The Washington Times attempted to practice export control journalism a few days ago and did not quite cover itself with glory. In an article titled “Legitimate charities snared in terror net,” reporter Cajsa Collin attempts to argue that OFAC improperly seized monies from European charities that were transiting through U.S. banks:

On three separate occasions, the two charitable groups had funds seized under U.S. anti-terrorism laws even though neither is accused of any terrorist connections. While most of the money was returned, some is still being held without explanation.

Yikes. That sounds terrible. Bad OFAC! Shame on you, OFAC! Except when you look at the cases, as reported by Collin, the seizures had zip, zero, nada to do with terrorism and the reasons the funds were blocked are, well, blindingly obvious.

The poster child for the Times’s fright piece is Norwegian Church Aid. According to the story, Norwegian Church Aid “denied any connection to terrorism and a careful examination of the OFAC lists, which are publicly available on the Treasury Department’s Web site, showed that [Norwegian Church Aid] was [never] listed.” Even so, Collins claims, transfers from the group were seized without cause. Collins two allegedly problematic cases of funds transferred by the group being blocked.

Here’s the first:

The first transaction was going to sponsor an American professor for an AIDS conference in Cuba. The money was confiscated in early 2003 but not returned until late 2005,” said Eigil Schander-Larsen, the financial director of Norwegian Church Aid.

Gee, I wonder why that transaction might have been blocked? Hint: it’s not because the Norwegian Church Aid group was thought to be a terrorist group. No, it’s because it looks like the wire must have referenced Cuba and neglected to reference a specific or general OFAC license.

And here’s the second:

“The second transaction [intended for a YMCA branch in Burma] was confiscated in 2004 and, even though we have sent in the paperwork OFAC requires both by fax and PDF file, we still haven’t heard anything. I sent the last reminder in January 2007,” he said.

Apparently, neither Norwegian Church Aid or the Washington Times reporter has ever heard of the Burma sanctions. Section 537.202 of the Burmese Sanctions Regulations forbids the exportation of financial services to Burma. Financial services are broadly defined so that any transfer of funds from a U.S. Bank to Burma — even a YMCA in Burma — is forbidden and must be blocked.

So, the reason that funds in both cases were blocked had absolutely nothing to do with anti-terrorism laws, as claimed by Collins, but by country-specific OFAC sanctions. The fact that Norwegian Church Aid wasn’t on the SDN list didn’t make blocking the transfers improper.

Hint to Washington Times: next time you do a story on OFAC, call an OFAC lawyer before you go to press and say something silly. There are, after all, more than a few OFAC lawyers here in Washington.

This morning we laid our hands on the criminal complaint, unsealed earlier this week, charging a Dutch aviation parts firm and its owner Rob Kraaipoel with export violations. The underlying violations charged by the criminal complaint are fairly simple. The complaint alleges that Aviation Services International B.V. and it’s owner Rob Kraaipoel purchased various aviation items from U.S. companies and then sold them to customers in Iran without the necessary OFAC license. Additionally the complaint alleges that Aviation Services caused other to make fraudulent statements on Shippers’ Export Declarations (SEDs) as to the end users of items purchased by the company from vendors in the United States.

The story told by the criminal complaint starts with purchases in 2005 and 2006 of audio and video equipment by Aviation Services from New Hampshire-based DTC, Inc. When DTC requested that Aviation Services identify the end user for the equipment, Kraaipoel is alleged to have sent an email to DTC indicating that the Polish Border Control was the end user. This information was then used by DTC’s freight forwarder when it filled out the Shipper’s Export Declarations for these exports. According to the complaint, the Polish Border Control denies having purchased anything from Aviation Services. Subsequently when Aviation Services requested spare parts for these items, it sent an email to DTC that the end user was a company in Cyprus.

Based on these facts, the complaint charges Kraaipoel with two counts of false statements in violation of 18 U.S.C. § 1001(a). These charges are asserted even though Kraaipoel made no representations to any U.S. government official and even though there is no allegation that Kraaipoel knew that his representations as to the end-user would even be provided to the U.S. government. Nor is there any allegation that these items were ultimately exported to Iran or other embargoed country. Indeed, it appears that they ended up in Cyprus instead.

