Archive for the ‘Iran Sanctions’ Category


Feb

9

OFAC Radically Expands Its Extraterritorial Jurisdiction with B Whale Ruling


Posted by at 9:26 am on February 9, 2017
Category: Iran SanctionsOFAC

TMT Ship via http://www.tmtship.com [Fair Use]The recent decision by the Office of Foreign Assets Control (“OFAC”) to issue a finding of violation, but no fine, against B Whale, a member of the Taiwanese TMT Shipping Group represents a new high (or low, depending on your point of view) for OFAC’s general belief that it has jurisdiction over anyone anywhere in the world. At issue was the transfer of Iranian oil from an Iranian vessel in international waters to a Monrovian-registered Liberian-flag ship owned by a Taiwanese company without any branches or business operations in the United States.

OFAC claimed that this was an illegal importation of Iranian goods into the United States in violation of section 560.201 of the Iranian Transactions and Sanctions Regulations (“ITSR”).  Say what?  According to OFAC, the foreign flagged ship in international waters became a part of the United States once TMT filed a bankruptcy petition in the United States, thereby placing all its assets under the control of the bankruptcy court.  Because, you see, the ITSR defines the United States in section 560.307 of the ITSR as “the United States, its territories and possessions, and all areas under the jurisdiction or authority thereof.”  I imagine that TMT, and probably the government of Taiwan, will be somewhat surprised to learn that real property owned by TMT in Taipei is now a part of the United States.  By this logic, a bankrupt’s trucks in foreign countries would become “areas” under the jurisdiction of the United States. Certainly these absurd results demonstrate that “area” in section 560.307 means geographic areas and not simply any physical space somewhere in the world.

I am unable to find any precedent from OFAC itself or any other court or agency for such an expansive definition of the United States   Interestingly, Congress, when defining the scope of federal criminal law, stops far short of OFAC’s definition.   The definition of “United States” in the federal criminal code is defined as “all places and waters, continental or insular, subject to the jurisdiction of the United States, except the Canal Zone.” See 18 U.S.C. § 5.  To cover ships, which aren’t “places and waters, continental and insular” the federal criminal code defines the “special maritime and territorial jurisdiction” of the United States which covers ships on the high seas owned by at least one U.S. citizen or a foreign vessel with a scheduled departure or arrival in the United States “to the extent permitted by international law.”  See 18 U.S.C. § 7. Ships owned by bankrupts aren’t either the United States or part of the special maritime jurisdiction as far as Congress was concerned.  It’s hard to imagine that OFAC has the statutory authority to expand the scope of its jurisdiction in this fashion by calling every asset of a bankrupt anywhere on the face of the planet a part of “the United States.”

Not only does OFAC stretch the concept of “United States” beyond the breaking point, but also it does the same thing to the definition of “United States person.”  Whale B was found to have violated section 560.211 when it engaged in a transaction with a blocked Iranian vessel.  The violation occurred because OFAC decided that Whale B was a “United States person.” That term is defined in section 560.314 to cover a “person in the United States.”  And Whale B, a company organized under the laws of Taiwan and without any physical presence in the United States, was “in the United States” because it filed a bankruptcy case in the United States. It’s difficult to imagine where a principled limit could be drawn if filing a lawsuit in the United States means that a company is “in the United States.”  Is a company with a U.S copyright registration now “in the United States” and fully subject to U.S. sanctions? What if it has a dot com domain name issued by a U.S. registrar? Or it uses an email service that has servers in the United States?  Or it has a pending sales order it made with a U.S. company over the Internet?

And here’s one last comment on the B Whale shipwreck. OFAC cites this as an aggravating factor: B Whale “took steps to conceal a ship-to-ship transfer of Iranian oil with an Iranian vessel on the SDN List … by … switching off the vessel’s automatic identification system during the time period corresponding with the ship-to-ship transfer.” Apparently OFAC forgot that, because of the TMT bankruptcy, B Whale was subject to seizure and detention by foreign creditors in jurisdictions not interested in observing the automatic stay arising from the U.S. bankruptcy. In such a situation, the more likely reason for turning off the AIS was the common practice of doing so to hide from foreign creditors, not from OFAC.

