Archive for the ‘Iran Sanctions’ Category



Senate Moves Forward on New Iran Sanctions

Posted by at 4:35 pm on June 8, 2017
Category: Iran SanctionsOFAC

Imam Khomeini by Kaymar Adl [CC-BY-SA-2.0 (], via Flickr [cropped]Yesterday, and only hours after the ISIS attack on Tehran, the Senate voted to invoke cloture by a vote of 91-8 to allow a vote on S.722, the Countering Iran’s Destabilizing Activities Act of 2017. News reports suggest that further action on the bill, which is otherwise likely to pass the Senate, is being delayed for the moment based on a desire to tack onto the bill new Russia sanctions.

The pending legislation follows the pattern of recent Iran sanctions legislation. Rather than affirmatively imposing specific sanctions, the legislation would require the President to impose a variety of sanctions, including asset blocking, against companies and individuals, including foreign companies and individuals, who the President determines has assisted Iran in certain activities. Those activities are aiding Iran’s ballistic missile program, assisting Iran’s violations of human rights, and materially contributing to the transfer of arms to Iran.  Additionally, the President is directed to impose blocking and transactional sanctions on the “officials, agents, or affiliates” of the Iranian Revolutionary Guard Corps.

Iran has argued, not surprisingly, that the Senate Bill is inconsistent with the JCPOA, otherwise known as the Iran nuclear deal. The strongest argument in this regard concerns the secondary sanctions imposed on non-U.S. companies involved in arms sales to Iran. Under section 1.8 of Annex II to the JPCPOA, the E.U. commits to lift its arms embargo on Iran. And under section 5.1.2 of Annex II, the United States commits to “license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA.”
The proposed legislation would require the President to impose sanctions on foreign subsidiaries of U.S. companies that engage in arms deals with Iran, which would appear to violate that commitment. Although nothing in the U.S. commitments forecloses it from imposing secondary sanctions on wholly-foreign companies that engage in arms trading with Iran, it would difficult to argue that the JPCPOA prevented secondary sanctions on foreign subsidiaries of U.S. companies but not on wholly-foreign companies.

Of course, any violation here would be purely prospective. Under section 20.1 of Annex V, the arms embargo is not lifted until eight years after Implementation Day. Moreover, no violation would occur until the President actually designated a company under the proposed legislation, which may or may not ever happen. So although the proposed legislation might ultimately lead to a potential violation of the JCPOA, the simple adoption of the bill itself would not.

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Epsilon, The Unvanquished: Pt. 2

Posted by at 8:07 am on June 7, 2017
Category: Iran SanctionsOFAC

Soundstream Audio Car via [Fair Use - Soundstream is Epsilon sub]Last week I posted on the D.C. Circuit Court of Appeals’s opinion setting aside the $4 million fine that the Office of Foreign Assets Control (“OFAC”) imposed on Epsilon Electronics for shipping weapons of mass destruction (namely, subwoofers and other car audio pimping items)  to Iran.  As noted in the prior post, the D.C. Circuit came to the somewhat astonishing conclusion that you could violate the prohibition on exporting to Iran if there were red flags that your shipment might be diverted from the country of export to Iran even if that shipment ultimately did not wind up in Iran. Even so, the Court set aside the jaw-dropping fine and sent the case back to OFAC for further consideration.

Having found that OFAC did not need evidence of a shipment to Iran to fine someone for exporting to Iran, the Court then took the paradoxical position that OFAC erred by not considering evidence that five of the thirty-nine shipments involved might not have actually gone to Iran. The emails in question were ones that “contemplate[d] [Epsilon] products being sold out of the Asra store in Dubai.” The Court explains this apparent inconsistency by saying that these emails tended to show that Epsilon “did not have reason to know those shipments were specifically intended for reexport to Iran.” Remember, the Court has taken the position that, in the Court’s version of “ordinary English usage,”  you are “exporting” something to someone if you have reason to know it might go to that party even if it never does.

Leaving aside this metaphysical and linguistic conundrum about un-exported exports, the Court’s discussion of OFAC’s treatment of the ignored evidence is instructive.

Government counsel explained at oral argument that OFAC did not consider the emails credible evidence. We can infer as much from the agency’s liability finding. But we lack an explanation, from the record, of why they are not credible, and why they do not counsel against liability for the final five shipments.

The only discussion of the credibility of these emails in the record was an internal OFAC memorandum not provided to Epsilon, but the Court dismissed its reasoning. That memo argued that the Asra store opened after all but two of the five shipments in issue had been sent, but the Court noted that this would not rebut an inference that the earlier shipments were meant for sale at the store when it opened. Even more significantly, the Court noted:

We also note the low value of the last five shipments, two of which were worth just over one hundred dollars apiece. At the
time those shipments were sent, Epsilon knew its dealings with Asra were under OFAC investigation. OFAC did not explain why Epsilon would knowingly risk fines of up to $250,000 per shipment in return for such a small reward.

This is, of course, an excellent point and it could go much further than the case at hand. It is, indeed, a legitimate question that can be raised almost any time OFAC or the DOJ go after low-value exports.  Of the many things in the opinion for OFAC to dislike, I bet this part of the opinion is at the top of their list.

