small number of managers clearly demonstrated functional independence by maintaining a dedicated valuation function or an independent control function to lead on valuations. Such functions were responsible for developing valuation models and preparing recommendations for decisions made by valuation committees.
The FCA noted that examples of good practice to ensure independence included establishing a separate function to lead valuations and ensuring sufficient independence within the voting membership of valuation committees to guarantee effective control and expert challenge.
Policies, procedures and documentation
Unsurprisingly, the FCA emphasised that clear, consistent and appropriate policies, procedures and documentation are core components of a robust valuation process. These elements ensure a consistent approach to valuations and enable auditors and investors to verify adherence to the valuation process.
The FCA found that not all firms provided sufficient detail on their rationales for selecting methodologies and their limitations, nor did they include a description of the safeguards in place to ensure the functional independence of valuations or potential conflicts in the process. The FCA also observed examples of vague rationales for key assumption changes, such as adjustments in discount rates.
The FCA stated that it would encourage firms to engage with auditors appropriately, by inviting them to observe valuation committee meetings, raising auditor challenges at those meetings and taking proactive measures of managing conflicts of interest involving the audit service provider. It also stated that back-testing results can help firms inform their approach to valuations, by identifying insights about current market conditions and potential limitations in models, assumptions and inputs and encouraged firms to consider investing in technology to improve consistency and reduce the risk of human error in valuation processes.
Frequency and ad hoc valuations
The FCA noted that infrequent valuation cycles risk stale valuations, which may not accurately reflect the current conditions of investors’ holdings. This can lead to potential harm, such as inappropriate fees or investors redeeming at inappropriate prices.
The FCA emphasised that conducting ad hoc valuations (outside of the regular valuation schedule) can help mitigate the risk of stale valuations if material events cause significant changes in market conditions or how an asset performs.
Most firms, however, were found to lack formal processes for conducting ad hoc valuations. The FCA urged firms to incorporate a defined process for ad hoc valuations, including defining the thresholds and types of events that would trigger an ad hoc valuation (such as movement in the average multiple of the comparable set, company-specific events and fund-level triggers). It found that most firms waited for changes to flow through at the next valuation cycle instead of conducting ad hoc valuations. Only a few firms formally incorporated ad hoc valuations into their valuation processes by having defined types of events that would trigger these. The FCA stated firms should consider incorporating defined ad hoc valuation processes to mitigate the risk of stale valuations.
Transparency to investors
The FCA emphasised that transparency to investors increases confidence in their decision-making around private assets and enables them to make better informed decisions. The FCA urged full-scope UK AIFMs to provide investors with clear information about valuations and their calculations and encouraged all FCA-regulated firms to pay close attention to the information and needs of their clients.
The Review’s Findings highlighted that most firms demonstrated good practice by reporting both quantitative and qualitative information on performance at the fund and asset-levels, as well as holding regular conference calls with investors. Some firms further enhanced their reporting by including a ‘value bridge’ in their investor reports, showing the different components driving changes in asset values or net asset values, helping investors to better understand the factor influencing valuation changes. The FCA noted that some firms faced barriers limiting their ability to share information with investors. These barriers included restrictions arising from non-disclosure agreements and concerns about the commercial sensitivity of sharing valuation models.
The FCA urged firms to consider whether they can improve investor reporting and engagement by providing detail on fund-level and asset-level performance to increase transparency and investor confidence in the valuation process.
Application of valuation methodologies
The FCA stressed that valuation methodologies must be applied consistently for valuations to be appropriate and fair. In its review, the FCA observed that while firms applied valuation methodologies generally consistently by asset class, there were instances where firms employed different approaches, such as comparable sets and discount rate components for private equity assets. While firms could reasonably justify the use of different assumptions, the FCA expressed concerns that these variations might impair investors’ ability to compare valuations across firms. Firms demonstrating good practice were those that employed another established methodology as a sense check to validate their primary valuation and confirm their judgment.