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Feb

7

Sometimes Mistaken Identity Is Not A Laughing Matter


Posted by at 11:38 pm on February 7, 2017
Category: Economic SanctionsIran SanctionsOFAC

Tehran by Ninara [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/7QX7nZ [cropped and processed]Last week, on the heels of Iran’s ballistic missile test, the Office of Foreign Assets Control (“OFAC”) announced new sanctions on Iran. These sanctions appear to have been in the works for some time judging by wealth of detail in the explanatory press release.

The sanctions target, among other individuals, Abdollah Asgharzadeh and a network of people and companies that have assisted him in procuring items for Iran’s ballistic missile program. One person alleged to be in the network is Carol Zhou, who is described as one of “three China-based brokers” who assisted in these procurement activities. No  information is provided with respect to Carol Zhou other than her date of birth. And because she is being sanctioned under the Weapons of Mass Destruction Proliferators Sanctions, this means that secondary sanctions can be imposed under the Iran Financial Sanctions Regulations against foreign financial institutions that deal with Ms. Zhou.

It should come as no surprise to anyone, including the staff at OFAC, that Carol Zhou is an extremely common name and a name that no one would want to have right now. Not only will any transaction with the name of Carol Zhou on it, whether or not it involves the designated Carol Zhou, risk being blocked by U.S. financial institutions and entities but also that transaction will risk being rejected by every other financial institution in the world. Of course, for blocked transactions, the other Carol Zhous can just hire lawyers and march into OFAC with their passports (which hopefully will show a different birthdate) to get the blocked funds back. But there is nothing an innocent Carol Zhou can do about a rejection by a non-U.S. bank, which likely will not want to be bothered inspecting passports and will simply automatically reject the transaction.

So, while the Daniel Garcias of the world get a reprieve, the Carol Zhous of the world get a raw deal. If OFAC is going to continue to designate people with common names, it has an obligation to craft a process to minimize the collateral damage of the designation.

Photo Credit: Tehran by Ninara [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/7QX7nZ [cropped and processed]. Copyright 2010 Ninara

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Jan

18

OFAC Guidance Clarifies Application of Facilitation Doctrine to Legal Advice


Posted by at 11:32 pm on January 18, 2017
Category: Iran SanctionsOFAC

U.S. Treasury Department by Oran Viriyincy [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/ecNvDu [cropped]For many years, OFAC loved to toy with lawyers at conferences by rattling the facilitation sabre. Spokespersons for the agency would do so by suggesting that the day was coming when OFAC would go after lawyers under the facilitation doctrine, particularly when lawyers were providing advice to people that they were outside the scope of U.S. economic sanctions.

This was not an idle threat.  OFAC had tried this before.  Donald Looper, an American lawyer, had his briefcase seized by Customs as he returned to the United States after advising a Bermuda corporation on a proposed deal with Libya.  OFAC claimed that he was, by providing such advice, assisting his client in evading or avoiding sanctions.   Looper brought suit to prevent the examination of attorney-client privileged material in his briefcase.   The District Court had this to say about OFAC’s position:

[t]he Constitution certainly cannot abide the Kafkaesque interpretation that OFAC proposes–that the Libyan sanctions prohibit, at the whim of OFAC regulators, any effort to structure transactions with the purpose of complying with the remainder of the Libyan sanctions regulations, including any attempt to hire an attorney for guidance.

Ouch. Notwithstanding this smackdown, OFAC continued, at least informally, to caution attorneys that advice to clients might overstep the facilitation prohibition insofar as a lawyer might, in the language of the typical prohibition on facilitation, “approve … any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person.”

Lawyers have typically attempted to negotiate this issue by trying to make sure that advice provided to non-U.S. persons that they were not covered by sanctions programs was not given in a way that could be characterized as approval of the transaction. This was a strategy, of course, that worked better for outside counsel than in-house counsel.

By a guidance released last week on January 12, OFAC finally put this issue to rest.

U.S. persons have been able to provide, and may continue to provide, the services below relating to the requirements of U.S. sanctions laws to covered persons: Opining on the legality of specific transactions under U.S. sanctions laws regardless of whether it would be prohibited for a U.S. person to engage in those transactions.

This statement, however, was immediately followed by an obtuse qualification:

U.S. persons may solicit information from [U.S. persons and non-blocked foreign persons] and conduct research to make a determination as to the legality of transactions under U.S. sanctions laws provided there is no importation of services where the importation of services is prohibited by any part of [OFAC’s regulations].