Felony charges under 18 U.S.C. § 1001(a) seem questionable under the facts alleged. A Dutch citizen sends an email to a private individual in the United States and then faces criminal charges in the United States because inaccurate information in that email is provided, without the Dutch citizen’s knowledge, to the U.S. government. Consider also that a reseller of aircraft parts has a legitimate commercial interest in not providing the end-user’s name to his vendor in order to prevent the vendor from cutting him out as the middleman in future transactions. Because of that Aviation Services misidentification of the end user isn’t necessarily suspicious. And since there is no evidence that the equipment wound up in an embargoed country, it’s even more difficult to assert that there was any criminal intent on the part of the Dutch company.

There’s much more to discuss about the complaint. Tomorrow we will look at the remaining counts of the complaint relating to items that were purchased from other vendors and that were allegedly transshipped by Aviation Services to Iran.

The Office of Foreign Assets Control (”OFAC”) released today its monthly report of penalties imposed by the agency. Of course, that report reveals that OFAC continues to protect our national security by chasing hapless cigarficianados who buy their Cuban Cohibas over the Internet. More interesting, however, was a Penalty Notice posted by OFAC in conjunction with the report and which imposed a penalty of $8,250 on Parkdale Mills, the largest independent yarn spinner in the United States.

According to the Penalty Notice, Parkdale attempted to import, in October 2003, 1.65 million pounds of cotton from Sudan. Upon learning that such a transaction would violate the Sudanese Sanctions Regulations, Parkdale cancelled the transaction and the cotton was never imported from Sudan to the United States. In April 2007, OFAC sent a Prepenalty Notice to Parkdale alleging that the attempted import of cotton from Sudan violated section 538.204 and section 538.210 of the Sudanese Sanctions Regulations.

In a written submission to OFAC, Parkdale raised a number of arguments in its defense. The first argument was the Parkdale was unaware of the embargo of Sudan. I suspect that had Parkdale made that argument to Judge Judy, it would have elicited her trademark riposte: “Don’t pee on my leg and tell me it’s raining.” Cotton is the main cash crop of Sudan and constitutes 45 percent of its exports. There is no way on earth that Parkdale didn’t know that Sudanese cotton was embargoed.

Second, Parkdale claimed that First Atlantic Commodities told it that there were no licensing requirements. This argument is pretty much the equivalent of saying that your Uncle George thought the transaction was okay, given that First Atlantic Commodities is a small North Carolina company that appears to be principally involved in the real estate business and not international trade.

Saving its best argument for last, Parkdale also noted that it had in fact cancelled the order when it discovered that it violated the embargo. More likely, it cancelled the order when a freight forwarder or shipper said it wouldn’t handle the transaction because it seems inconceivable that Parkdale “discovered’ the prohibition only after it ordered the cotton.

OFAC, not surprisingly, wasn’t impressed by the first two arguments made by Parkdale. It provided a 25% mitigation of the originally proposed $11,000 penalty and based that mitigation on Parkdale’s previously clean record, its cancellation of the order and its timely provision of a response to the Prepenalty Notice.

Parkdale should really consider itself lucky here. For the life of me, I don’t understand why it would try to mitigate an $11,000 fine from OFAC by telling a story which, even on the off chance that it were true, sounds like a whopper. A company like Parkdale is going to be assumed to be a sophisticated company that buys large amounts of cotton on the world market and would therefore be quite aware of the embargo on Sudanese cotton — unless the entire purchasing staff of the company had been conducting their trading operations from space ships in some distant galaxy. Moreover, no agency likes to hear companies assert that the agency’s regulatory activities were so unimportant that the company just couldn’t bother to keep abreast of agency regulations. If OFAC had been more aggressive, it might well have launched an investigation into whether the response to the Prepenalty Notice was a misrepresentation that warranted further civil and/or criminal penalties.

USA*Engage recently released a report on foreign countermeasures that have been applied to the extraterritorial application of unilateral U.S. sanctions. Most of the incidents covered in the report have been discussed here — such as the eviction of a Cuban oil delegation from an American-owned hotel in Mexico City and the eviction another Cuban delegation from a American-owned hotel in Oslo. But I missed one interesting story from April of this year. Of course, I blame Google.