The FCA expects firms to apply valuation methodologies and assumptions consistently, making valuation adjustments solely based on fair value. It also emphasized the need for valuation committees and independent functions to focus on these adjustments to ensure decisions are robust and well-documented.
Use of third-party valuation advisers
The FCA noted that it is good practice to seek further validation for internal valuations through third-party valuation advisors, particularly after identifying material conflicts of interest, such as calculating fees, pricing redemptions and subscriptions, transferring asset using valuations.
The FCA found that most managers engaged third-party valuation advisers and discussed their controls to assess the quality of service and independence provided by these advisers. Examples of good practice included conducting an annual exercise whereby the firm used a valuation from an alternative provider for the same asset and compared the quality of valuations from both providers.
Firms that adopted good practices had considered the limitations of the service provided, taken steps to ensure the independence of the third-party valuation advisers, and retained responsibility for valuation decisions.
The FCA urged firms to consider the strengths and limitations of the service provided and to disclose the nature of these services to investors, including the portfolio coverage and frequency of valuations. Additionally, firms need to be aware of potential conflicts of interest when using third-party valuation advisers and should ensure that investment professionals are kept at arm’s length to maintain the independence of third-party valuations.
Next Steps
The FCA indicated that the Review’s Findings will inform its review of the AIFMD and will be taken into consideration when updates are made to the FCA’s Handbook rules. Furthermore, the FCA indicated that the Review’s Findings will inform its contribution to the International Organization of Securities Commission’s review of global valuation standards to support the use of proportionate and consistent valuation standards globally in private markets.
In the meantime, the FCA has said that managers should assess the Review’s Findings and address any gaps in their valuation processes to ensure they are robust and are supported by a strong governance framework with a clear audit trail. Boards and valuation committees should also be provided with regular and sufficient information on valuations to ensure effective oversight.
In light of the above, fund managers and other regulated firms in the UK performing key functions related to funds should:
consider reviewing the FCA’s findings and identify any gaps in their valuation approach, taking action to address deficiencies where applicable;
ensure their governance arrangements provide accountability for valuation processes;
assess whether their valuation committees have sufficient independence and expertise to make valuation decisions; and
enhance oversight of third-party valuation advisers and consider the strengths and limitations of service providers.
New Interim Rule Removes CTA Reporting Requirements for U.S. Companies and U.S. Persons
On March 21, 2025, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued an interim final rule to the U.S. Corporate Transparency Act (“CTA”) that eliminates beneficial ownership information (“BOI”) reporting requirements for domestic entities and U.S. persons. The immediate result of the interim final rule is that no U.S. entities are required to register or update any BOI reports, and no beneficial owners who are U.S. persons are required to provide BOI.
The prior rule applied to:
“domestic reporting companies”: entities created by a filing with a Secretary of State or any similar office, and
“foreign reporting companies”: entities formed under the law of a foreign country and registered to do business in any U.S. state or tribal jurisdiction by the filing of a document with a Secretary of State or similar office.
These companies were required to file a report with FinCEN identifying their beneficial owners—the persons who ultimately own or control the company—and provide similar identifying information about the persons who formed the entity, absent an applicable exemption.
FinCEN stated that the interim final rule is intended to minimize regulatory burdens on small businesses, a priority for the new federal administration. In the preamble to the interim final rule, FinCEN stated that most domestic reporting companies not covered by an exemption under the prior rule were small businesses and determined that exempting these domestic reporting companies would not negatively impact national security, intelligence, or law enforcement efforts. FinCEN concluded that much of the BOI that would otherwise have been reported under the prior rule is provided to financial institutions at the time an entity opens a bank account or is otherwise available to law enforcement.
Modifications Under the Interim Final Rule:
The interim final rule modifies the definition of “reporting company” to only include foreign reporting companies.
All domestic reporting companies and their beneficial owners are exempt from the CTA and are not required to file or update any BOI reports.
