Archive for the ‘Iran Sanctions’ Category



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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Touch a U.S. Dollar Anywhere, Go Directly to U.S. Jail

Posted by at 11:58 pm on August 2, 2017
Category: Iran SanctionsOFAC

DSME Drillship via [Fair Use]Two companies in Singapore, CSE Global and CSE Transtel, agreed to pay the Office of Foreign Assets Control (“OFAC”) $12,027,066 to settle charges that they violated the Iran Transactions and Sanctions Regulations (“ITSR”). The charges arose from CSE Transtel supplying telecommunications goods and services to energy projects in Iran. OFAC did not allege that these goods and services originated in the United States. Rather, OFAC alleged that because the vendors were paid in U.S. Dollars that CSE had caused the export of financial services from U.S. Banks to Iran in violation of section 560.204 of the ITSR.

Now we’ve been through this U.S. dollar business with OFAC before. In the typical case, OFAC’s claim of jurisdiction over the foreign company is based on the fact that the foreign company’s bank and the foreign company’s customer’s bank would have used correspondent accounts denominated in dollars and held in U.S banks to effectuate the transaction. Of course, whether the transfer of dollars between U.S. banks in connection with a foreign company’s sale of goods to Iran is the export of a financial service to Iran is not entirely clear. But at least in this scenario you can see a direct flow of dollars related to a specific Iranian transaction.

But the Singapore situation is different because Singapore is authorized to engage in offshore dollar clearing transactions. And, as the OFAC release admits, the transactions in question were effectuated through U.S. Dollar accounts held in Singapore banks. The way that U.S. Dollar transactions are cleared in Singapore is described here. Suffice it to say, there are cases where U.S. Dollar transactions can be cleared in Singapore under this system without a U.S. bank ever being involved. If, for example, CSE and its vendor had U.S Dollar accounts at the same bank, or were the only dollar transactions between two Singapore banks on a clearing day, the Singapore clearing house would clear the transactions without the need for either bank to make up a dollar deficit as part of the clearing process.

But in the other possible (and more likely) situations where the dollars clear in Singapore but dollar transfers are needed to make up differences between banks, it still can’t be said that the dollar transfers to settle the dollar position of the Singapore bank is the export of a financial service to Iran. Say a bank in Singapore pays $10,000 for a customer’s Iran transaction but during the day pays out $200,000 and receives $100,000 where none of these other dollar transactions have anything to do with Iran. It will need to transfer $100,000 to the Singapore clearing house, which will be effectuated through a U.S. Dollar correspondent account in the United States. In that case the bank in the United States has not transferred any financial service to Iran because the payment relates to an aggregate of transactions valued at $300,000, almost all of which have nothing to do with Iran.

The only scenario in the Singapore clearing situation where the U.S. bank would transfer a financial service to Iran would be where the Iran payment by the Singapore bank is the only U.S. dollar transaction by the Singapore bank during the clearing day. In that case, the transaction looks like a traditional one where the dollar payment is cleared through the U.S. bank. But there is no reason to believe that any or all of the CSE Iran transaction were the only dollar transactions during that clearing day. But that doesn’t stop OFAC from inaccurately claiming that every dollar transaction conducted by CSE through its Singapore accounts caused a transfer of financial services from the United States to Iran.

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OFAC Fines AIG for Drafting Error in Global Insurance Policies

Posted by at 10:40 am on June 28, 2017
Category: Cuba SanctionsEconomic SanctionsIran SanctionsSudan

IG Employees via [Fair Use]On Monday, the Office of Foreign Assets Control (“OFAC”) announced that insurance giant AIG had agreed to pay $148,698 to settle charges that it had insured 555 shipments involving Sudan, Iran and Cuba. Although some of the apparent violations involved single shipment policies to the sanctioned destinations or paying claims under global policies on shipments to those destinations, others involved simply accepting premiums under global insurance policies that were later used to cover shipments on which no claims were made to sanctioned destinations.

In November of last year, OFAC provided guidance on how global insurance policies should deal with U.S. economic sanctions

The best and most reliable approach for insuring global risks without violating U.S. sanctions law is to insert in global insurance policies an explicit exclusion for risks that would violate U.S. sanctions law. For example, the following standard exclusion clause is often used in open marine cargo policies to avoid OFAC compliance problems: “whenever coverage provided by this policy would be in violation of any U.S. economic or trade sanctions, such coverage shall be null and void.” The legal effect of this exclusion is to prevent the extension of a prohibited service (insurance or risk assumption) to sanctioned countries, entities or individuals. It essentially shifts the risk of loss for the underlying transaction back to the insured – the person more likely to have direct control over the economic activity giving rise to the contact with a sanctioned country, entity or individual. [11-16-07]

This is a sensible and reasonable policy with respect to global insurance policies. So, you must be assuming, AIG must have left the language cited above out of its global policies and that led to the fines. But you would be wrong. OFAC said this about the AIG global policies:

While a majority of the policies were issued with exclusionary clauses, most were too narrow in their scope and application to be effective.

And how were they “too narrow in their scope and application”? OFAC is not saying. Apparently, OFAC thinks it will be easier to fine other insurance companies later if it keeps secret the drafting errors in the global policies that made the exclusionary clauses in the AIG global policies “too narrow in their scope and application.” And what about those clauses other than most clauses that were too narrow?  Why was AIG being fined for shipments under policies where the exclusionary clauses were acceptable?

Worse yet, after staying mum on what was wrong with “most” of AIG’s exclusionary clauses beyond being “too narrow,” OFAC has the nerve to say this in its announcement:

This enforcement action highlights the important role that properly executed exclusionary clauses play in the global insurance industry’s efforts to comply with U.S. economic sanctions programs.

If “properly executed exclusionary clauses” are so gosh-darned important, then why on earth does OFAC refuse to give the insurance industry a single clue as to what exactly are  “properly executed exclusionary clauses” and what was wrong with “most” of the clauses in the AIG global policies? Did they leave out the word “void” from the recommended language? Did they just say “U.S. economic sanctions” instead of “U.S.economic or trade sanctions”?  How hard would it have been for the agency to say precisely and specifically what was wrong with AIG’s exclusionary clauses?  This just underscores the perception that OFAC is more interested in terrifying than regulating U.S. businesses.

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