Archive for the ‘OFAC’ Category


Jul

24

Oh Noes! Another Post on UCC Article 4A and Blocked Wire Transfers


Posted by at 11:01 am on July 24, 2016
Category: OFAC

Industrial Bank Clock by Clif Burns via Flickr https://flickr.com/clif_burns [All Rights Reserved]

My apologies for yet another post arising out of Receivers of Sabena v. Deutsche Bank, but there is one more important point to be made if you’ll bear with me. (For background, here are links to the first post and the second post.)

Last week, in the second post on this subject, I talked about a transfer made by a hypothetical Sally Jones Heavy Machinery LLC which was blocked by the intermediary bank because of the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. In that hypothetical, the intermediary bank’s maximum damages to Sally Jones Heavy Machinery LLC were limited to interest on the blocked funds if the bank blocked when it should not have. On the other hand, penalties to OFAC would have been up to $1 million if the bank did not block and should have. In that light, it was easy to figure out why the intermediary bank had little interest in hearing whether Sally Jones’s company and Sakinah Hussain were related.

But what if the funds transfer had been initiated by Sally Jones as an individual consumer? Would things have been different? Section 4A-108 exempts from its coverage wires covered by the Electronic Fund Transfer Act of 1978, 15 U.S.C.§ 1693. This means that wires with an individual consumer on either end, with some exceptions such as wires initiated in person at a money transfer agency, are exempted from Article 4A and are covered by the EFTA instead. So in this instance, this would mean that the liability limitations set forth in section 4A-305 would not govern the liability of the intermediary bank.

But that’s not the end of the story. Section 1693h sets forth the liability of financial institutions, and it does provide for damages that are the proximate result of a financial institutions failure to execute properly instructions received from the consumer. That, however, doesn’t cover the intermediary bank because it has not received instructions from the consumer, just instructions from the consumer’s bank. So the EFTA neither establishes nor disclaims liability. And the limitation on liability doesn’t apply.

Or does it? Look at this in the Official Comment to section 4A-108

A court might, however, apply appropriate principles from Article 4A by analogy in analyzing any part of the funds transfer that is not subject to the provisions of EFTA or other law, such as the obligation of the intermediary bank to execute the payment order of the originator’s bank (Section 4A-302)

And, of course, if a court did that (as the banks and their lawyers that drafted Section 4A clearly hope), all that the intermediary bank owes to Sally is interest on the blocked account which conveniently is sitting in that account already. So once again, it may be better to be the bank than to be Sally Jones, which probably comes as no big surprise.

Photo Credit: Copyright Clif Burns 2013 (www.clifburns.net)

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Jul

21

Why Intermediary Banks Are More Scared Of OFAC Than You


Posted by at 11:17 pm on July 21, 2016
Category: GeneralOFAC

Right Twice A Day by Clif Burns [All Rights Reserved], via Flickr https://flic.kr/p/zDCVmvIn my post two days ago on the sad tale of Sabena Airlines and the blocked wire transfer, I focused on the rights (or lack thereof) of a beneficiary of wire that was blocked in mid-transit to recover those funds once unblocked by OFAC.  Now let’s look at the other side of the coin, which is a situation that I’m sure many readers may have encountered.

Consider this hypothetical:  Sally Jones, a U.S. citizen, owns Sally Jones Heavy Machinery, LLC.  She asks the company’s bank, Third National Bank of Quahog, to wire $500,000 to a company in France to purchase equipment needed to fulfill a contract.  Her bank initiates the wire which transits the First Bank of Paranoia in New York City.   That intermediary bank blocks the transfer because it considers Sally Jones in the name of the company a hit for the SDN Listing for Sakinah Hussain a.k.a. Sally Jones. Because Sally Jones Heavy Machinery is unable to purchase the equipment in time, it winds up breaching the contract with its customer who then sues Sally Jones Heavy Machinery for a billion dollars and wins.  Can Sally Jones Heavy Machinery sue the First Bank of Paranoia for a billion dollars?

The logic in the Sabena case as applied to the beneficiary of the wire also applies to the sender of the wire.  The court there relied on UCC section 4A-212 which states that the “receiving bank” — in this case both the sender’s bank and the intermediary bank — has no obligation to either the sender or the beneficiary to accept a payment order without an express agreement and that no liability can arise until that payment order is accepted.   Quahog Bank had an account agreement with Sally Jones Heavy Machinery and therefore may have had an obligation to accept and execute the payment order by sending it on to the First Bank of Paranoia, which it did.  But the First Bank of Paranoia would not have any obligation to, or agreement with, Sally Jones Heavy Machinery and had no obligation to accept the payment order despite any protestations made by Sally Jones Heavy Equipment that it had no relation to Sakinah Hussain.  As far the bank was concerned, that was an issue for OFAC to sort out, not for the bank.