Non-exempt foreign reporting companies are still required to file BOI reports with FinCEN, but such reports are not required to include the BOI of any beneficial owner that is a “U.S. person”.
Foreign reporting companies that only have beneficial owners that are “U.S. persons” are not required to report beneficial owners.
The special rule for foreign pooled investment vehicles only requires disclosure of the individual exercising substantial control if that individual is not a U.S. person. If more than one individual exercises substantial control over a foreign pooled investment vehicle and at least one of those individuals is not a U.S. person, the entity is required to report BOI with respect to the non-U.S. person who has the greatest authority over the strategic management of the entity.
Both the prior rule and the interim final rule incorporate the definition of “United States person” from the Internal Revenue Code, which includes U.S. citizens as well as permanent residents and persons who meet the substantial presence test under the Internal Revenue Code. As a result, the exemptions for U.S. persons apparently also apply to those foreign nationals who fall under the Internal Revenue Code’s definition of United States person. FinCEN appears to use the terms “U.S. person” and “United States person” interchangeably.
Certain U.S. Persons Are Still Required to Report BOI
U.S. persons who are company applicants (i.e., those persons who directly file, and who are primarily responsible for filing, or directing or controlling the filing of, the foreign reporting company’s registration documents with a Secretary of State or similar office) remain obligated to provide their BOI to non-exempt foreign reporting companies.
Compliance Deadlines
The interim final rule is effective as of March 26, 2025. Existing foreign reporting companies are required to file their BOI reports by April 25, 2025. Foreign companies newly registered to do business in a U.S. state or tribal jurisdiction will have thirty days from the date they receive notice that the registration is effective to file a BOI report.
The interim final rule will be open to comments until May 27, 2025; however, the interim final rule will be in effect during the comment period. FinCEN indicated that it had good cause to implement the interim final rule immediately, given that domestic entities were facing a filing deadline of March 21, 2025 and there was not enough time to solicit public comment and implement a final rule before that deadline. FinCEN intends to issue a final rule before the end of the year.
The CTA remains subject to a number of legal challenges despite the issuance of the interim final rule.
We continue to closely monitor further developments with respect to the CTA.
Martine Seiden Agatston also contributed to this article.
Corporate Transparency Act Shakeup: Domestic Companies off the Hook, Foreign Entities Still Reporting
In a significant change to the Corporate Transparency Act (“CTA”), the Financial Crimes Enforcement Network (“FinCEN”) has announced that U.S.-based companies are no longer required to report beneficial ownership information (“BOI”).
This interim final rule, released on March 21, 2025, means that only foreign entities registered to do business in the United States will still need to meet the CTA’s reporting requirements.
Originally enacted to increase corporate transparency and fight financial crime, the CTA previously required both domestic and foreign companies to disclose their beneficial owners to FinCEN. However, domestic entities are no longer obligated to file BOI reports under the new rule. Instead, the focus has shifted to foreign companies doing business within the United States.
New Reporting Deadlines for Foreign Entities
For those foreign entities that still fall under the reporting requirements, FinCEN has outlined new deadlines based on the publication of the interim final rule. These deadlines are as follows:
Foreign entities registered before March 21, 2025: Must file their BOI reports within 30 calendar days from that date.
Foreign entities registering on or after March 21, 2025: Must file within 30 calendar days of receiving notice of their effective registration.
This update comes shortly after FinCEN’s February 27 announcement, in which the agency stated that it would not impose fines or penalties for failures to file or update BOI reports by the previous deadlines as it awaited the release of this interim final rule. It also aligns with the U.S. Department of the Treasury’s decision to suspend enforcement of the CTA.
What Qualifies as a Foreign Entity?
With reporting now limited to foreign entities, it’s essential to understand which businesses fall under this classification. According to FinCEN, foreign reporting companies are defined as entities—including corporations and limited liability companies—that are formed under the law of a foreign country and have registered to do business in the United States by filing a document with a secretary of state or any similar office. These entities are the only ones still subject to BOI reporting requirements under the revised rule.
