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Archive for the ‘Iran Sanctions’ Category

Feb

13

iPods to Iran: A How-To Guide

Posted by Clif Burns at 11:19 pm on February 13, 2008

Griffin iPod Speaker System A fascinating article in today’s Wall Street Journal details how Iran eludes U.S. sanctions on exports to that country. An interview with an Iranian merchant supplies an instructive example of how the merchant obtains iPod accessories from Tennessee-based Griffin Technology:

The owner of an electronics-goods store in affluent North Tehran, who asked to be identified only by his first name, Borhan, recently stopped using bank-to-bank wire transfers to pay for goods because of the restrictions. U.S. companies can’t ship most products into Iran. Borhan says he orders iPod accessories online from Griffin Technology in Nashville, Tenn., and has them shipped to a middleman — a UAE-registered company in Dubai that operates out of a post-office box.

A typical $10,000 order, packed in 10 boxes, costs as much as $800 to ship to Dubai, he says. He pays another $500 to the middleman to unpack the goods in Dubai and reship them to Tehran. To pay for the shipment, he says, he gives cash to an acquaintance in Tehran who sends the money to his brother in Dubai through an informal money-transfer service, or “hawala.” The brother then pays the middleman.

Commissions for the middlemen and for the hawala transfer come out to about $1,000. The payment system takes three days, instead of the 12 hours a bank-to-bank transfer would take. (A spokeswoman for Griffin says it is “unable to control where products end up in the marketplace.”)

The pat response from Griffin — “we can’t control where products end up” — just doesn’t cut it here. If the story of how the merchant ordered the product is true, this transaction doesn’t have red flags; it has red banners the size of a football field draped all over it. A transaction worth $10,000 shipped to a P.O. Box in Dubai is bad enough, but if Griffin checked the IP Address associated with the order it would almost certainly show that the order came from Iran. Game over.

Exporters can’t simply bury their heads, ostrich-like, in the sand and say they just have no idea where their products wind up and that they are “shocked, shocked to find that” their products were ultimately shipped to Iran or another sanctioned country.

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Feb

12

What Goes on in Dubai Doesn’t Stay in Dubai

Posted by Clif Burns at 7:35 pm on February 12, 2008

Category: Iran Sanctions

Satellite image of the Strait
of Hormuz

A wire story from Agence France Presse today documents the extent to which trade between Iran and the UAE may be circumventing unilateral U.S. sanctions against Iran:

Thousands of Iranian firms are still doing business in the country’s top trading partner, the United Arab Emirates, despite a US drive to choke Tehran’s economy over its controversial nuclear program. But US banking sanctions are also beginning to bite, industry sources say.

The AFP reporter interviewed Nasser Hashempour, executive deputy president of the Dubai-based Iranian Business Council, who provided one of the reasons the sanctions weren’t having much impact on trade between Dubai and Iran:

Iranian businesses “have not had any problem with local banks because we are considered UAE companies” under local rules requiring at least 51 percent of a business to be owned by an Emirati national, said Nasser Hashempour. …

The same goes for fully Iranian-owned firms operating out of free zones “because they are registered in the UAE and their sponsor is the free zone,” which would pull their licenses if they flouted the rules, he told AFP.

The article goes on to point out that almost 10 percent of the population of Dubai is Iranian and that almost 10,000 Iranian firms are doing business in Dubai.

But the real reason that the sanctions may not have stopped trade in U.S.-origin goods between Dubai and Iran is that Dubai has no interest in making it stop according to a UAE official who, not surprisingly, requested anonymity:

As for unilateral US sanctions, these would have to be applied by private banks and companies and “it is not for the UAE government to tell private companies what to do,” the official added.

That doesn’t appear to be what officials of the UAE were telling the U.S. government when they convinced U.S. officials not to put the UAE on Schedule C to the EAR as a country of “diversionary concern.”

Bottom line for exporters: it’s probably a bad idea to export an item to the UAE unless you have a pretty good reason to believe it’s going to stay in there

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Feb

8

It Could Have Been Worse

Posted by Clif Burns at 4:05 pm on February 8, 2008

Iran Air Yesterday the Bureau of Industry and Security (“BIS”) released a Settlement Agreement it had entered into with Selex Sistemi Integrati, Inc. According to the charging papers, Selex had exported an instrument landing system classified under ECCN 7A994 and then re-exported it without a license to Iran. The export and re-export in question occurred in November 2002. Selex agreed to a fine of $12,300. The violation was not voluntarily disclosed by Selex to BIS.

Interestingly, this is the first reported enforcement action commenced after the effective date of Public Law 110-96 which increased the penalties for export violations (under the International Emergency Economic Powers Act, or “IEEPA”) to the greater of $250,000 or twice the value of the transaction. Amended section 206(b) states that the higher penalty is applicable in any enforcement action which is “pending or commenced on or after the date of the enactment of this Act.” Because of BIS’s annoying habit of not dating much of its correspondence, it is impossible in this case to tell from the documents posted whether the enforcement action was commenced after after October 16, 2007, the date of enactment. Assuming, however, that this was the case, the $250,000 penalty would be, under the terms of the amendment, retroactively applicable.

In that light, the $12,600 fine is relatively low. There are several possible explanations for this. I do not think that one explanation was any concern about the legality of increasing the civil penalty retroactively. The black letter law is that the constitutional provision against ex post facto laws applies to criminal penalties but not to civil penalties. See Collins v. Youngblood, 497 U.S. 37 (1990). Granted there is some support for the proposition that a civil penalty that is essentially punitive and not remedial might be covered under the ex post facto clause. But it can’t be easily concluded that IEEPA’s $250,000 penalty is essentially punitive rather than remedial, although that might well be the case.

