Today the Office of Foreign Assets Control (”OFAC”) added three Burmese entities to the Specially Designated Nationals and Blocked Persons List, i.e., the SDN List. Among the three entities was the Myanmar Gem Enterprise, the state-owned monopoly that is in charge of gem sales in Burma. As you may know, Burmese rubies are especially prized and the sale of these rubies is thought to constitute a significant part of the revenues to the military junta that controls Burma.

Current OFAC regulations forbid the import into the United States of Burmese-origin goods. OFAC, however, refers to U.S. Customs rules for determining whether a good is of Burmese-origin, as can be seen from this OFAC guidance letter on Burmese teak sawn into planks in third countries. Most Burmese rubies are exported in uncut form to Thailand where they are processed and cut for sale to jewelers. In December 2004, Customs ruled that rough rubies mined in Burma that were processed and cut into gemstone rubies in another country underwent a “substantial transformation” and were no longer considered to be of Burmese origin. Notwithstanding this ruling, the 11,000 member association Jewelers of America urges its members not to traffic in blood rubies.

It is not clear that the designation of the Myanmar Gem Enterprise will have any substantial effect. Because the Burmese rubies must be processed in Thailand or elsewhere in order to be imported into the United States, no U.S. persons have any dealings with Myanmar Gem Enterprise but, rather, deal exclusively with companies in Thailand that process and cut the rough stones.

OFAC also designated the Myanmar Pearl Enterprise, hence the opportunity to swipe a line from an A.E. Housman poem as the title of this post.

The Wall Street Journal’s Law Blog had an interesting post last Friday regarding Iranian santurs (a dulcimer-like instrument) that a UCLA professor of ethnomusicology had been importing from Tehran. These instruments had been sailing through customs until last August when somebody in customs woke up and seized the instruments. A curt notice from DHL informed the professor of the seizure and the possibility that the santurs might be destroyed.

So Professor Sadeghi hired a lawyer to free the santurs. The lawyer told the WSJ blog that he “scoured” the Iranian Transactions Regulations for an exception for “dulcimers” — to no avail, of course. I suspect that the lawyer is speaking figuratively here because anyone familiar with the regulations would have known immediately that there were no applicable exceptions that would cover Professor Sadeghi’s santurs.

So, the lawyer did his best to make something up:

In his package, he acknowledged that the dulcimers didn’t have the appropriate licensing from the Office of Foreign Assets Control (OFAC) but argued that the instruments met the requirements for the regulatory exceptions made for informational materials and gifts.

Er, no. The gift exception provided in section 560.506 of the Iranian Transaction Regulations is limited to gifts valued at less than $100 dollars, and Persian santurs seem to exceed this dollar limit by a considerable amount. And I’m not quite sure how one gives a gift to oneself. Nor is the informational exception applicable. A musical instrument does not fit within the category of items described as informational materials in section 560.315. Frankly, he could just as well have argued that the santur is a carpet covered by section 560.534.

Even the lawyer himself appeared to be a little embarrassed by these arguments and offered an alternative justification:

Furthermore, [he] argued, even if they didn’t meet those exceptions, this was an ideal case for OFAC to exercise its discretion.

Okay, now were talking. And, miraculously enough, he received a letter from OFAC, stating:

Mr. Manoochehr Sadeghi is hereby authorized to engage in all transactions necessary to receive delivery from Iran of four miniature hammered dulcimers (santurs) seized by U.S. Customs and Border Protection on or about August 30, 2007.

More interesting, it appears that the lawyer, rather than filing a voluntary disclosure, filed something akin to a retroactive license request. If he did file a voluntary disclosure, the WSJ blog doesn’t relate whether OFAC imposed a fine or mitigated the fine completely.

In the end, it appears that two factors were at play in OFAC’s decision. In the past, the Bureau of Industry and Security (”BIS”) has used its discretion to permit exports of musical instruments to Cuba, and so a direct appeal to OFAC’s discretion in this case, without relying on inapplicable regulatory exceptions, was probably the best approach. Additionally, it seems possible that OFAC may have been influenced by Professor Sadeghi’s fame: he performed at the Kennedy Center and received a National Heritage Award from the National Endowment for the Arts.

Last week the Department of Treasury’s Office of Foreign Assets Control issued a guidance document that answered a question that has probably prompted legions of law firm associates and export compliance officers to call OFAC. The question: what if a company is not on the SDN list, but one of its partners/shareholders/members is? Can we do business with the company?

And the answer, given out by countless on the Hotline team and other OFAC employees is what you might think: only if the SDN does not control, directly or indirectly, a “50% or greater” interest in the company. Note that’s 50 percent or greater, not greater than 50%, although this distinction may not have been carefully observed by folks at the OFAC Hotline.