Public Comment and Next Steps
As FinCEN continues to refine the regulation, the agency is actively seeking public feedback on the interim rule before finalizing it later this year. Companies impacted by the change are encouraged to participate in the comment process to ensure their perspectives are considered.
Ghost Guns and the Bankruptcy Code: Neither Provides Ammunition for Dismissing Actions – SCOTUS Today
The Supreme Court decided two cases today, continuing the release of opinions on which the Court is not deeply divided. The tougher ones are yet to come.
Despite the fact that today’s cases come from highly specialized areas of practice—firearms control and bankruptcy—both are interesting because they involve the interpretation of text, as Justices of all stripes continue to apply textual, literalist principles of interpretation rather than couching their views in a broader, arguably political, analysis of implied congressional intent.
The more closely watched of today’s two cases is Bondi v. Vanderstok, in which an interesting array of Justices—Justice Gorsuch wrote for himself and six other members of the Court (with Justices Thomas and Alito dissenting)—upheld a 2022 regulation of the Biden administration governing the sale and possession of so-called “ghost guns,” i.e., firearms made from kits constructed from untraceable parts. The regulation in question subjects the do-it-yourself “ghost gun” kits to the same requirements as fully assembled firearms, requiring serial numbers, background checks, and records of sales or transfers to private buyers. The Gorsuch opinion endorsed the position that the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) had the authority to issue the rule under the Gun Control Act of 1968 (GCA). The law “embraces, and thus permits ATF to regulate, some weapon parts kits and unfinished frames or receivers,” Gorsuch wrote. One notes that the Trump administration took no position in the case. The 7-2 decision keeps in force the 2022 regulation. Justice Gorsuch’s leadership as to the decision—a rare reversal of the U.S. Court of Appeals for the Fifth Circuit—is particularly interesting because of his alignment with three conservatives (Chief Justice Roberts, the increasingly independent Justice Barrett, and Justice Kavanaugh) and the Court’s three liberals.
Turning to the stated language of the GCA, Justice Gorsuch writes that the GCA authorizes ATF to regulate “any weapon . . . which will or is designed to or may readily be converted to expel a projectile by the action of an explosive.” This language creates two requirements. First, there must be a “weapon.” Second, the weapon “must be able to expel a projectile by the action of an explosive, designed to do so, or susceptible of ready conversion to operate that way.” According to the Court, “[A]t least some kits will satisfy both.” Rejecting the application of the rule of lenity and the rule of constitutional avoidance, Justice Gorsuch held that neither of those rules “has any role to play where ‘text, context, and structure’ decide the case. . . . The GCA embraces, and thus permits ATF to regulate, some weapons parts kits and unfinished frames or receivers, including those we have discussed. Because the court of appeals held otherwise, its judgment is reversed, and the case is remanded for further proceedings consistent with this opinion.”
Justice Thomas dissented, arguing that the statutory terms did not cover the unfinished frames in the parts kits and that those kits, by themselves, did not fit the definition of a “firearm.” Justice Alito argued that the majority decided the case on grounds that were not raised or decided in the courts below. Both dissents are swamped by the strong bipartisan majority that, as Justice Gorsuch made clear, was conscious of the regulation’s origin in the wake of the assassination of Dr. Martin Luther King, Jr.
From a Court “politics” standpoint, the other case decided today, United States v. Miller, is just as interesting. In this case, Justice Jackson’s majority opinion was joined by all of the other Justices, save for Justice Gorsuch, who dissented. The case involved the power of a bankruptcy trustee under the Bankruptcy Code, 11 U.S.C. §544(b)(1), to set aside, or “avoid,” certain fraudulent transfers of a debtor’s assets. The Court held that the Bankruptcy Code’s waiver of sovereign immunity only waives sovereign immunity with respect to the federal cause of action created by Section 544(b), which gives the trustee the power to avoid certain transfers that would be “voidable under applicable law”—that is, voidable outside of bankruptcy proceedings. However, it doesn’t encompass sovereign immunity for state law claims nested within that federal claim. Ultimately, the case is remanded to allow the courts below to consider an argument based on state law that was not briefed or considered by the Supreme Court.
