Jan

29

Two Louisiana Men Indicted For Sales By Independent Distributor to Iran


Posted by Clif Burns at 8:48 pm on January 29, 2008
Category: Criminal PenaltiesIran Sanctions

Iranian Offshore Oil RigA copy of the indictment of two Louisiana men for selling CAD software to companies in Iran which we reported last week is now posted here. And it certainly raises some interesting issues.

First, the AP wire story gave the impression that the two defendants were directly exporting the software to Iran. In fact, as the indictment shows, the software and maintenance services in question were sold not by the two defendants but by a distributor in Brazil. Specifically, the indictment alleges a conspiracy between the two Louisiana defendants and the Brazilian distributor to sell the software to companies in Iran.

Second, because the indictment is based on sales by a foreign distributor, it raises the issue of the reach of U.S. sanctions against Iran. If a U.S. company sells an item to an independent foreign distributor who later sells the item to a sanction country, the U.S. company is not liable for that sale unless there is some evidence that the sale was made to the foreign distributor for the purpose of re-exporting that item to the sanctioned country. The indictment in this issue seems to fall short of that standard.

The indictment makes clear that Engineering Dynamics, Inc. (“EDI”), the company that employed the defendants, had sold the CAD software at issue to Iran prior to the 1995 sanctions which prohibited exports to Iran. After the sanctions, all sales to Iran were made by a distributor in Brazil rather than by EDI. Most of the allegations of the indictment relate to communications from the Brazilian distributor to EDI relating to its Iranian sales, many of which were for the purpose of calculating and paying commissions due to EDI. There were only a handful of communications from the EDI employees to the Brazilian distributor from the two EDI employees, many of which were innocuous at best, including an email from one of the defendants telling the distributor to “have a nice trip” to Iran. Nothing in the emails indicated that the distributor’s sales efforts in Iran were being directed by EDI or were being made with the prior knowledge of the EDI employees.

The worst facts alleged in the indictment are hardly conclusive. There is an allegation that EDI reimbursed the costs of one trip by the distributor to Iran. Additionally, there is an allegation that one of the defendants provided activation codes for software that the defendant knew had previously been sold by the distributor to an Iranian company. Finally, there is an email where one of the defendant employees tells the distributor that he responded to an Iranian inquiry with a pro forma invoice but should have forwarded the sales inquiry to the distributor instead.

There is, of course, a compliance lesson here. Even though the Iranian sanctions don’t require that a U.S. exporter obtain an undertaking from a foreign distributor that the exporter’s products won’t be sold to a sanctioned country, it is still a good idea to require such an undertaking. After all, once the distributor makes such a sale, it may be difficult for the U.S. exporter to prove that the distributor was solely responsible for the sale and that it was not made with the knowledge, participation or assistance of the U.S. exporter.

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