But wait, can the First National Bank of Paranoia get away with this despite its arguably obvious negligence here, particularly if it refused to consider Sally Jones Heavy Equipments evidence that it was not the Sally Jones on the SDN List?  Again, the court in Sabena makes clear that tort actions for negligence would not be possible and that Article 4A was intended “to be the exclusive means of determining the rights, duties and liabilities” of parties to the funds transfer.

Suppose in our example that the First National Bank of Paranoia actually accepted the payment order but then decided to block it.  Would there be liability?  Section 4A-305 says that there is liability for consequential damages for the failure to execute the payment order only if it agreed to pay such damages which, of course, it will not have done.  Instead, the maximum liability it will have to anyone under section 4A-305(a) is to pay interest on the delay.  So when OFAC ultimately decides that Sally Jones Heavy Machinery is not Sakinah Hussain, the First Bank of Paranoia will owe interest to Sally Jones Heavy Machinery.  Given that blocked funds are required in any event to be in an interest bearing account this is, as they say, no skin off of Paranoia’s back.

So it’s now easy to see why the First National Bank of Paranoia was more scared of OFAC than Sally Jones.  OFAC could fine the Bank one million dollars (twice the value of the transfer) if Sally Jones was Sakinah Hussain.   If the bank was wrong, then its damages are equal to the amount of interest accrued on the blocked funds, interest which conveniently will be sitting in the account with the funds.

Photo Credit: Right Twice A Day by Clif Burns [All Rights Reserved], via Flickr https://flic.kr/p/zDCVmv. Copyright 2015 Clif Burns

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Jul

19

The Little Airline That Couldn’t


Posted by at 9:49 pm on July 19, 2016
Category: OFAC

Sabena Airbus A321-211 by Aero Icarus [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/8PJXJn [cropped and color processed]

Remember Sabena, the ill-fated Belgian airline that declared bankruptcy in 2001? Well, to quote Ford Madox Ford, this is the saddest story I have ever heard.

One of the things that Sabena did, other than fly people back and forth to Brussels, was to provide repair and technical services to other airlines. One of those was Sudan Airways, which originated a wire transfer of $360,500 to pay Sabena. One day before the wire transfer, on November 3, 1997, President Clinton blocked the assets of the government of Sudan, including those of Sudan Airways. So when the wire from Sudan Airway’s bank hit Bankers Trust in New York on November 4 on its way to Sabena’s bank in Belgium, Banker’s Trust blocked the transfer and put the funds in a blocked account where they sat for more than a decade.

In 2009 Sabena requested that OFAC unblock the funds. In 2012, OFAC issued a license to Banker’s Trust (by then Deutsche Bank) to release the funds. The receivers for Sabena were doing a happy dance over getting the license from OFAC when their celebration was abruptly cut short. Deutsche Bank relied on the license Sabena obtained and sent the funds not to Sabena’s bank but to Sudan Airways bank. It’s something like renting a hall and a band for a party and then not being allowed to attend but rather forced to watch through the windows as your guests eat all your food and drink all your champagne.

So the receivers for Sabena decided to get even: they sued Deutsche Bank for not sending the money to them. But poor Sabena just can’t get a break. On July 14, a New York appeals court dismissed the Sabena complaint and upheld the return of the unblocked funds to Sudan Airways.

To get there, the appeals court relied on Article 4A of the Uniform Commercial Code that governs fund transfers. Specifically the court relied on two provisions. First, it relied on section 4A-212, which says that an intermediary bank, like Bankers Trust, has no liability to the beneficiary of the funds transfer. Second, it relied on section 4A-402 which requires the intermediary bank to return to the sender any uncompleted funds transfer. Once the funds were blocked, then the transfer order was cancelled under section 4A-211(d) five days after the intermediary bank received a transfer request and did not execute it. And once cancelled, then section 4A-402(d) requires the funds to go back to the sender.

The moral of the story is this: intended recipients of blocked fund transfers should not waste their time trying to get an unblocking license.

Photo Credit: Sabena Airbus A321-211 by Aero Icarus [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/8PJXJn [cropped and color processed]. Copyright 2010 Aero Icarus

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Jun

24

A Brief Brexplanation of Brexit and Brexport


Posted by at 11:37 am on June 24, 2016
Category: BrexitEconomic SanctionsEUOFAC

Boatleave-12 by Gary Knight [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/J5K8dc [cropped]

Although Brexit is unlikely to be in effect for almost two years or more, there are some questions as to what impact Brexit might have on British export controls and economic sanctions.  Any prediction here is risky beyond my speculation that the UK will be unlikely to alienate the U.S. and other allies by significantly altering its export and sanctions regimes.

