We have followed the saga of Epsilon Electronics extensively, beginning with the posts titled The Auto Sound and the OFAC Fury Part I and Part II followed by Epsilon, Epsilon and, then, As Epsilon Lay Dying, which discussed the federal district court’s decision reviewing OFAC’s $4.073 million fine imposed on Epsilon. Epsilon has persevered, and now the D.C. Circuit Court of Appeals has spoken in an opinion setting aside the fine and remanding the case back to OFAC for further proceedings.

I am going to break my thoughts on the D.C. Circuit’s opinion into several posts. This post will deal with an issue that Epsilon lost, namely its argument that it couldn’t be fined under section 560.204 of the Iranian Transactions and Sanctions Regulations (“ITSR”) without a showing that its products wound up in Iran. At issue were shipments Epsilon made to a distributor in Dubai that OFAC said only or mostly dealt with Iran. OFAC’s argument was that 560.204 was violated when Epsilon shipped the goods to Dubai when it knew, or should have known, that the goods would then be exported to Iran. According to OFAC, the shipment to Dubai was the violation of the ITSR whether or not the goods ultimately made it to Iran. (Significantly, OFAC did not charge Epsilon with attempt under section 560.203, where it would clearly not require a showing that the goods wound up in Iran.)

Section 560.204 prohibits exports to Iran “including the exportation … to … a third country undertaken with … reason to know that such goods … are intended specifically for … re-exportation, directly or indirectly, to Iran.” Using a somewhat bizarre analogy the Court reasoned that a shipment to Dubai with reason to know the goods were going to Iran was an “export to Iran” even if the goods never got to Iran.

Suppose you put a birthday card in the mail, addressed to your brother. While the card is still en route, your mother asks you, “Did you send a card to your brother?” In line with OFAC’s usage, you would respond, “I sent a card to him, but it hasn’t arrived yet,” because you put the card in transit, intending it to reach him. Following Epsilon’s usage, though, you would have to say, “I didn’t send a card to him,” because the card has not yet arrived.

This strange analogy fails because here the card is not put in the mail addressed to the brother. Instead, it was put in an envelope addressed to a third party with a note saying that if the third party saw the brother he should give this card to him. When Mom asked about the birthday card, only the most reprobate of siblings would respond that he sent the card to his brother. “No, Mom, but I did send it to Joe Schmo with a request that he give it to Bill if he sees him.”

The dissenting opinion by Judge Silberman notes that the majority opinion’s notion that a shipment to Dubai with reason to know it was going to Iran was an “export to Iran” is a notion that is inconsistent with OFAC’s decisions below. Judge Silberman points to a statement made by OFAC in the penalty proceeding that “multiple facts tend to show that the goods exported to Asra were sent to Iran,” which, “fudged the answer to the crucial question” whether a violation occurred without regard to whether goods ever wound up in Iran.

In my view there is another reason that section 560.204 can’t be read in the fashion suggested by the majority opinion. The statutory basis for the regulation is the International Emergency Economic Powers Act which, in section 1702, provides the power to the President to bar exports to a foreign country after declaring an emergency with respect to that country.  A declaration of national emergency has, in fact, been issued with respect to Iran. But, section 1701(b) of IEEPA provides:

The authorities granted to the President by section 1702 of this title may only be exercised to deal with an unusual and extraordinary threat with respect to which a national emergency has been declared for purposes of this chapter and may not be exercised for any other purpose.

Here Epsilon shipped product to Dubai. Its alleged “reason to know” that the goods might go to Iran was that the distributor had business in Iran. Even if the distributor was contractually obligated to sell the goods only in Dubai and that’s the only place they were sold, OFAC’s reasoning would be that this “reason to know” was enough for there to be a violation. That, I think, does not deal with an emergency declared with respect to Iran. This would not even qualify as an attempted export to Iran, which I think is the farthest limit that IEEPA permits sanctioning an activity without an actual export to Iran.

The recent decision by the Office of Foreign Assets Control (“OFAC”) to issue a finding of violation, but no fine, against B Whale, a member of the Taiwanese TMT Shipping Group represents a new high (or low, depending on your point of view) for OFAC’s general belief that it has jurisdiction over anyone anywhere in the world. At issue was the transfer of Iranian oil from an Iranian vessel in international waters to a Monrovian-registered Liberian-flag ship owned by a Taiwanese company without any branches or business operations in the United States.

OFAC claimed that this was an illegal importation of Iranian goods into the United States in violation of section 560.201 of the Iranian Transactions and Sanctions Regulations (“ITSR”).  Say what?  According to OFAC, the foreign flagged ship in international waters became a part of the United States once TMT filed a bankruptcy petition in the United States, thereby placing all its assets under the control of the bankruptcy court.  Because, you see, the ITSR defines the United States in section 560.307 of the ITSR as “the United States, its territories and possessions, and all areas under the jurisdiction or authority thereof.”  I imagine that TMT, and probably the government of Taiwan, will be somewhat surprised to learn that real property owned by TMT in Taipei is now a part of the United States.  By this logic, a bankrupt’s trucks in foreign countries would become “areas” under the jurisdiction of the United States. Certainly these absurd results demonstrate that “area” in section 560.307 means geographic areas and not simply any physical space somewhere in the world.

