Archive for the ‘OFAC’ Category


May

4

Banks Caught Between Scylla (OFAC) and Charybdis (Customer Wrath)


Posted by at 2:38 am on May 4, 2016
Category: Cuba SanctionsOFAC

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

By now, we’ve all seen these stories. A slightly dimwitted, possibly drunk, prankster writes “I ❤ ISIS” in the memo line of a check or in the description field of an online payment service and then is shocked, shocked to learn his check or payment has not been processed. The prankster immediately takes to Twitter, swears on a stack of Marvel comic books that he’s not a terrorist, laments the utter stupidity of his bank or payment provider and then waits for a horde or reporters to gather on his steps. Within hours, reporters, bloggers and TV news crews have breathlessly reported the injustice of it all, with almost all of them saying (erroneously) that OFAC (rather than the bank) had seized the funds and with the prankster now lamenting that, as a result of this seizure, his third cousin in Venezuela will not be able to pay for the drug she needed to cure a rare river parasite infestation and would likely die in a matter of days, if not hours. Reddit then stirs up its gang of Internet trolls who vow revenge the minute they can take a break from playing Halo LVII.

It’s about time to step back from this wave of mass hysteria and take stock of what is going on here and how we got where we are. This excellent article in the Tampa Bay Tribune, besides quoting my friend Peter Quinter, sheds some light on what is going on. It starts with the story of a merchant who sells fedoras, guayaberas and other Cuban-style articles made wholly outside Cuba but sold through a site called MyCubanStore.com. Even though none of the merchandise sold is Cuban, customer payments, the merchant claims, are regularly seized or held up. The article notes that once OFAC whomped one payment service with a massive fine, the payment services and banks did what any sane business would do: they started erring on the other side, holding up, questioning or blocking anything vaguely suspicious.

Frankly, if you were in the bank or payment provider’s shoes, with OFAC standing behind you wielding an enormous hatchet and threatening mayhem if you clear as much as a nickel in error, wouldn’t you do the same thing? You want to call your store Havana Hats or Tehran Trinkets, then get used to some cash flow issues or pick another name. No one is going to risk a massive fine to clear a 50 cent fee on a $10 order from one of your customers. The answer here is not to shame the banks and the payment providers. Rather it is to insist that OFAC settle down and take a more measured approach to this issue, perhaps even issue some reassuring guidance assuring banks and others involved in clearing payments. Even that might not settle down a shell-shocked industry.

In the meantime, people, please find some other way to amuse yourselves besides seeing whether you can slip references to hardened terrorists past your local bank. Take a walk, read a poem, tutor a school kid, learn to speak Chinese, or listen to all the Shostakovich symphonies in order. If you want to play a prank, call up CVS and ask them if they have Prince Albert in a can.

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

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Copyright © 2016 Clif Burns. All Rights Reserved.
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Apr

28

Two Heads Are Not Always Better Than One


Posted by at 9:22 am on April 28, 2016
Category: BISCuba SanctionsOFAC

Havana by Bryan Ledgard [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/nwFDPh [cropped and processed]

The Office of Foreign Assets Control (“OFAC”) last week updated its Cuba FAQs with this perplexing little blurb that can only charitably actually be called an “answer” or the “A” in FAQ.

68. May a person subject to U.S. jurisdiction export or reexport to Cuba items that include U.S.-origin content, but are not 100 percent U.S.-origin?

Persons subject to U.S. jurisdiction may engage in all transactions ordinarily incident to the exportation or reexportation of 100 percent U.S.-origin items from a third country to Cuba, consistent with the export licensing policy of the Department of Commerce. Items that are not 100 percent U.S.-origin would require OFAC authorization, which would be subject to certain statutory restrictions.

This is nothing more than a paraphrase of section 515.533(a)(1) of the Cuban Assets Control Regulations. In fact, the FAQ might have been more clearly stated and just as useful if it was written this way:

68. Do you really mean what you say in section 515.533(a)(1)?

Yes.

Of course, the FAQ neatly dodges the ugly truth that if the item is 99 percent U.S.-content, then you will need a license from both BIS and OFAC to reexport that item from a foreign country to Cuba. You want real export reform? Here’s where you start. There is no need in this instance, or ever in any other instance, for two federal agencies to decide whether something can be exported. Of course, you could avoid the double license requirement by shipping the item from the third country to the U.S. before exporting it to Cuba in which case you will only need the BIS license. This workaround further illustrates how absurd the double licensing requirement is here.