Again, we note that the Court continues to deal with the “easy” stuff. There remain more than a few storm clouds on the horizon. So, keep your rubber boots on and look out for lightning in the days to come.
FinCEN Eliminates Beneficial Ownership Reporting Requirements for U.S. Companies and U.S. Persons and Sets New Deadlines for Foreign Companies
On March 21, 2025, the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued an interim final rule under the Corporate Transparency Act (“CTA”) to eliminate the requirement for U.S. companies and U.S. persons to report any beneficial ownership information (“BOI”) to FinCEN under the CTA.
Under the interim final rule only foreign legal entities formed in a foreign country and registered to do business in the United States by filing with secretaries of state or similar offices (these entities are referred to herein as “foreign reporting companies”) are required to report BOI as reporting companies under the CTA. However, under the interim final rule foreign reporting companies are no longer required to report the BOI of any U.S. persons who are beneficial owners of the foreign reporting company and U.S. persons are exempt from having to provide such information to any foreign reporting company in which they are a beneficial owner. Accordingly, foreign reporting companies that only have beneficial owners that are U.S. persons will be exempt from the requirements to report any beneficial owners.
While the interim final rule does not substantially change the requirement for foreign reporting companies that registered to do business in the United States by filing with secretaries of state or similar offices before March 26, 2025, it does extend the deadline for such entities to file initial BOI reports and to update or correct previously filed BOI to April 25, 2025. In addition, on or after March 26, 2025, a foreign reporting company will be required to file an initial BOI report within 30 calendar days of the date it registered to do business in the United States by filing with secretaries of state or similar offices.
Although the interim rule is still subject to a comment period ending on May 27, 2025, the interim final rule became effective on March 26, 2025.
New Office of Financial Sanctions Implementation Financial Services Threat Assessment
On 13 February 2025, the Office of Financial Sanctions Implementation (OFSI) published its assessment of suspected sanctions breaches involving financial services firms since February 2022 (the Assessment). The Assessment forms part of a series of sector-specific assessments by OFSI that address threats to UK financial sanctions compliance by UK financial or credit institutions.
The Assessment highlights three areas of main concern:
Compliance;
Russian-Designated Persons (DPs) and enablers; and
Intermediary Countries.
This alert provides a summary of these concerns and suggests action financial services firms can take to combat these threats when developing their risk-based approach to compliance.
Compliance
OFSI has identified several compliance issues and advised steps that firms can take to improve and strengthen their compliance. These include:
Improper Maintenance of Frozen Assets
All DPs accounts and associated cards, including those held by entities owned or controlled by DPs, must be operated in accordance with asset freeze prohibitions and OFSI licence permissions. Financial institutions should review existing policies or contracts as these can often automatically renew, resulting in debits from DP accounts.
Breaches of Specific and General OFSI Licence Conditions
Firms need to carefully review permissions when assisting with transactions they believe are permitted under OFSI licences. Firms must ensure that OFSI licenses are in date, bank accounts are specified in OFSI licences and licence reporting requirements are adhered to.
Inaccurate Ownership Assessments
Firms must be able to identify entities that are directly owned by Russian DPs, and subsidiaries owned by Russian conglomerates that are themselves designated or majority owned by a Russian DP. Firms should conduct increased due diligence where necessary and regularly update due diligence software.
Inaccurate UK Nexus Assessments
Firms should take extra care to understand the involvement of UK nationals or entities in transaction chains when assessing the application of a UK nexus. They must also ensure they understand the difference between United Kingdom, European Union and United States sanctions regimes to make correct assessments of how UK sanctions might be engaged.