OFAC promises to start putting this into new regulations and to amend existing regulations to reflect this guidance. Be very careful, however, and don’t assume that this guidance applies to all sanctions programs. Some programs — such as the Cuba and Sudan sanctions — cover entities where persons of interest might hold less than 50 percent. Under section 515.201(a) of the Cuban Assets Control Regulations, transactions are prohibited in connection with property in which a Cuban national has any interest.

US Embassy in Khartoum

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Late last week Reuters reported that Adam Szubin, head of the Office of Foreign Assets Control (”OFAC”), announced that OFAC was stepping up its enforcement actions for violations of the U.S. sanctions on Sudan. According to Szubin, agents have built up a “queue” of enforcement actions against violators that will be rolled out in as early as a month’s time.

And Szubin is hoping to go for the big bucks:

Violating companies now face fines of up to $250,000 a breach or a charge of twice the offending transaction — a penalty that in some cases could run into millions, said Szubin. …

The recent increase in penalties for sanctions violators had strengthened OFAC’s hand, he added. …

Before the penalty increase, the company would have only had to pay up to $50,000 for each illegal sale — a charge that many organisations could write off.

“We’re now able to say, if your transactions totalled $40 million, and those were violative transactions, you could be facing a maximum penalty of $80 million. And that is no longer something that people will shrug off.”

This prospective uptick in enforcement actions, corresponds with increasing diplomatic parries between the U.S. and Sudan over the sanctions. According to a story in the Sudan Tribune, last year the government of Sudan had blocked 400 containers bound for the U.S. Embassy in Khartoum for failure to pay customs fees. The U.S. premised this non-payment on the Sudan sanctions and it was not until Sudanese president Omar Hassan Al-Bashir issued a decree granting an exception to the containers from custom fees that the containers were released. The Sudanese government later reversed its position and recently blocked entry of containers bound for the U.S. Embassy for non-payment of customs fees. In response, the U.S. has threatened to halt construction of a new U.S. Embassy in Khartoum. That construction has been underway for the past two years.

Screen clip from Al-Zawraa

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On January 9, the Department of Treasury designated Syrian television station Al-Zawraa under Executive Order 13438. That executive order targets parties that threaten Iraqi stabilization, including insurgent and militia groups and their support. Among the reasons cited for sanctioning Al-Zawraa were its broadcast of insurgent videos showing attacks on U.S. troops in Iraq.

According to a State Department authored article disseminated by the Voice of America:

Administration officials concede Wednesday’s order will likely have little practical impact. But Treasury Undersecretary for Terrorism Stuart Levey said the move brings to light “the lethal actions” of the sanction targets, and he urged the international community to join the United States in isolating them from the global economy.

One reason that this order “will likely have little practical impact” is that Al-Zawraa has been off the air since July 2007 and no longer appears to exist.

This is also the first time, at least that I am aware of, that Treasury has based a designation, at least in part, on the content of a broadcast or a publication. There is no reason to doubt Treasury’s claim that the station, while it was in existence, broadcast videos of insurgent attacks on U.S. troops. But so did major U.S. networks, including CNN.

The Treasury release also stated as a ground for the designation of Al-Zawraa that the station agreed “to broadcast open-coded messages through patriotic songs to [a] Sunni terrorist group.” Of course, coded messages are quite a different story from broadcast of insurgent videos and should have been sufficient, in and of itself, to designate that station. At least assuming that there is any point in blocking the assets of defunct entities.

A spokesman for the Treasury Department’s Office of Foreign Assets Control (”OFAC”) told Export Law Blog this morning that discussions between OFAC and the North Pole over Santa Claus’s Christmas Eve itinerary had broken down and were not expected to be resumed before Santa’s scheduled departure on December 24 at 10 pm EST.

The dispute arose from a dilemma that the U.S. sanctions against Cuba posed for Santa’s planned delivery of toys to children in Cuba. If Santa delivers toys for U.S. children first, there will be toys destined for Cuba in the sleigh in violation of 31 C.F.R. § 515.207(b). That rule prohibits Santa’s sleigh from entering the United States with “goods in which Cuba or a Cuban national has an interest.” On the other hand, if Santa delivers the toys to Cuban children first, then 31 C.F.R. § 515.207(a) prohibits the sleigh from entering the United States and “unloading freight for a period of 180 days from the date the vessel departed from a port or place in Cuba.”

A press release from the North Pole announced that the OFAC rules left Santa no choice but to bypass the children of the United States this Christmas. A spokesman from OFAC warned that if Santa attempted to overfly the United States, his sleigh would be forced to land and his cargo seized. He continued:

We know that the outcome is harsh, but we cannot allow Fidel Castro’s regime to continue to be propped up by Santa’s annual delivery of valuable Christmas toys to Cuban children.

Congressional leaders had left for the holiday recess and could not be contacted for comment.