My best guess is this means that if a lawyer were, say, advising a German company on the legality under the Iran sanctions of a transaction by a German company in Iran, the U.S. lawyer could not query the counterparties in Iran (or their lawyers) about the scope of the transaction to make that determination. However, I’m not sure why that would ever be necessary. Comments from any readers on what this qualification might actually mean are welcome.

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Copyright © 2017 Clif Burns. All Rights Reserved.
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Jan

13

OFAC Expands Prohibitions on Re-Exports by Foreign Persons


Posted by at 4:16 pm on January 13, 2017
Category: Iran SanctionsOFAC

Aban Oil Rig via http://www.abanoffshore.com/downloads/DD1PL%20Investor%20Presentation%20231015.pdf [Fair Use]Yesterday the Office of Foreign Assets Control (“OFAC”) announced that it had levied a $17,500 fine against Aban Offshore Ltd. (“AOL”), an Indian oil rig company, because AOL’s subsidiary in Singapore arranged to have oil rig equipment, presumably U.S. origin although not stated as such, re-exported from Saudi Arabia to Iran. This was alleged to have been in violation of section 560.204 of the Iranian Transactions and Sanctions Regulations (“ITSR”) which prohibits re-exportations from the United States to Iran.

The OFAC action is more than a little peculiar. Both AOL and it’s Singapore subsidiary are not U.S. persons and so it would seem that section 560.205 of the ITSR, which covers “reexportation of goods … by persons other than United States persons” would be the applicable provision. Of course, that section only penalizes re-exports of items that require a license from BIS for export to Iran. See § 560.205(a)(2). The oil rig equipment was almost certainly EAR99, although the OFAC document is oddly silent on this point, and would not have required a license under either sections 742.8 or 746.7 of the EAR.

It looks like what OFAC is doing here is pretending that section 560.205 does not limit section 560.204 at all. On its face, and without reference to section 560.205, section 560.204 prohibits re-exports by anyone, U.S. persons and non-U.S. persons alike, from the United States to Iran without regard to whether the item would require a BIS license. But if section 560.204 is intended to be read that broadly, there is no reason for section 560.205 to exist at all. It would simply be swallowed up by the breadth of section 560.204 rather than serve as a qualification of the scope of 560.204 for non-U.S. persons.

Granted agencies have broad latitude to interpret their own regulations, but that latitude does not go so far as to allow an agency to read one rule in a way as to render another rule absolutely meaningless.  As it stands, OFAC has read section 560.205 out of its rules and held that non-U.S. persons can now be held liable for re-exports of U.S. origin EAR99 items to Iran.

 

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Dec

20

Merry Snapback! Bah! Humbug!!


Posted by at 6:24 pm on December 20, 2016
Category: Iran SanctionsOFAC

Ebeneezer Scrooge via Wikipedia https://en.wikipedia.org/wiki/Ebenezer_Scrooge [Public Domain - Copyright Expired]

Chestnuts roasting on an open flame.

Jack Frost nipping at your shoes.

Iran Sanctions coming back all the same.

So OFAC dressed up its FAQs

Ah, yes, nothing says Christmas cheer quite like the possibility that the JCPOA will be put on Santa’s naughty list and everyone will find the old Iran sanctions back under their Christmas tree.  This is why, of course, OFAC, full of the holiday spirit, just amended its JCPOA FAQs to answer the question on everyone’s mind:  what happens when Santa brings the sanctions back?

Not wanting to be too much of a Grinch, on December 15, OFAC revised JCPOA FAQs M4 and M5 to reassure the exporters in Whoville that they’ll have 180 days to wind-down their dealings with Iran after snapback or US withdrawal from the JCPOA.  But if this is a Christmas gift, it’s like the “Sea Monkey Circus” that you begged for from your parents — you know, those worms in a water bag that didn’t look anything like monkeys or a circus once you actually got the gift.

Like the Sea Monkey Circus, what the wind-down means is not what you might think.  You have 180 days to get paid for goods already delivered to Iran.  But what if you have goods in production that were destined to Iran but not completed when the sanctions are reimposed? Do you have 180 days to finish them, deliver them and get paid?  Nope.  You’re out of luck. All you can do is pray to find someone willing to buy the goods at something above salvage value.  Or that OFAC gives you a special license to finish and deliver the goods.

Grandma getting run over by a reindeer seems, well, not so bad by comparison to the JCPOA getting stolen by the Grinch.

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Copyright © 2016 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)