The incident in question was the cancellation by BAWAG, an Austrian bank, of all accounts held by Cuban nationals at the bank in advance of the expected takeover of the bank by American-owned Cerberus Capital. Lawyers for Cerberus had evidently advised that it could not close the transaction as long as Cuban nationals had accounts at the bank. In response to the cancellations, Austria instituted proceedings under E.U. Council Regulation 2271/96 which prohibits compliance with U.S. sanctions on Cuba. BAWAG faced a 73,000 euro fine under the Austrian proceeding.

Two things are interesting about this. First, this is the first instance I am aware of where a proceeding has actually been brought by an E.U. member state under Regulation 2271/96. Second, BAWAG applied for a license from OFAC to reinstate the accounts. And the license was granted.
So companies that find themselves caught between the rock of U.S. sanctions and the hard place of foreign countermeasures should consider seeking a license based on the foreign countermeasure.

While reading some of the news accounts of the BAWAG matter, I also discovered the interesting story of Maria Cajigal-Ramirez, whose accounts at BAWAG were initially cancelled. Ms. Cajigal-Ramirez was a naturalized Austrian citizen who had been born in Cuba. Problem is that Cuba doesn’t allow renunciation of Cuban citizenship. Section 515.201 of the Cuban Assets Control Regulations prohibit transactions with Cuban “nationals.” Are banks, and other businesses, in the U.S. violating the CACR by dealing with first-generation Cuban immigrants since they are still Cuban nationals? And, in answering this question, don’t forget the application of section 515.303 of the CACR that says that dual nationals are considered nationals of both countries for purposes of the regulations.

The new OFAC penalty disclosure for August came out on Saturday with some embarrassing news about Travelocity’s Roaming Gnome. Seems that for for six years, between 1998 and 2004, the Travelocity site booked 1,458 reservations for travel to Cuba. The gnome, or rather his employer Travelocity, agreed to a fine of $182,750.

The report of the Travelocity fine follows the general OFAC “the less you know the better” policy and reveals no more about the violation than described above. But some educated guesses can be made. First, the violation was not voluntarily disclosed because the OFAC report almost always notes that fact if there has been a voluntary disclosure. Second, given the time frame, this violation probably involved Travelocity booking trips to Cuba through the sites of its foreign subsidiaries.

You may remember this letter which OFAC sent in 2002 to an unidentified company that operated travel websites in the United States and in foreign countries. That company (probably Travelocity, Orbitz or Expedia) had sent a letter to OFAC requesting OFAC to declare that those operations were permissible or, alternatively, to issue a license to cover them. In OFAC’s responding letter, OFAC asserted that the Cuban Assets Control Regulations apply to overseas subsidiaries and that the Berman Amendment’s exception for information didn’t apply to actually booking reservations but only to providing information about available flights. Accordingly OFAC held that the company’s overseas operations violated the CACR and declined to issue a license to permit such operations.

It’s now pretty safe to assume that the 2002 OFAC letter did not involve Travelocity. Travelocity appears not to have disclosed the violations leading to the fine, and the company involved in the 2002 letter had at least fessed up to its overseas operations. (My money is on Expedia, and not Orbitz, given the length of the whited-out references to the company in the letter.)

One part of the letter has an intriguing passage:

Your letter indicates that there are many U.S.-owned or controlled companies located in third countries that engage in providing travel services. OFAC has not granted a license authorizing any such companies to provide services associated with the tourism and business travel of third country nationals to Cuba. If you have specific information concerning apparent violations of the CACR by such companies, you may submit the information, preferably in writing, to the attention of OFAC’s Chief of Enforcement.

Does anybody else wonder if Expedia (or maybe Orbitz) snitched on Travelocity?

In other OFAC penalty news, the August disclosure indicates that your tax dollars are still being spent on fining individuals who bought Cuban cigars over the Internet, with one individual being fined $999.45 and another $510.00. Given what’s involved in the penalty process, it’s safe to assume that these fines won’t recoup the time spent by OFAC enforcement staff on chasing down the stogie-puffing miscreants, sending penalty notices and negotiating a settlement. Shouldn’t OFAC be chasing terrorists or something?

A federal district court judge in Washington, D.C., on Monday rejected challenges by a professor and a student at Johns Hopkins University in Baltimore to changes made in 2004 by the Office of Foreign Assets Control (”OFAC”) to its regulations relating to academic study in Cuba. The regulations at issue required eligible academic programs to be at least 10 weeks and be restricted to students enrolled at the academic institution conducting the course in Cuba.

