My colleague Stan Marcuss points out that the Office of Foreign Assets Control (“OFAC”) appears to have changed course in treating Freedom of Information Act (“FOIA”) requests and has decided to hand out OFAC license applications willy-nilly to anyone who can afford a postage stamp. Several years ago, after someone requested copies of all licenses to ship food, medicine and medical devices to Iran, OFAC sent letters to the affected parties asking them if they wished to assert protection under Exemption 4 of the FOIA which exempts from disclosure confidential commercial information. If a licensee asserted the exemption, OFAC normally would withhold the license from disclosure.

Now, citing the new administration’s policy of transparency, OFAC has sent letters indicating that these licenses will be released to the public. The filing of such a license, and the contents thereof, will be freely disclosed over the objection of the licensee even though such disclosure may discourage some from filing these licenses in the future, clearly in contravention of the Trade Sanctions Reform and Export Enhancement Act of 2000 which clearly sought to encourage the export of such humanitarian supplies to sanctioned countries. Even if we don’t like the government of Iran, Congress passed TSRA because it did not want to see the people of Iran deprived of food and life-saving medicines and medical devices. Those requesting TSRA licenses, of course, don’t really have those interests in mind.

At least two things make OFAC’s new position more than a little absurd. OFAC is still using FOIA Exemption 6 to black out the names of any individuals mentioned in disclosed documents. The absurdity here is that this policy is even used to withhold the names of terrorist and other specially designated nationals (“SDNs”) when releasing information on enforcement actions against companies that have engaged in transactions with SDNs. That means, of course, that Osama Bin Laden has more protections under OFAC’s interpretation of the FOIA than an exporter shipping food to a sanctioned country.

Worse, when an agency promises transparency, one might reasonably assume that transparency would extend to providing information on export enforcement cases that might actually assist exporters in trying to interpret and to understand the scope of OFAC’s vaguely worded regulations.   Not so.   OFAC continues to release as little information as possible about enforcement actions.  That sort of transparency would prevent the OFAC from being able to use ambiguities in its own regulations to deter certain exports — a practice I like to call in terrorem regulation.

Apparently, what’s transparent for the goose isn’t really transparent for the gander.

The Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued a guidance today on exports of medical parts to support medical devices legally exported under OFAC licenses to Iran or Sudan, the two countries for which OFAC exercises licensing authority over medical devices. And, not surprisingly, OFAC continues its efforts to resist the mandate of the Trade Sanctions Reform and Export Enhancement Act of 2000, which sought, on obvious humanitarian grounds, to prevent OFAC and other export agencies, from restricting exports of food, medicine and medical devices to sanctioned countries.

Under the new guidance, rather than saying simply that exports of replacement parts are ordinarily incident to the export of medical device itself, and therefore allowed, OFAC imposes burdensome conditions on those exports. The potential impact of this red tape on ordinary citizens in Iran and Sudan who are sick or dying just doesn’t matter. Worse, such punitive measures directed at the sick and dying are not going to cause Iran to give up its nuclear aspirations or cause the regime in Sudan to rethink its genocidal policies.

First, if the part that needs to be replaced fails during the one-year period of validity of the export license for the medical device itself, the part can be exported, but only as a one-for-one replacement. But there is another, and more significant, catch. The replacement part must have obtained a specific classification as EAR99 from the Bureau of Industry and Security (“BIS”). And even if the exporter has a classification for the medical device as EAR99, it doesn’t count unless that classification specifically mentions the replacement part in question.

Medical devices on this list don’t require a specific BIS classification, but the list doesn’t include parts. So even though an OFAC license for a digital blood pressure monitor doesn’t require a specific classification from BIS, exporting a replacement display screen for that device does!

Second, if the underlying license has expired, a new OFAC license is required to export the replacement parts. And, again, a specific BIS classification is required for each of the replacement parts exported, even if the device itself was classified as EAR99 or was on the exempted list and did not require a BIS classification. OFAC license approvals can take from 40 days to six months or more, which means that patients may go without care while the exporter waits for a BIS classification and an OFAC license.

Third, even an import of the device back to the United States for repair will require a license — as will the re-export after the device is repaired. The application will require, among other things, a “statement regarding the circumstances under which the medical device broke.” It’s not clear that simply saying that the device was being used and it just failed will suffice as a justification for a license.

If you are an exporter of medical devices under TSRA licenses to either Iran or Sudan, you should make sure that any request for a required BIS classification of the device also includes a request for classification of the important parts of that device. You also should be aware that you can’t solve this problem by continually renewing the license. Parts can only be shipped without a license under this guidance if they are shipped during the original period of validity of the license under which the medical device for which the parts are destined was exported.

ANZ Bank, Australia’s third largest bank, recently agreed to pay to the Office of Foreign Assets Control (“OFAC”) a fine of $5.75 million to settle allegations that the bank had engaged in transactions in Sudan and Cuba in violation of the U.S. embargo on those two countries. The OFAC announcement of the settlement noted that ANZ manipulated the SWIFT messages related to the Sudan transactions by removing all references to Sudan. ANZ was liable for these violations as a result of its banking office in New York City.

According to the announcement, 31 transactions with a total value of $106 million were involved. Given the size of the agreed penalty, it is clear that the applicable penalty to this case was not the penalty applicable before the International Economic Powers Penalty Enhancement Act (or $50,000 per transaction) but the enhanced penalties of $250,000 per violation or twice the value of the transaction imposed by that legislation. Under the enhanced penalties, ANZ was theoretically liable for $212 million. [UPDATE: Actually the maximum liability was $57,040,000. The Cuban transactions were subject to a maximum fine of $65,000 each. Thanks to Jim Slear in the comments for catching my mistake]

OFAC cited a number of mitigating factors justifying the reduced penalty including ANZ’s cooperation in the investigation, its voluntary disclosure of the Cuba violations, its adoption of revised compliance procedures, and its agreement to engage in, and report to OFAC, further audits of its activities to insure that it doesn’t process financial transactions involving embargoes countries through U.S. financial institutions. Australian banking authorities have agreed to review these examinations. The $5.75 million paid by ANZ is substantially less than the fines paid by Lloyds, ABN Amro and USB for similar violations which were, respectively, $350 million, $80 million and $100 million.

An article in the Brisbane Times provides more background on ANZ’s dealing with embargoed countries:

ANZ initially became aware of the issue in late 2006 when regulators last year blocked a $US15,000 transaction involving the import of stone from Iran.

ANZ appointed Deloitte to conduct an independent investigation of more than 330,000 trade finance transactions for Australian and international clients going back five years. This ultimately turned up 42 deals found to have breached US economic bans on 13 countries. However the fine from the US Treasury only relates to 31 trade finance transactions involving parties in Sudan and Cuba.

The OFAC announcement states that ANZ didn’t voluntarily disclose the Sudan transactions. That is somewhat hard to reconcile with this report of the Deloitte investigation unless ANZ kept the Deloitte investigation internal until OFAC independently uncovered the Sudan transactions.