There is a second ugly truth that the FAQ dodges. Both the FAQ and section 515.533(a)(1) imagine that the phrase “100 percent U.S.-origin items” actually means something and can be determined to be true or false with respect to any given product. Nowhere in OFAC’s rules, or FAQs, or website, or presumably even on scraps of paper on the floor of OFAC’s basement is there any guidance as to how to determine U.S. content. Anyone who has ever struggled with this issue in its many contexts (including customs country of origin rules) will realize that there are a number of ways to analyze such a question, based on tariff shift rules, substantial transformation rules or the FTC’s “substantially produced in” rule. And often, if not almost always, each of these rules will result in a different country of origin for a product.

Take this example: apples grown and packaged in the United States are packaged in boxes made in the United States with cardboard imported from Canada. A substantial transformation rule might say that the box was U.S. origin; a tariff shift rule might say that it was not; and the substantially produced test would also probably say that it was not. Under the tariff shift rule, BIS licenses the reexport; using the others then both may have to license the re-export.

Here’s a harder case: take the same example above but with the box made in the United States with U.S. cardboard made from U.S. trees and printed with ink made in the United States, although one of the chemicals in the ink is imported from China. Probably under all the tests described above, the packaged apples would be 100 percent origin. Still, there is a Chinese chemical in the ink on the box. Without BIS or OFAC committing to any of the three tests described above, this is not a 100 percent origin U.S. product.

That being said, there are probably no 100 percent origin U.S. products (short of unpackaged agricultural produce without foreign-produced pesticide residue). In that case, you always need both licenses for re-exports and there was really no need at all — unless there was some desire to confuse — for Cuba FAQ 68.

Photo Credit: Havana by Bryan Ledgard [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/nwFDPh [cropped and processed]

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

Apr

12

Texas Millionaire’s Release in Iran Prisoner Swap Remains a Mystery


Posted by at 6:21 pm on April 12, 2016
Category: Criminal PenaltiesIran SanctionsOFAC

Smart Power Systems and Bahram Mechanic via http://www.smartpowersystems.com/content/main/corporateinformation.html [Fair Use]An excellent and detailed article in the Houston Press, an alternative weekly news magazine and website, ponders the reason that a Texas millionaire, Bahram Mechanic, was on Iran’s prisoner swap list and received, as part of the prisoner swap negotiated with the nuclear deal, a pre-trial pardon of export charges that had been filed against him. This blog had previously written about the indictment against Mechanic which incorrectly accused him, at least for certain (but not all) of the charged exports, of not having a BIS license that he didn’t need. Nine months later, in January 2015, Mechanic walked out of the federal detention center where he was being held without bond pending trial. Like the other Iranian prisoners swapped in the deal, none of whom actually returned to Iran, Mechanic re-ensconced himself in a $2 million condo atop the forty story Four Leaf Towers in Houston and had the crab dinner he complained he had been craving ever since he became the involuntary guest of federal taxpayers.

The author of the article candidly admits that he has no idea why the Iranians were interested in freeing Mechanic. But he does supply a number of curious details about the case. First, Mechanic was denied bail, at least in part, because they found 156 grams of cocaine, 4 kilos of an opium derivative, multiple passports and $100,000 in cash in multiple currencies in a safe in his home. The drug possession charges were later dropped without explanation.

Second, it appears that his defense was going to be a version of the dog that didn’t bark in the night. Apparently, back in 1997, Mechanic had a lawyer at a small trade firm in Houston send a letter asking the Office of Foreign Assets Control if his ownership interest in, and business relationship with, Faratel, a company in Iran, posed any problems. (Ya think?) Not hearing anything (ever) back from OFAC, Mechanic and his lawyers saw this as a green light to continuing shipping things to Faratel in Iran. This is a bit odd since he was indicted at about the same time as the letter to OFAC for transshipping items through Taiwan to Faratel in Iran. Although those criminal charges were dropped, he ultimately paid OFAC a $100,000 fine to settle civil penalty charges OFAC brought arising out of those shipments.

Mechanic’s lawyer suggested to the author of the Houston Press article that the government’s case was meritless, using a familiar term sometimes used to describe bovine excrement. He speculates that the government fabricated the case against Mechanic as “trade bait” for the Iranians. At other times in the article, Mechanic’s lawyer somewhat inconsistently concedes that Mechanic may have done the things he was accused of doing but didn’t know that it was wrong, apparently because the 1997 letter never got an answer (other than, of course, the $100,000 fine).