There has been some discussion here at Export Law Blog about the proper role of freight forwarding companies in export enforcement. If a customer of a freight forwarder proffers a package addressed to Iran without an OFAC license, should the freight forwarder decline the package and tell the customer that shipments to Iran must be licensed? Or should the freight forwarder accept the package and call the authorities? The recent settlement agreement entered into between Kuwaiti-owned Proclad International Pipelines and the Bureau of Industry and Security shows, I think, a freight forwarder that struck exactly the right balance.

At issue were attempted exports by Proclad of nickel alloy pipes classified as EAR99 to Iran without a license. The company attempted to export the pipes to Iran by transshipping them through the UAE. In the recitation of the various counts with which Proclad was charged is this interesting language:

Proclad altered markings for use on the crates of nickel alloy pipes that it was attempting to export to Iran. The altered markings were provided to the U.s. manufacturers in lieu of markings previously provided indicating that pipes were being exported to Iran. Proclad altered the markings to conceal the true ultimate destination of the items after it had been informed by a freight forwarder of the applicable licensing requirements during a previous attempt to export the pipes to Iran.

What apparently happened was that once the freight forwarder said the pipes couldn’t be shipped to Iran, Proclad simply slapped on new labels saying that the pipes were going to the UAE. I suspect the freight forwarder then called the authorities.

The freight forwarder did the right thing by initially telling the exporter that exports to Iran required licenses. Clearly any exporter that hands documents to the freight forwarder showing Iran as the ultimate destination is clueless about U.S. law. Proclad Pipelines is located in Scotland, so it’s a reasonable assumption that they may not have been familiar with U.S. export restrictions.

But what initially might be seen as an innocent mistake quickly became an illegal undertaking when Proclad decided that the appropriate response wasn’t to decline to export items to Iran but to pretend to export the Iranian-bound goods elsewhere. And a freight forwarder who saw that a package previously bound for Iran now had on shipping labels for the UAE would have to be well-aware that the exporter was attempting some shenanigans. And that, in my view, fully-justified the freight forwarder ratting out Proclad.

The Office of Foreign Assets Control (”OFAC”) today released a document entitled “Notice for TSRA License Holders and Applicants.” In that document, OFAC notes that Bank Sepah, Bank Saderat, Bank Mellat and their branches and certain subsidiaries were designated pursuant to Executive Order 13382 and Executive Order 13224 and that all property of those banks was therefore blocked and U.S. persons were forbidden to deal with those banks. The Notice then stated:

Even if you are holding a valid OFAC license authorizing the exportation or reexportation of agricultural commodities, medicine or medical devices to Iran …, as of October 25, 2007, you are no longer permitted to engage in any transactions, directly or indirectly, with any of the above-listed banks.

The need for the notice was probably prompted by an ambiguity that may have been created by section 516 of the Iranian Transactions Regulations which deals with payment for transactions involving Iran. Section 516(a)(3) permits U.S. banks to process transfers of funds to or from Iran where:

The transfer arises from an underlying transaction that has been authorized by a specific or general license issued pursuant to this part ….

The Notice now makes clear that this doesn’t apply to transactions with the three designated banks.

The Office of Foreign Assets Control (”OFAC”) yesterday released its monthly report on penalties imposed by the agency last month. And, for the first time since the invention of the Internet, no one got fined for buying Cohibas over the web. Instead, OFAC reports penalties relating to Sudan, Iran and Specially Designated Global Terrorists (”SDGTs”).

Notice the interesting disparity between the violations that were voluntarily disclosed and those that weren’t. Wachovia voluntarily disclosed one rejected rather than blocked payment to an SDGT and got the maximum penalty for one violation, which in 2004 was $11,000. SKE and Rita made multiple shipments over a period of years and paid less than $11,000 per violation even though the violations were not voluntarily disclosed. OFAC has a good record of reducing penalties for voluntary disclosures, so it is not quite clear here why this didn’t happen for Wachovia.

The apparently never-ending fight over the trademark for “Havana Club” rum made a detour through the Office of Foreign Assets Control and into the Federal District Courtroom of Judge Royce Lamberth. At issue was an OFAC decision that effectively denied the renewal of the registration of the “Havana Club” trademark in the United States.

Judge Lamberth’s decision, released last Thursday, had something for everyone. For the Cuban side his order required that OFAC provide more documentation of why it appeared to have held that the general license for transactions in connection with Cuban trademark renewals wasn’t applicable. For the OFAC-Bacardi side, Judge Lamberth held that OFAC licensing decisions were immune from judicial review (which, no doubt, led to much rejoicing and merriment, perhaps even some dancing, in the halls of OFAC).

