Aug

15

OFAC Repeals, IPSA Facto, Iran General License H.


Posted by at 6:29 pm on August 15, 2017
Category: GeneralIran SanctionsOFAC

IPSA Phoenix Office via Google Maps [Fair Use]
ABOVE: IPSA Phoenix Office

Last Thursday, the Office of Foreign Assets Control (“OFAC”) announced that IPSA International had agreed to pay a fine of  $259,200 to settle charges that it violated the Iranian Transactions and Sanctions Regulations (“ITSR”)  in connection with background investigations conducted on Iranian nationals by IPSA’s foreign subsidiaries.  In order to support the charges against IPSA, OFAC unnecessarily concocted a theory which effectively repeals Iran General License H and substantially increases the risk that U.S. companies will be fined for what had previously thought to be legal activities by foreign subsidiaries involving Iran.

At issue are two contracts entered into by IPSA: one with a foreign government (“Contract #1”) and the other by IPSA’s Canadian subsidiary with a foreign government-owned financial institution (“Contract #2).  Both contracts required background checks on various individuals, some of whom were in Iran.   Those background checks, including the ones in Iran, were conducted not by IPSA but by its Canadian subsidiary and another subsidiary in Dubai.  OFAC concedes that both subsidiaries “managed and performed” the background investigation contracts involving the Iranian nationals.  Significantly, OFAC does not allege or claim that the results of these investigations were ever communicated by either foreign subsidiary to IPSA in the United States.   Nevertheless, OFAC claims the conduct of these investigations in Iran constituted a violation of the ITSR.

In the case of Contract # 2, OFAC alleges that IPSA violated the prohibition against facilitation in section 560.208 of the ITSR when it “reviewed, approved, and initiated the foreign subsidiaries’ payments to providers of the Iranian-origin services.”  That, if true, would make out a fairly clear-cut facilitation violation by IPSA.

Things get problematic, however, in the case of Contract #1. OFAC asserts that in that case  IPSA imported Iranian-origin services into the United States in violation of section 560.201 of the ITSR.  This was not because the results of the background checks were communicated to IPSA in the United States because, as we’ve noted, OFAC has not alleged that occurred.  It was because the background checks in Iran were conducted “for the benefit of” IPSA.

This is a troubling rationale because everything done by foreign-incorporated subsidiary of a U.S is company is “for the benefit” of the parent company in the United States.    Under this benefit theory, General License H, which permits certain activities by foreign subsidiaries, is completely eviscerated.  IPSA’s  signing and entering into the contract performed by the subsidiaries clearly facilitated those activities in violation of section 560.208 of the ITSR, so there was no need to suggest a violation based on a benefit theory.  It is unclear why OFAC would have chosen in the case of Contract #1 to argue importation of services under a benefit theory rather than facilitation unless it intended to create uncertainty about the proper scope of General License H.

 

 

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Copyright © 2017 Clif Burns. All Rights Reserved.
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2 Comments:


Your point would be valid if the contract was entered into after General License was enacted…. but the contract was entered into in 2012, as per the Enforcement Information. Enforcement is performed based on the regulations and licenses available at the time of the violating behavior. If this happened today, you would have a valid point, however.

Eric

Comment by Eric Sohn on August 16th, 2017 @ 9:29 am

    It’s not quite as simple, Eric, as you state. Both contracts were signed by the subsidiaries after the passage of the Iran Threat Reduction and Syria Human Rights Act in January 2012. Section 218 of that Act would have made the foreign subsidiaries themselves liable for their activities in Iran. For some reason, and that may have had to do with when OFAC implemented 218, OFAC went after the parent and not the subsidiaries and to do so, at least in the case of Contract 1, it applied a benefit theory to get to the parent instead. There’s no reason why OFAC would not continue to apply this logic, particularly given that footnote 2, rather bizarrely and for no apparent reason, discussed General License H even though it post-dates both contracts. Why discuss General License H at all if OFAC is not trying to say that the logic of this case, including the benefit theory, applies even where General License H is available?

    Comment by Clif Burns on August 16th, 2017 @ 10:38 am