I am unable to find any precedent from OFAC itself or any other court or agency for such an expansive definition of the United States   Interestingly, Congress, when defining the scope of federal criminal law, stops far short of OFAC’s definition.   The definition of “United States” in the federal criminal code is defined as “all places and waters, continental or insular, subject to the jurisdiction of the United States, except the Canal Zone.” See 18 U.S.C. § 5.  To cover ships, which aren’t “places and waters, continental and insular” the federal criminal code defines the “special maritime and territorial jurisdiction” of the United States which covers ships on the high seas owned by at least one U.S. citizen or a foreign vessel with a scheduled departure or arrival in the United States “to the extent permitted by international law.”  See 18 U.S.C. § 7. Ships owned by bankrupts aren’t either the United States or part of the special maritime jurisdiction as far as Congress was concerned.  It’s hard to imagine that OFAC has the statutory authority to expand the scope of its jurisdiction in this fashion by calling every asset of a bankrupt anywhere on the face of the planet a part of “the United States.”

Not only does OFAC stretch the concept of “United States” beyond the breaking point, but also it does the same thing to the definition of “United States person.”  Whale B was found to have violated section 560.211 when it engaged in a transaction with a blocked Iranian vessel.  The violation occurred because OFAC decided that Whale B was a “United States person.” That term is defined in section 560.314 to cover a “person in the United States.”  And Whale B, a company organized under the laws of Taiwan and without any physical presence in the United States, was “in the United States” because it filed a bankruptcy case in the United States. It’s difficult to imagine where a principled limit could be drawn if filing a lawsuit in the United States means that a company is “in the United States.”  Is a company with a U.S copyright registration now “in the United States” and fully subject to U.S. sanctions? What if it has a dot com domain name issued by a U.S. registrar? Or it uses an email service that has servers in the United States?  Or it has a pending sales order it made with a U.S. company over the Internet?

And here’s one last comment on the B Whale shipwreck. OFAC cites this as an aggravating factor: B Whale “took steps to conceal a ship-to-ship transfer of Iranian oil with an Iranian vessel on the SDN List … by … switching off the vessel’s automatic identification system during the time period corresponding with the ship-to-ship transfer.” Apparently OFAC forgot that, because of the TMT bankruptcy, B Whale was subject to seizure and detention by foreign creditors in jurisdictions not interested in observing the automatic stay arising from the U.S. bankruptcy. In such a situation, the more likely reason for turning off the AIS was the common practice of doing so to hide from foreign creditors, not from OFAC.

For many years, OFAC loved to toy with lawyers at conferences by rattling the facilitation sabre. Spokespersons for the agency would do so by suggesting that the day was coming when OFAC would go after lawyers under the facilitation doctrine, particularly when lawyers were providing advice to people that they were outside the scope of U.S. economic sanctions.

This was not an idle threat.  OFAC had tried this before.  Donald Looper, an American lawyer, had his briefcase seized by Customs as he returned to the United States after advising a Bermuda corporation on a proposed deal with Libya.  OFAC claimed that he was, by providing such advice, assisting his client in evading or avoiding sanctions.   Looper brought suit to prevent the examination of attorney-client privileged material in his briefcase.   The District Court had this to say about OFAC’s position:

[t]he Constitution certainly cannot abide the Kafkaesque interpretation that OFAC proposes–that the Libyan sanctions prohibit, at the whim of OFAC regulators, any effort to structure transactions with the purpose of complying with the remainder of the Libyan sanctions regulations, including any attempt to hire an attorney for guidance.

Ouch. Notwithstanding this smackdown, OFAC continued, at least informally, to caution attorneys that advice to clients might overstep the facilitation prohibition insofar as a lawyer might, in the language of the typical prohibition on facilitation, “approve … any transaction by a foreign person where the transaction by that foreign person would be prohibited by this part if performed by a United States person.”

Lawyers have typically attempted to negotiate this issue by trying to make sure that advice provided to non-U.S. persons that they were not covered by sanctions programs was not given in a way that could be characterized as approval of the transaction. This was a strategy, of course, that worked better for outside counsel than in-house counsel.

By a guidance released last week on January 12, OFAC finally put this issue to rest.

U.S. persons have been able to provide, and may continue to provide, the services below relating to the requirements of U.S. sanctions laws to covered persons: Opining on the legality of specific transactions under U.S. sanctions laws regardless of whether it would be prohibited for a U.S. person to engage in those transactions.

This statement, however, was immediately followed by an obtuse qualification:

U.S. persons may solicit information from [U.S. persons and non-blocked foreign persons] and conduct research to make a determination as to the legality of transactions under U.S. sanctions laws provided there is no importation of services where the importation of services is prohibited by any part of [OFAC’s regulations].

My best guess is this means that if a lawyer were, say, advising a German company on the legality under the Iran sanctions of a transaction by a German company in Iran, the U.S. lawyer could not query the counterparties in Iran (or their lawyers) about the scope of the transaction to make that determination. However, I’m not sure why that would ever be necessary. Comments from any readers on what this qualification might actually mean are welcome.