Citigroup oversaw US$1 billion in deals for trust while sanctioned oligarch held concealed interest
Treasury can fine companies that break sanctions whether they realise it or not, and in some previous cases, civil fines have run into the hundreds of millions of US dollars
[WASHINGTON] Citigroup oversaw more than US$1 billion worth of transactions for a Delaware-based trust that US authorities say a sanctioned Russian oligarch held a concealed stake in, according to documents reviewed by Bloomberg News.
Citigroup set up Heritage Trust in July 2017 with money that originated from billionaire Russian Senator Suleiman Kerimov, who was subsequently sanctioned by the US Treasury Department in April 2018. After the Treasury’s action, the bank administered more than US$1 billion in transactions that included deposits into trust accounts and existing stakes in several US companies, including US$57 million in Uber Technologies and US$141.5 million in Snap, according to the previously unreported documents.
As the trust’s administrative trustee, the bank also oversaw an investment in SpaceX held by Heritage Trust while Kerimov was sanctioned, Bloomberg previously reported.
Citigroup is under investigation by the Justice Department over its handling of Kerimov’s money, Bloomberg reported in November. A review of documents associated with the trust reveals the extent the bank went, including engaging with lawyers and Treasury officials, to keep doing business with Heritage Trust lawfully after Kerimov’s designation, and the large value of the deals Citigroup facilitated. Treasury requires companies to freeze assets and transactions of sanctioned individuals and to report any frozen interest they have within 10 business days.
Treasury eventually froze the trust four years after Kerimov was sanctioned, saying he had retained a concealed stake.
“Citi has been fully transparent with our regulators and the US Department of the Treasury’s Office of Foreign Assets Control (Ofac) regarding the Heritage Trust,” a Citigroup spokesperson said, in response to questions from Bloomberg. “Despite suggestions to the contrary, we acted in compliance with our obligations under US sanctions laws and regulations.”
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Kerimov did not respond to a request for comment.
A representative for Snap did not address questions about the alleged holding in Heritage Trust. However, the representative said that the company does not know the underlying owner of shares in Class A common stock because they are registered in the name of a brokerage firm rather than the individual investor.
Uber and SpaceX did not respond to requests for comment. The Justice Department declined to comment, and Treasury did not respond to requests for comment about any further investigations related to Heritage Trust or Kerimov.
SEE ALSO
Treasury can fine companies that break sanctions whether they realise it or not, and in some previous cases, civil fines have run into the hundreds of millions of US dollars. Treasury can calculate fines based in part on the total value of transactions in violation and can levy penalties totalling as much as twice the value of those dealings, though they are often reduced based on mitigating circumstances or come to a negotiated settlement.
Separately, in June, a San Francisco-based venture capital firm was hit with a fine related to its dealings with Kerimov. Treasury assessed a US$216 million fine on GVA Capital, which it said “knowingly” managed an investment for Kerimov that was ultimately owned by Heritage Trust for more than three years while he was sanctioned. It was the maximum possible fine for the GVA case.
The agency’s determination makes no mention of Citigroup.
Treasury made clear at the time of the GVA enforcement that it hoped the action would put a spotlight on “the risks that arise when gatekeepers, such as investment professionals, accountants, attorneys, and providers of trust and corporate formation services, among others, fail to properly understand the risks associated with the provision of their services”.
GVA managed the investments for Kerimov through his nephew Nariman Gadzhiev, whom the company “knew served as Kerimov’s proxy”, according to the Ofac, the part of the Treasury that deals with sanctions enforcement. Gadzhiev himself was eventually designated by the Treasury in November 2022. Gadzhiev did not respond to a request for comment, and GVA could not be reached.
Citigroup corresponded with Gadzhiev about transactions relating to Heritage Trust before and after Kerimov was sanctioned, according to communications reviewed by Bloomberg. It’s not clear in what capacity Gadzhiev was acting, on the basis of those communications.
Heritage Trust documents show the sole source of its funding was Kerimov, a Russian senator who built a fortune valued at US$9.7 billion by Bloomberg Billionaires Index via investments in Russia’s energy, banking and mining sectors. The trust was set up with funds from Liechtenstein-based Diversity Foundation, which was founded in 2013 and held US$400 million that Kerimov had gifted to two of his adult children, who were listed as the foundation’s two beneficiaries, according to the documents.
By early 2017, Citigroup officials had secured Kerimov as a client and were involved in seeking a way to move the assets held by the Diversity Foundation into a US-based trust, one benefitting several more family members that the bank would be responsible for administering, according to correspondence reviewed by Bloomberg.
But it was not a straightforward process, documents show. Diversity Foundation’s trustees, Andreas Schurti and Ernst Walch, felt uncomfortable about agreeing to transfer all the funds from the foundation to Heritage Trust. That’s because it would mean the two adult children’s share would be diluted, according to the correspondence.
The trustees, Schurti and Walch, at one point proposed making Citigroup “the new sole beneficiary” of the foundation, replacing Kerimov’s two adult children, records from 2017 show. Citigroup officials requested multiple amendments to the draft document, removing the language that would have made it a beneficiary, the correspondence shows. Nevertheless, a document signed by the trustees describing Citigroup as “the new sole beneficiary” of the foundation was included in a “Know Your Customer” package provided to an investment adviser and a law firm representing Heritage Trust in 2018, according to correspondence reviewed by Bloomberg.
