Gracetown, Inc. Challenges OFAC's $7.1 Million Penalty In Court

One month after the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) imposed a civil penalty on the company, Gracetown, Inc. (Gracetown) filed suit in the U.S. District Court for the Southern District of New York seeking to vacate the penalty and obtain declaratory and injunctive relief. The lawsuit raises important Constitutional challenges that could shape OFAC enforcement practices and procedural requirements.

On December 4, 2025, OFAC imposed a $7.1 million civil penalty on Gracetown, a New York-based property management company, for alleged sanctions violations arising from Gracetown's receipt of 24 loan payments between 2018 and 2020 that were linked to sanctioned Russian oligarch Oleg Deripaska. Gracetown continued to process payments linked to Deripaska despite OFAC's prior notice to Gracetown that such dealings were prohibited. We previously discussed OFAC's penalty against Gracetown on our Enforcement Edge post here.

In its complaint for declaratory and injunctive relief, Gracetown asserted the following:

• Penalty Disproportionate to Conduct. Gracetown argued that OFAC's $7.1 million penalty is "grossly disproportionate" under the Excessive Fines Clause of the Eighth Amendment to the Constitution, given that the underlying transactions involved "inadvertent acceptance of small-value loan payments" totaling only $31,250 during the relevant time period.
• Non-Willful, First-Time Violation. Gracetown asserted that the conduct was inadvertent and non-egregious, despite OFAC deeming the violations "egregious" in its penalty assessment. Gracetown stated that the violations stemmed from a "negligent administrative oversight," rather than from an intent to evade U.S. sanctions, and emphasized its status as a first-time offender. Gracetown also highlighted the lack of evidence of any attempt to back-channel payments for Deripaska's benefit and called OFAC's claims to the contrary "baseless."
• Failure to Apply Mitigation Credit. Gracetown claimed that OFAC denied mitigation credit for voluntary disclosure, cooperation, and first violation status. According to Gracetown, in January 2022 (almost two years after the last alleged violation), it voluntarily disclosed "complete information" regarding the transactions to OFAC. It entered into a tolling agreement with OFAC during its investigation. Gracetown claimed that "OFAC's understanding of the alleged violations was materially shaped and advanced by [its] disclosure," providing substantial mitigating value that OFAC denied.
• Constitutional Challenges. Gracetown's complaint raised multiple constitutional claims, including the following:
  • Due Process: Gracetown argued that OFAC's enforcement process under the Ukraine-/Russia-Related Sanctions Regulations lacks impartial adjudication, unlike other sanctions programs that provide hearings before an Administrative Law Judge.
  • Equal Protection: Gracetown—a U.S. company with prior and current Russian ownership—alleged discriminatory treatment based on national origin of its ownership and affiliation, noting that similarly situated, non-Russian-affiliated entities received mitigation credit.
  • Excessive Fines: Gracetown argued that the penalty—more than 200 times the alleged value of the transactions—is "grossly disproportionate" and thus a violation of the Eighth Amendment.
  • Right to Jury Trial: Citing SEC v. Jarkesy, 603 U.S. 109 (2024), Gracetown argued that punitive civil penalties of this nature require a jury trial in an Article III court under the Seventh Amendment.

The Southern District of New York will now consider whether OFAC's penalty was arbitrary and capricious under the Administrative Procedure Act and whether constitutional protections apply to civil sanctions in this context. A ruling in Gracetown's favor could reshape enforcement practices and introduce new procedural requirements for OFAC.

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