The student and professor challenged the regulations under the First Amendment and the Fifth Amendment. The court rejected the First Amendment claim by noting that OFAC’s rules were content neutral:

The regulations place no restrictions on what universities and their professors may teach their students about Cuba–they merely restrict them in limited circumstances from teaching students in Cuba. Thus, there can be no question that the 2004 CARC amendments are content neutral.

Because the regulations were content neutral, their incidental burden on First Amendment rights could be justified if they further an “important or substantial governmental interest.” The Court ruled that these regulations did meet that standard, noting that the “interest in denying hard currency to embargoed countries such as Cuba is ‘important’ and ’substantial.’ ”

The challenge by the Johns Hopkins student and the professor under the Fifth Amendment was premised on a “right to travel” which the Supreme Court has ruled is created by the Fifth Amendment. The District Court, however, noted that the Supreme Court has said that the right to international travel under the Fifth Amendment could be circumscribed if the government has a “rational, or at most an important, reason for restricting such travel.” The government’s interest in denying currency to the Castro regime was, according to the court, a sufficient justification under this standard

Iowa-based fish processor Stoller Fisheries was recently assessed $931.25 by the Office of Foreign Assets Control (OFAC) for shipping 20 grams of carp pituitary glands (valued at $4,900) to Iran without an OFAC license. Carp pituitary glands are believed to be beneficial to the spawning and fertility of farmed fish. The violation was not voluntarily disclosed.

The penalty notice issued by OFAC indicated that the company made both a written presentation and a verbal presentation to OFAC, which prompted OFAC to reduce it’s proposed penalty of $3,725 to the $931.25 actually assessed. The $3,725 represents a substantial reduction from the $11,000 penalty that could have been imposed, assuming, as seems the case, that only one export was involved.

So what prompted this significant reduction for a company that, after all, didn’t voluntarily disclose the violation?

To begin with, Stoller’s case presented all the other factors that would normally be used for mitigation. As the penalty notice stated:

Company alleged that it was not aware of regulations prohibiting sales to Iran and that its primary business is in the processing of fresh water fish for human consumption and particularly kosher fish products. Moreover, Company alleged that the sale of carp pituitary glands is a by-product of the primary business.

In support of its request for a waiver, Company has submitted its current compliance policy instructing employees to check and verify exportations to countries prior to packaging any shipment to such country and to contact the U.S. Customs and Border Patrol if any questions arise. . . .

Company took affirmative steps to prevent further unlicensed shipments to Iran and that some relief is warranted in consideration of the fact that this constitutes Company’s first offense on record at OFAC, Company instituted a new compliance policy, and evidence that such activity may have been licensable.

First offense? Check. Inexperienced exporter? Check. Unintentional violation? Check? Licensable? Check. Implemented steps to prevent similar exports? Check. Adopted new compliance program? Check.

One part of the compliance program adopted by Stoller, however, is something that I don’t recommend. As noted above, Stoller’s program advises employees to contact Customs if they have questions about a shipment. If Customs thinks it is being used as compliance counsel, it may well decline to provide assistance beyond saying: “Ship it and we’ll seize it and prosecute if there’s a problem.”

In addition to the mitigation factors mentioned above, there is one intangible reason, which I’ll call the good guy factor, that I think may also explain why Stoller was treated well here. I can’t help but think that Company officials made quite a personal impression during their verbal presentation to OFAC. This suspicion is based on the Company’s website which is, frankly, simple, charming and appealing. Even though I have no particular use for the plate-frozen blocks of mechanically-deboned minced fish sold by the Company, the website made even me consider, if only for a moment, whether I might find some use for plate-frozen fish blocks. Okay, let’s be honest, I even wondered whether I could find some use for the carp pituitary glands.

I think what sold me on the Company, among other things, was this memorable phrase from the website:

Don’t ask if the carp is good enough for you to eat. Ask instead if you’re good enough to eat carp.

Words to live by indeed.

The House today adopted legislation that would roll back restrictive rules adopted by the Office of Foreign Assets Control (”OFAC”) in February 2005 regarding shipments of agricultural goods to Cuba under the Trade Sanctions Reform Act of 2005 (”TSRA”). Under those rules, payment was required prior to the departure of the ships carrying the agricultural goods.