Another, and more likely possibility, is that the item exported, an instrument landing system, is a key component of aviation safety. The Iranian sanctions have been severely criticized for their detrimental impact on aviation safety and have been argued to have played a role in a recent civilian air disaster in Iran.

Finally, and probably the most likely possibility, is that the increase in maximum penalty available has not altered BIS’s perception of what a fair settlement is in a particular case. With most penalties in the past being in the five-figure range and only the rare penalty in the six- or seven-figure range, it may well be that BIS is not inclined to ratchet up penalties in the average case just because of the IEEPA amendment, but will reserve the maximum penalty for the most egregious cases.

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Jan

29

Two Louisiana Men Indicted For Sales By Independent Distributor to Iran

Posted by Clif Burns at 8:48 pm on January 29, 2008

Category: Criminal Penalties • Iran Sanctions

Iranian Offshore Oil Rig A copy of the indictment of two Louisiana men for selling CAD software to companies in Iran which we reported last week is now posted here. And it certainly raises some interesting issues.

First, the AP wire story gave the impression that the two defendants were directly exporting the software to Iran. In fact, as the indictment shows, the software and maintenance services in question were sold not by the two defendants but by a distributor in Brazil. Specifically, the indictment alleges a conspiracy between the two Louisiana defendants and the Brazilian distributor to sell the software to companies in Iran.

Second, because the indictment is based on sales by a foreign distributor, it raises the issue of the reach of U.S. sanctions against Iran. If a U.S. company sells an item to an independent foreign distributor who later sells the item to a sanction country, the U.S. company is not liable for that sale unless there is some evidence that the sale was made to the foreign distributor for the purpose of re-exporting that item to the sanctioned country. The indictment in this issue seems to fall short of that standard.

The indictment makes clear that Engineering Dynamics, Inc. (“EDI”), the company that employed the defendants, had sold the CAD software at issue to Iran prior to the 1995 sanctions which prohibited exports to Iran. After the sanctions, all sales to Iran were made by a distributor in Brazil rather than by EDI. Most of the allegations of the indictment relate to communications from the Brazilian distributor to EDI relating to its Iranian sales, many of which were for the purpose of calculating and paying commissions due to EDI. There were only a handful of communications from the EDI employees to the Brazilian distributor from the two EDI employees, many of which were innocuous at best, including an email from one of the defendants telling the distributor to “have a nice trip” to Iran. Nothing in the emails indicated that the distributor’s sales efforts in Iran were being directed by EDI or were being made with the prior knowledge of the EDI employees.

The worst facts alleged in the indictment are hardly conclusive. There is an allegation that EDI reimbursed the costs of one trip by the distributor to Iran. Additionally, there is an allegation that one of the defendants provided activation codes for software that the defendant knew had previously been sold by the distributor to an Iranian company. Finally, there is an email where one of the defendant employees tells the distributor that he responded to an Iranian inquiry with a pro forma invoice but should have forwarded the sales inquiry to the distributor instead.

There is, of course, a compliance lesson here. Even though the Iranian sanctions don’t require that a U.S. exporter obtain an undertaking from a foreign distributor that the exporter’s products won’t be sold to a sanctioned country, it is still a good idea to require such an undertaking. After all, once the distributor makes such a sale, it may be difficult for the U.S. exporter to prove that the distributor was solely responsible for the sale and that it was not made with the knowledge, participation or assistance of the U.S. exporter.

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Jan

23

Two Louisiana Men Indicted for Software Exports to Iran

Posted by Clif Burns at 10:12 pm on January 23, 2008

Category: Criminal Penalties • Iran Sanctions

Screenshot of SACS software According to an Associated Press wire story, two Louisiana men were indicted on charges that they illegally attempted to export structural design software to Iran without a license from the Office of Foreign Assets Control (“OFAC”). The two men own Engineering Dynamics, Inc., a Kenner, Louisiana, company that sells worldwide a software package knows as SACS (“Structural Analysis Computer System”). The software, although apparently aimed at the oil and gas industry, can also be used by designers and engineers for a wide variety of structures outside of oil and gas drilling platforms.

Although I don’t have a copy of the indictment yet, the AP story attributes an interesting assertion to the document:

The software is a controlled product under various U.S. laws and regulations because of its sophistication and its potential use, the documents said.

Say what? Anybody want to venture a guess at the ECCN of this software? It’s simply CAD software. If it could be used to design semiconductors it would be covered under ECCN 3D003, but otherwise generic CAD software isn’t controlled. It’s not clear why this assertion is even in the charging documents, since the defendants are only charged with exporting to Iran without an OFAC license. And in that case it doesn’t matter whether they were attempting to export sophisticated software or a pile of bricks. The crime was committed because the software was going to Iran, not because it was “sophisticated” or had a particular “potential use.”

It would appear that the U.S. Attorneys Office involved either doesn’t understand what items are subject to export controls or the office is simply trying to lard the indictment with irrelevant and prejudicial material. It’s not clear which is worse. Of course, since I haven’t seen the indictment and am relying only on a reporter’s account of the indictment, it’s impossible to be sure that the indictment alleged that the software was controlled. Once I get a copy of the indictment, I’ll update this post.

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