At this point, and in the wake of the vote last night, you may find it useful to understand the legal background under which Brexit will affect U.K. export controls and sanctions.   Given that all your Facebook friends have suddenly become experts on Brexit (soon to be known as Brexperts), you can now impress them as a Brexport Brexpert.

Let’s start with the Wassenaar Arrangement.  The European Union is not a party to the Wassenaar Arrangement.  Rather all member states of the E.U. (other than Cyprus) are individual members of the Wassenaar Arrangement.   Accordingly, Brexit will have absolutely no impact on Britain’s obligations under Wassenaar.   The Wassenaar Agreement is the source, via Council Regulation (EC) No 428/2009 (and associated legal amendments) of the UK Control Lists.  Although the intermediate authority for the lists will go away on Brexit, no alteration in those control lists will occur by virtue of Brexit alone.

This brings us to Council Regulation (EC) No. 428/2009, which establishes the E.U. framework for export controls. Here it is important to understand that the regulation did not create a centralized EU export control regime. Rather it left principal authority with Member States to implement their own control regimes in accord with principles set forth in the regulation. Britain’s Export Control Order of 2008 implements 428/2009 and related EU authorities. Although it will become untethered from 428/2009 on Brexit, there is no reason that it should not remain in place post-Brexit.

The situation with sanctions is somewhat more complicated and depends on the particular EU sanction. The JCPOA, which lifted many international sanctions on Iran, for example, will not be affected because the U.K. is an independent signatory to the JCPOA.  Other E.U. sanctions, such as the Russia/Ukraine sanctions, have direct legal effect in the U.K., although it is up to the member state to establish and enforce penalties. In these instances, there is no independent legal authority in the U.K. for that sanction, and its status after Brexit becomes uncertain. It is, of course, likely that Britain will not seek to alienate its allies by walking away from these sanctions, but it will have to enact domestic legislation to implement them before or after Brexit.

Photo Credit: Boatleave-12 by Gary Knight [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/J5K8dc [cropped]. Copyright 2016 Gary Knight

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Jun

15

DOJ Issues Misleading Press Release in Connection with Export Guilty Plea


Posted by at 11:47 pm on June 15, 2016
Category: BISCriminal PenaltiesIran SanctionsOFAC

All in a Day's Work by Damian Gadal via Flickr https://flic.kr/p/5xQkWj [Fair Use]
ABOVE: Erdal Kuyumcu

This blog reported earlier on the case against Erdal Kuyumcu in connection with exports of an EAR99 Cobalt Nickel powder (CoNiCrAIY) to Iran. In that initial post, I questioned the government’s evidence that Mr. Kuyumcu knew that his sales of this powder to a customer in Turkey were destined to Iran, noting that the criminal complaint based its allegations on the “training and experience” of an investigating agent who felt that unrelated emails discussing Iran covered these shipments. (I also mocked the agent’s claim that a “[b]ased on my training and experience … [a] colon followed by a close parenthesis … represents a smiley face.”)

Yesterday the Department of Justice issued a press release stating that Mr. Kuyumcu had pleaded guilty to the charges against him. Of course, the DoJ, as usual, could not restrain itself from misleading hyperbole in the process of patting itself on its own back:

Kuyumcu, a United States citizen, conspired to export from the United States to Iran a metallic powder composed of cobalt and nickel without having obtained the required license from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC). The metallic powder can be used to coat gas turbine components, such as turbine blades, and can also be used in aerospace, missile production, and nuclear applications. Such specialized metals are closely regulated by the U.S. Department of Commerce to combat nuclear proliferation and protect national security, and exporting them without an OFAC license is illegal.

Why, you ask, if CoNiCrAIY powder is “closely regulated” by the U.S. Department of Commerce was its export a violation of OFAC rules? Good question. CoNiCrAIY powder is EAR99 and its export is not regulated, either “closely” or otherwise, by the Department of Commerce. Perhaps the DoJ has gotten confused, innocently or otherwise, by ECCN 2E003.f which controls certain “technology” for application of certain specified inorganic compounds, including CoNiCrAIY and similar compounds, on non-electronic substrates. But even this is not tantamount to close regulation of the powder because other inorganic compounds covered within these controls of deposition technology include tungsten and oxides like, er, carbon dioxide. By this logic, if Kuyumcu exported a carbonated soft drink to Iran, the DoJ could claim that he exported a product to Iran “closely regulated” by the Department of Commerce.

Once again, we see that the government can misinterpret export laws and regulations with immunity while everyone else does so at their peril.

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