The language of TSRA only requires that payment be made in one of two ways: (i) “payment of cash in advance” or (ii) through financing by third-country (i.e. non-U.S. and non-Cuban) financial institutions. Because of Cuba’s credit standing and inability to obtain third-country financing facilities, most transactions have been structured as “payment of cash in advance.”

The statutory term “payment of cash in advance” does not specify in advance of what. Prior to February 2005, OFAC had taken the position that a standard “cash against documents” transaction complied with that
term.

In a “cash against documents” transaction, the seller delivers the goods to the shipper and obtains a negotiable bill of lading from the shipper. The Cuban buyer’s bank (usually either Paris-based Banque National de Paris or Société Générale) pays the seller upon presentation of the bill of lading. The bill of lading is then provided to the Cuban buyer by the French bank. That bill of lading authorizes the shipper to unload the cargo and permits the Cuban buyer to take possession of the cargo.

Under prevailing commercial case law, the delivery of a negotiable bill of lading is seen as equivalent to delivery of the goods themselves. Accordingly, payment in advance of obtaining the bill of lading was seen as complying with the statutory requirement of payment in advance.

Under the “cash against documents” method, the goods are usually shipped shortly after the U.S. seller obtains the bill of lading. Because of the short shipping distance from southern ports to Cuba the goods often arrived at the port in Cuba before the French bank has confirmed the issuance of the bill of lading and made payment to the seller’s account. For this reason, OFAC began to advise the sellers’ banks that the transactions did not conform to the TSRA “payment in advance” requirement. And in February 2005, it adopted rules requiring payment prior to the departure of the ship transporting the purchased goods.

The House bill would restore the “cash against documents” rule. The Bush administration recently threatened to veto any legislation that would “weaken” the current sanctions, and it is widely believed that this threat was specifically directed at plans to restore the “cash against documents” rule.

A bill was introduced in the Senate on June 21 that would also restore the “cash against documents” rule. That bill would also lift all restrictions on travel to Cuba. A copy of the Senate bill can be found here.

The Office of Foreign Assets Control (”OFAC”) published today in the Federal Register a Final Rule amending the Burmese Sanctions Regulations. The amendment adds to those regulations a new § 537.527 which overrules the regulations’ prohibition of imports of Burmese-origin articles to permit the importation of “animals and specimens of Burmese origin, in sample quantities only, for bona fide scientific research and analysis purposes.” The importation will require a license, and licensing decisions will be made on a case-by-case basis.

The Federal Register notice provides no indication as to OFAC’s motivation for adopting the rule, but it seems to me that it is a speedy and laudable response to the recent outbreak of the H5N1 bird flu in Burma. The new rule will permit the importation, among other things, of birds and laboratory samples taken from birds in Burma in order to promote scientific research into the causes, prevention, treatment and eradication of bird flu.

It seems that OFAC can, from time to time at least, stop gnawing on the Cuba bone long enough to do something useful. Kudos to the agency officials who took this prompt action.

(The title is a reference to this guilty pleasure.)

The Office of Foreign Asset Controls (”OFAC”) today issued General License No. 7 authorizing U.S. persons “to engage in all transactions otherwise prohibited by 31 C.F.R. parts 594, 595, and 597 with the Palestinian Authority.” Obviously this General License is the official action that implements the administrations promise to lift sanctions on the Palestinian Authority due to the expulsion of Hamas from the Palestinian Authority.

Of course, no official action needed to be taken at all. The Palestinian Authority itself had never been officially sanctioned. The PA isn’t listed on the SDN list, nor were “Palestinian Authority Transaction Regulations” or the like adopted by OFAC. Instead, the PA was constructively sanctioned because members of Hamas, which is on the SDN list, had been elected as part of the PA. So, no more Hamas, no more sanctions, no OFAC action or assembly required.

On a broader note, these “secret sanctions” such as those imposed on the PA, and more recently on Nepal, are a compliance headache of the first order. A compliance officer might look at the list of sanctioned countries and the SDN list and never conclude that the Palestinian Authority or the Nepalese Government were sanctioned unless they happened to know, as well, that SDNs had become part of the PA and the Nepalese Government. Granted the sanctions aren’t completely secret because in both cases there were General Licenses ultimately issued which indirectly attest to the difficulties of dealing with the PA and Nepal. Still, here’s a question for export compliance officers: have the Government of Nepal and the Palestinian Authority ever been mentioned in your OFAC compliance programs?