For those of you who haven’t followed the peregrinations of the struggle between Bacardi and Pernod-Ricard over the Havana Club rum trademark (and I assume that’s almost everyone), here is a short “Havana Club for Rummies.” Pernod-Ricard bases its claim to the trademark based on a transfer by Cubaexport of the trademark to Havana Club Holdings SA (”HCH), a joint-venture between the Cubans and Pernod-Ricard. Bacardi bases its claim to the trademark on a purchase of the rights to trademark from the exiled members of the Arechabala family. The Arechabalas had produced Havana Club in Cuba until their distilleries were seized by Castro in the 1960s.

Much litigation then ensued between Pernod-Ricard¹ and Bacardi, with Pernod-Ricard filing a suit against Bacardi for trademark infringement and Bacardi filing an action before the Patent and Trademark Office (”PTO”) to cancel Pernod-Ricard’s registration of “Havana Club.” Pernod-Ricard lost its infringement claim and all the subsequent appeals. Bacardi lost its cancellation petition and its appeal of that decision is still pending.

In the meantime Pernod-Ricard needed to renew its registration for the Havana Club trademark. This posed certain difficulties because the trademark was held by HCH — a joint venture with the Cubans. That, of course, made it difficult for HCH to pay its U.S. lawyers and to pay to the PTO the registration fee for the trademark, both of which may be prohibited by the Cuban Assets Control Regulations.

I said “may” because it is not clear whether the general license contained in 31 C.F.R. § 515.527(a) applies or not. The general license permits transactions related to trademark registration applications or renewals by Cuban nationals. However, in 1998 Congress — after extensive lobbying by Bacardi and others — exempted from the general license any

mark, trade name, or commercial name that was used in connection with a business or assets that were confiscated, as that term is defined in § 515.336, unless the original owner of the mark, trade name, or commercial name, or the bona fide successor-in-interest has expressly consented.

Needless to say, Bacardi and Pernod-Ricard disagree over whether the Havana Club trademark meets the standards set forth in the exemption from the general license. Pernod-Ricard argues that the Arechabala family abandoned the trademark when it failed to renew its U.S. registration for that trademark in 1973 and that therefore this trademark doesn’t meet the exemption standards.

Just to be safe, Pernod-Ricard applied for a license from OFAC to engage in the transactions necessary to renew the Havana Club registration. OFAC sat on that letter for almost four months and then on the day after the Havana Club trademark registration had expired (just a coincidence, no doubt!) denied the license application to take the steps necessary to renew the registration. Pernod-Ricard sought review of that OFAC decision in federal district court, which brings us to Judge Lamberth’s decision.

The first important issue considered by Judge Lamberth was whether the OFAC decision denying the specific license to renew the trademark was a decision that the general license set forth in 31 C.F.R. § 515.527(a) wasn’t applicable. The court held that the record was insufficient to determine what OFAC had made any decision about the applicability of the general license. In order to make a determination on this point, the court ordered OFAC to provide information as to

whether it concluded [Pernod-Ricard] could not rely on the general license in 31 C.F.R. § 515.527(a)(1) , and if so, how and why it determined the exception in part (a)(2) embraced [Pernod-Ricard’s] HAVANA CLUB registration. Further, it should explain what process [Pernod-Ricard] was afforded with respect to this particular determination.

The second issue was the reviewability of OFAC’s decision to deny the application for a specific license. Judge Lamberth held that the granting of licenses under the Cuban sanctions program was committed solely to OFAC and, therefore, not subject to judicial review.

It is a fundamental tenet of judicial review that when a court reviews an action or decision, it must do so against some standard. [Pernod-Ricard] asks this Court to judge whether OFAC’s denial of a specific license was consistent with U.S. foreign policy and its own prior licensing decisions. Neither presents a justiciable standard of review.

Notwithstanding this refusal to review OFAC’s denial of a specific license, the game is far from over. Even though the Court felt it couldn’t review the denial of a license, it did feel there were sufficient criteria to permit it to review a determination by OFAC that the trademark was or wasn’t used in conjunction with seized Cuban property and, therefore, was or wasn’t eligible for the general license for trademark applications and renewals.

Several results, then, are possible. The court might find that OFAC made a determination that the Havana Club trademark wasn’t eligible for the general license but that such determination was wrong. Pernod-Ricard could then fairly safely re-register its trademark with the PTO. Or the court might find that OFAC did properly make such a determination, in which case Pernod-Ricard won’t be able to do anything at the PTO. Finally, the court might find that OFAC made no determination on the applicability of the general license. This means, I suppose, that Pernod-Ricard could try to claim the general license applied and file with the PTO. OFAC would, of course, issue a pre-penalty notice claiming that the general license didn’t apply, and everyone would be back where they started.

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¹ To avoid unnecessary confusion, I am referring to Cubaexport, HCH and Pernod-Ricard simply as Pernod-Ricard throughout the remainder of this post.