None of this does anything but deepen the mystery as to why anyone in Tehran would give two cents, much less three American prisoners, to spring Mechanic from jail so he could return to his luxury condo in Houston and catch up on all the crab dinners he missed while in jail.

Photo Credit: Smart Power Systems and Bahram Mechanic via Smart Power Systems [Fair Use];

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

Mar

31

OFAC May Make a U-Turn on Its U-Turn Ban


Posted by at 10:39 am on March 31, 2016
Category: Iran SanctionsOFAC

Freedom Triumphant by takomabibelot [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/4Au9Zg [cropped and processed]An AP story today suggests that the White House may be considering the return of “U-turn” transactions for permitted sales to Iran. Those transactions, which were eliminated in 2008, allowed, under former section 560.516(a)(1), transactions with Iran to be cleared in U.S. Dollars by permitting non-U.S. banks to use their correspondent banks in the United States. In order to qualify for the exception, both the originating and beneficiary banks had to be non-Iranian foreign banks. In addition, no Iranian banks on the SDN List could be involved and, of course, the underlying transaction could not be one prohibited under U.S. law. So, if an Iranian customer wanted to buy goods from France and pay dollars, the Iranian customer would direct its bank in London to use its correspondent account in a New York bank to send the purchase price in U.S. dollars to the seller’s bank in France.

Of course, even if U-turn transactions are permitted once again by OFAC, there is no guarantee that banks will be willing to process them.   After all, no one has forgotten that the New York Department of Financial Services, believing the it understood OFAC regulations better than OFAC, went after Standard Chartered bank for legal U-turn transactions involving Iran.

Photo Credit: Freedom Triumphant by takomabibelot [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/4Au9Zg [cropped and processed]

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

Mar

29

There’s Nork Gold in Them Thar Gadgets!


Posted by at 11:01 pm on March 29, 2016
Category: North Korea SanctionsOFAC

North Korean Commemorative Coin via KCNA at https://flic.kr/p/e8xtQk [Fair Use]

A Reuters story is hyperventilating over the new sanctions on North Korea and their impact on the discovery in 2014 reported by the Wall Street Journal that there might be North Korean gold in the U.S. supply chain. In reviewing conflict minerals issues, some companies discovered that electronic components purchased by them might have contained gold refined by the Central Bank of the Democratic People’s Republic of Korea. So do the new sanctions make this problem worse?

To begin with, imports from North Korea have required licenses since Executive Order 13570 in 2011 and are not affected or changed by the new sanctions. But if I purchase an electronic component from China that uses North Korean gold, have I imported that North Korean gold into the United States when I import the electronic component? The WSJ article linked above quotes an “attorney at Nixon Peabody LLP, who specializes in sanctions,” as saying this: “It’s a problem, even if the raw materials are coming very indirectly through suppliers.”

This is far from clear. Neither the Executive Order nor the implementing North Korea Sanctions Regulations define what constitutes an import from North Korea. There is no reverse de minimis rule that covers imports of items with any particular level of North Korean content, say, one atom, one molecule, 10 percent or 25 percent. In the absence of any specific rule, it seems reasonable that if the North Korean gold has been substantially transformed into another product outside the United States, import of the transformed item is not the import of any good from North Korea within the meaning of E.O. 13570.

Perhaps the most relevant provision in the new sanctions imposed by Executive Order 13722 is section 2(a)(i) which permits OFAC to block any person that OFAC determines

to have sold, supplied, transferred, or purchased, directly or indirectly, to or from North Korea or any person acting for or on behalf of the Government of North Korea or the Workers’ Party of Korea, metal, graphite, coal, or software, where any revenue or goods received may benefit the Government of North Korea or the Workers’ Party of Korea, including North Korea’s nuclear or ballistic missile programs.

Although that seems to pose some peril, in my example, for the Chinese company buying Nork gold for its electronic components, it is far from clear that it covers, or would be used to block, a U.S. company that buys the electronic component incorporating the Nork gold. This seems even clearer given that section 1702(a)(1)(B) of the International Emergency Economic Powers Act, under which Executive Order 13722, only provides blocking authority for “property in which any foreign country or a national thereof has any interest” and would not permit the blocking of U.S. company (and all its property) simply because it imported some items incorporating some North Korean content.

Of course, given that the foreign manufacturer using North Korean gold risks blocking, U.S. importers would be well advised to remove Nork gold from their supply chain, both because of the risk to their supply chain and the commercial optics of dealing with a foreign manufacturer that winds up being blocked under the new sanctions.

Photo Credit: KCNA

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