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Epsilon, the Unvanquished

Posted by at 7:02 pm on May 31, 2017
Category: Iran SanctionsOFAC

Soundstream Audio Car [Fair Use - Soundstream is Epsilon sub]We have followed the saga of Epsilon Electronics extensively, beginning with the posts titled The Auto Sound and the OFAC Fury Part I and Part II followed by Epsilon, Epsilon and, then, As Epsilon Lay Dying, which discussed the federal district court’s decision reviewing OFAC’s $4.073 million fine imposed on Epsilon. Epsilon has persevered, and now the D.C. Circuit Court of Appeals has spoken in an opinion setting aside the fine and remanding the case back to OFAC for further proceedings.

I am going to break my thoughts on the D.C. Circuit’s opinion into several posts. This post will deal with an issue that Epsilon lost, namely its argument that it couldn’t be fined under section 560.204 of the Iranian Transactions and Sanctions Regulations (“ITSR”) without a showing that its products wound up in Iran. At issue were shipments Epsilon made to a distributor in Dubai that OFAC said only or mostly dealt with Iran. OFAC’s argument was that 560.204 was violated when Epsilon shipped the goods to Dubai when it knew, or should have known, that the goods would then be exported to Iran. According to OFAC, the shipment to Dubai was the violation of the ITSR whether or not the goods ultimately made it to Iran. (Significantly, OFAC did not charge Epsilon with attempt under section 560.203, where it would clearly not require a showing that the goods wound up in Iran.)

Section 560.204 prohibits exports to Iran “including the exportation … to … a third country undertaken with … reason to know that such goods … are intended specifically for … re-exportation, directly or indirectly, to Iran.” Using a somewhat bizarre analogy the Court reasoned that a shipment to Dubai with reason to know the goods were going to Iran was an “export to Iran” even if the goods never got to Iran.

Suppose you put a birthday card in the mail, addressed to your brother. While the card is still en route, your mother asks you, “Did you send a card to your brother?” In line with OFAC’s usage, you would respond, “I sent a card to him, but it hasn’t arrived yet,” because you put the card in transit, intending it to reach him. Following Epsilon’s usage, though, you would have to say, “I didn’t send a card to him,” because the card has not yet arrived.

This strange analogy fails because here the card is not put in the mail addressed to the brother. Instead, it was put in an envelope addressed to a third party with a note saying that if the third party saw the brother he should give this card to him. When Mom asked about the birthday card, only the most reprobate of siblings would respond that he sent the card to his brother. “No, Mom, but I did send it to Joe Schmo with a request that he give it to Bill if he sees him.”

The dissenting opinion by Judge Silberman notes that the majority opinion’s notion that a shipment to Dubai with reason to know it was going to Iran was an “export to Iran” is a notion that is inconsistent with OFAC’s decisions below. Judge Silberman points to a statement made by OFAC in the penalty proceeding that “multiple facts tend to show that the goods exported to Asra were sent to Iran,” which, “fudged the answer to the crucial question” whether a violation occurred without regard to whether goods ever wound up in Iran.

In my view there is another reason that section 560.204 can’t be read in the fashion suggested by the majority opinion. The statutory basis for the regulation is the International Emergency Economic Powers Act which, in section 1702, provides the power to the President to bar exports to a foreign country after declaring an emergency with respect to that country.  A declaration of national emergency has, in fact, been issued with respect to Iran. But, section 1701(b) of IEEPA provides:

The authorities granted to the President by section 1702 of this title may only be exercised to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.

Here Epsilon shipped product to Dubai. Its alleged “reason to know” that the goods might go to Iran was that the distributor had business in Iran. Even if the distributor was contractually obligated to sell the goods only in Dubai and that’s the only place they were sold, OFAC’s reasoning would be that this “reason to know” was enough for there to be a violation. That, I think, does not deal with an emergency declared with respect to Iran. This would not even qualify as an attempted export to Iran, which I think is the farthest limit that IEEPA permits sanctioning an activity without an actual export to Iran.

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ZTE License Extended; Iranian News Outlet Gets It Wrong

Posted by at 7:24 pm on February 28, 2017
Category: BISIran Sanctions

ZTE Stand 6 via [Fair Use]Last Friday, the Bureau of Industry and Security extended the duration of the temporary general license which permits exports to ZTE notwithstanding it’s inclusion on the Entity List. Without the temporary general license, unlicensed exports to ZTE of items subject to the EAR would be prohibited.

It is notable that this extension — from February 27, 2017, to March 29, 2017 — is the shortest period of duration for the ZTE temporary general license granted so far, the others having been March 24, 2016, to June 30, 2016; June 30, 2016 to August 30, 2016; August 30, 2016, to November 28, 2016; and November 28, 2016, to February 27, 2017. It’s not quite clear why this duration is so much shorter than has been granted before.

The Financial Tribune, which bills itself as the “First Iranian English Daily” and which is owned by the Iranian newspaper Donya-e-Eqtesad has a rather entertaining, if incorrect, take on the meaning of the extension of the ZTE temporary general license:

ZTE has been granted an exceptional reprieve from the US Department of Commerce to continue exporting its telecoms equipment to Iran.

Er, not so much. After all, it was ZTE’s exports of telecom equipment from the United States to Iran which got ZTE in the snert in the first place. ZTE can export items not subject to the EAR to Iran without need of the temporary general license; and the temporary general license would not authorize ZTE, or anyone else for that matter, to export items subject to the EAR to Iran. All the temporary general license permits is the exports of items subject to the EAR to ZTE.

So, file the Financial Tribune‘s story under “Fake News” or “Wishful Thinking” depending upon your individual inclination.

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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 [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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Copyright © 2017 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)