Russian DPs and Enablers
OFSI defines an enabler as “any individual or entity providing services or assistance on behalf of or for the benefit of DPs to breach UK financial sanctions prohibitions.” Broadly, there are two types of enablers:
professional enablers that provide professional services “that enable criminality. Their behaviour is deliberate, reckless, improper, dishonest and/or negligent through a failure to meet their professional and regulatory obligations”; and
non-professional enablers, such as family members, ex-spouses or associates.
Maintaining Lifestyles and Assets
Most identified enabler activity has been in relation to maintaining the lifestyles of Russian DPs and assets as they face growing liquidity pressures from UK sanctions.
OFSI urges firms to scrutinise the following red flags:
New individuals or entities making payments to satisfy obligations formerly met by a DP;
Individuals connected to Russian DPs receiving funds of substantial value;
Regular payments between companies owned or controlled by a DP;
Crypto-asset to fiat transactions involving close associates of a Russian DP;
Family member of a DP that is an additional cardholder on a purchasing card that uses the card for personal expenses and overseas travel; and
Deposits of large sums of cash without sufficient explanation;
Fronting
With a significant value of the assets of DPs having been frozen in the United Kingdom, an increasing amount of enablers are attempting to front on behalf of DPs and claim ownership of frozen assets. The links between enablers fronting on behalf of DPs are not always clear, and so OFSI has outlined several red flags for firms to be aware of:
Individuals with limited profiles in the public domain, for instance, those with limited related professional experience;
Inconsistent name spellings or transliterations;
Recently obtained non-Russian citizenships; and
Repeated or unexplained name changes or declared location of operation.
Utilising Alternative Payment Methods to Breach Prohibitions
Financial services firms need to remain diligent when assessing the threat posed by the increasingly sophisticated methods employed by DPs and enablers to evade UK financial sanctions prohibitions. Particular attention should be paid to attempts at money laundering on behalf of Russian DPs, including any indications of high value crypto-asset to cash transfers.
Intermediary Countries
Emphasis is placed on the use of intermediary jurisdictions in suspected breaches of UK financial sanctions prohibitions. The following jurisdictions are utilised most often: British Virgin Islands, Guernsey, Cyprus, Switzerland, Austria, Luxembourg, United Arab Emirates and Turkey. These jurisdictions offer secrecy or particular commercial interests.
There has also been a change in the third countries referenced in suspected breach reports, with increased activity in the Isle of Man, Guernsey, United Arab Emirates and Turkey. Indeed, the United Arab Emirates accounted for the largest section of suspected breaches reported to OFSI in the first quarter of 2024. This shift has likely been caused by various factors, including capital flight by Russians to jurisdictions that do not have sanctions on Russia.
The Assessment helpfully outlines a non-exhaustive list of specific activities in various countries that could be indicative of UK financial sanctions breaches. Financial institutions are encouraged to review and familiarise themselves with this list so that they can identify potential threats to sanctions compliance. Businesses should then consider the involvement of these jurisdictions when conducting due diligence, and evaluate the risks associated with various transactions.
Conclusion
The recent expansion of the United Kingdom’s financial sanctions regime, particularly in relation to Russia’s invasion of Ukraine, has resulted in sanctions evasion becoming increasingly sophisticated and widespread. Considering the scale of evasion being conducted, financial institutions need to remain proactive and vigilant in identifying transaction activity that may be indicative of attempts to circumvent UK sanctions regimes.
When designing sanctions compliance programmes, financial institutions should refer to the Assessment to account for methodologies of evasion and recognise specific behaviours that might present warning signs. By taking a proactive approach to prevent their services from being exploited as instruments of circumvention, financial institutions will contribute to efforts to combat sanctions evasion, whilst avoiding the financial and reputational repercussions of non-compliance.
If you have any questions on the Assessment or want further advice on developing your policies for UK sanctions compliance, please do not hesitate to contact our Policy and Regulatory practice.