United States: An Outbound Hole in Your Compliance Manual Can Be Costly

By: Thoreau A. Bartman, Meg W. Laurent, Sarah V. Riddell, and Yuki Sako

On 7 October 2026, US Department of the Treasury (Treasury) announced its first civil penalty under the Outbound Investment Security Program (OISP) and this should catch the attention of every CCO.

The Rule

The OISP took effect on 2 January 2025. It bans certain investments by US persons, and requires notice to Treasury of other investments, in companies in or connected to China, Hong Kong and Macau that are involved in specific semiconductor, quantum computing and artificial intelligence activities. Covered transactions include equity acquisitions and certain convertible debt, joint ventures, greenfield investments, and limited partner investments in non-US funds. The recently adopted, but not yet implemented COINS Act will also extend the program to more countries and technologies soon.

The Penalty

Treasury fined a US venture capital firm US$200,000 for failing to notify Treasury of its Chinese fund subsidiary’s investment of roughly US$92,000 in a private Chinese AI and robotics company. While the transaction itself was not prohibited, the firm violated the OISP’s notification requirement. Treasury found the transaction through its own monitoring and the penalty was more than twice the amount invested. If the investment had been a prohibited transaction, the penalty may have been far higher.

Takeaways

Advisers should ensure that their written policies and procedures address OISP risk areas in line with their activities. These should include pre-investment screening in potentially implicated areas, diligence representations, and clear responsibility for monitoring transactions and making filings.

This penalty also reinforces the importance for US person institutional investors of their diligence of managers and funds in which they invest for OISP compliance, and of appropriate OISP language in their side letters as needed to receive adequate protection.

This is not just a private investment issue. The OISP includes an exception for investment in publicly traded securities that might otherwise be implicated by the rules, so long as no special “minority rights” are obtained. Managers investing on behalf of and registered funds and other clients may draw questions from the SEC about their compliance with this exception. Unlike OFAC, there is no published list of OISP covered entities, so the onus is entirely on asset managers to verify their investments comply.