Schurti declined to comment, while Walch did not respond to requests for comment.
However, they resolved the transfer, the assets ended up in Heritage Trust. Under the terms of the trust set up by Citigroup, Kerimov’s mother was the grantor and could distribute the trust’s funds to any of her descendants unless they were explicitly barred from receiving them. A subtrust also included a provision that any mothers of Kerimov’s children would be included as beneficiaries, according to trust documents. The records refer to Kerimov as his mother’s “second oldest son”.
Kerimov’s mother, Kuncha Kerimova, could not be reached for comment.
Kerimov was sanctioned on Apr 6, 2018, as part of the Trump administration’s effort to hold Russian officials accountable for profiting from alleged corruption and foreign aggression. That’s when the clock started ticking for Citigroup.
Under federal regulations, the bank had 10 business days to report the trust to Treasury as blocked property, or seek legal reassurance it could continue to operate it. Treasury’s Ofac urges caution over transacting with an entity in which a blocked person has “significant ownership” even if it is less than 50 per cent, or if they “may control by means other than a majority ownership interest”.
A source familiar with Citigroup’s view said that at the time of the designation, it was not clear to the bank that Kerimov was sufficiently involved to require them to block the trust, Bloomberg has previously reported. Citi and others pursued a series of measures so that the trust could continue to operate legally.
After the sanctions, James Langdon, an attorney who represented and advised the trust independent of Citigroup, inquired whether its terms could be modified, according to the documents. That resulted in an Apr 24, 2018, document that would have excluded any child of Kerimov’s mother from receiving income or principal from the trust, according to a Bloomberg review of the material. That necessarily would have excluded Kerimov.
It’s not clear whether the document was acted upon.
Peter Gordon, a partner at the Delaware law firm GF&M that worked on the proposed modification, said the document was drafted after Langdon asked him if there was anything that could be done under Delaware trust law to rectify an unspecified problem facing Heritage Trust. The trust was classified as “irrevocable”, meaning its terms could not be changed.
“What I understood is this inadvertent thing had happened,” Gordon said in an interview, and that the trust now needed to be changed to remove any possibility that a sanctioned person could ever benefit. “The people who unknowingly had this person as a beneficiary” wanted to ensure this person “could never receive benefit from the trust”, he said.
Gordon added that his firm “took the necessary steps under Delaware law” to ensure Kerimov could never receive any benefit from the trust, adding he did not know at the time that Kerimov had recently been sanctioned. He said that he was subsequently contacted by US Treasury “because there was an investigation” and said he gave them the same answer.
On Apr 26, 2018, Citigroup emailed information about Heritage Trust to Ofac, seeking a determination that Heritage Trust was not subject to blocking.
In response to Citigroup’s e-mail, a Treasury official said it did not appear that the bank needed to block the trust, based on what was shared, but that it should review additional information before deciding, a source familiar with the correspondence said, asking not to be identified discussing private matters.
Citigroup needed to rule out any scenario in which Kerimov could have a future or contingent interest in the trust, which certain terms and conditions of the trust indicated might be the case, the Treasury official wrote, according to the source.
Under Treasury guidance, any interest by a sanctioned person whatsoever – even if indirect, future or contingent – needs to be frozen.
On Apr 27, 2018, a letter written at Citigroup’s request and signed by Langdon, listed Kerimov and several others as “prohibited” persons who shall not be considered a beneficiary of the trust, Bloomberg previously reported. That would prevent his mother, the Heritage Trust grantor, from distributing money to Kerimov. Whatever legal steps were taken, they ultimately weren’t enough to satisfy Treasury.
Four years later, on Jun 23, 2022, the department privately issued a “Notification of Blocked Property” stating that Ofac had reason to believe that Kerimov retained an interest in the trust based on, among other things, “a review of the Trust provisions and its course of investments”, according to a Bloomberg review of the document. A week later, Ofac publicly announced the trust was blocked.
While Citigroup continued to correspond with Kerimov’s nephew, Gadzhiev, after Kerimov was designated in 2018, Langdon cut ties with him, correspondence reviewed by Bloomberg shows. That’s despite Gadzhiev signing a Dec 13, 2018, document stating that he has not “and will not, take instruction from any SDN”, short for the Specially Designated National term used to describe a sanctioned person, “in relation to trust property,” according to correspondence that refers to the document.
“Langdon focused intently on compliance and enlisted a team of legal experts who advised him on each and every decision that crossed his desk as a fiduciary to the trust,” a spokesperson for Langdon said. “Based on the consistent advice that he received, and despite the prior administration’s conclusions about the status of the trust, Langdon believed at all times that the activities and operation of the trust were entirely compliant with applicable laws and regulations.”
Citigroup and Gadzhiev meanwhile, regularly exchanged messages in 2018 about the trust, documents show. In an Aug 6, 2018 e-mail, a Citigroup employee confirms receipt of US$65 million paid to one of several Heritage Trust accounts. In a Nov 23, 2018 e-mail, the employee confirms receipt of another US$23.8 million payment to the account, before signing off with: “Have a wonderful weekend!” BLOOMBERG
Share with us your feedback on BT's products and services
