On Thursday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) announced a $415,350 settlement agreement with COSL Singapore Ltd. (“COSL”). The parties settled a potential civil liability claim for 55 apparent violation of the Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR), which took place between October 2011 and February 2013.

COSL is a Singapore-based subsidiary of a Chinese oil field service company. It has several offshore drilling oil rigs and enters into charter agreements with third-party drilling companies to allow those parties to use its oil rigs.

Between October 2011 and February 2013, the procurement specialists for COSL purchased at least 55 orders of supplies from vendors located in the U.S. that were specifically intended for export or re-export to oil rigs located in Iranian territory. These purchases were made despite some warning from U.S. vendors that the goods should not be shipped or re-exported to countries subject to U.S. sanctions, including Iran.

OFAC determined that COSL used its own subsidiary companies, COSL Drilling Pan Pacific (Lbuan) Ltd. and COSL Drilling Pan Pacific Ltd., to export or attempt to export the oil rig supplies from the U.S. to Singapore and the United Arab Emirates before re-exporting or attempting to re-export the supplies to oil rigs located in Iranian territory.

COSL has agreed to pay $415,350 to settle potential civil liability, which is a lot less than what the potential liability could have been for COSL. The statutory maximum penalty amount for the apparent violations is $13,750,000, and the base penalty amount is $923,000.

OFAC considered aggravating and mitigating factors in determining the settlement amount. Some of the aggravating factors included: (1) COSL is a large sophisticated company doing business throughout the world; (2) COSL did not have an OFAC compliance program in place at the time of the transactions; and (3) OFAC determined that the exportation or re-exportation aided in the development of Iran’s energy resources.

The mitigating factors included: (1) COSL did not have any prior sanctions history; (2) COSL took remedial action by instituting an OFAC sanctions compliance program; and (3) COSL displayed substantial cooperation throughout the investigation process.

Companies that are involved in international trade and conduct business in the U.S. or with U.S. companies should have an OFAC compliance program in place. If companies are in a situation where they may have violated Iranian sanctions programs (or other U.S. sanctions programs), full cooperation with OFAC is essential.

Last week, the D.C. Circuit affirmed the U.S. Treasury Department’s Office of Foreign Assets Control’s (“OFAC”) wide latitude to impose Iran sanctions, but it set aside a $4.07 million penalty against car accessory seller Epsilon Electronics (“Epsilon”). The D.C. Circuit found that the agency cut too many corners in its investigation of Epsilon.

In July 2014, OFAC imposed the $4.07 million penalty on Epsilon, alleging that a series of shipments in 2012 by the company to Asra International Corporation, LLC in Dubai, United Arab Emirates (“Dubai Asra”) were destined for end-use in Iran. Sending products to Iran would violate the Iranian Transactions and Regulations. OFAC is authorized to impose civil penalties against individuals or entities who export to a third party who it has reason to know intends to send those goods to Iran.

The case dealt with the initial question of whether OFAC must prove that the goods ended up in Iran in order to hold the company liable for the breach of U.S. sanctions. The court determined that OFAC had enough evidence to support a finding that the first 34 shipments from Epsilon to Dubai Asra violated the sanctions. However, for the final five shipments, the court found that OFAC failed to explain why it discounted certain evidence and why the conclusion about the first 34 shipments applied to the last five, in light of the countervailing evidence presented. The evidence included several email exchanges between Epsilon’s sales team and Dubai Asra’s manager that indicated that the last five shipment were intended for a Dubai retail store and not Iran.

The U.S. Court of Appeals for the D.C. Circuit remanded the case to the district court, with instructions to remand the matter to OFAC for further consideration of the alleged 2012 violations relating to the final five shipments, and calculation of the total monetary penalty imposed for all liability findings. While the court found that the government does not need to show that the goods actually ended up in Iran, the court did conclude that OFAC did not adequately explain its determination that Epsilon had reason to know that the goods would end up in Iran. Because OFAC failed to justify its conclusion that Epsilon should be held liable for the last five shipments as well as the first 34, the final liability determinations were deemed capricious and arbitrary.

The decision establishes key precedents related to trade compliance. The case shows that OFAC does not need to prove that the goods actually reached the sanctioned country in order to impose penalties. Additionally, the case shows that agency enforcement actions from OFAC can be subject to judicial review. This could lead to enhanced transparency between violators and the government imposing sanctions. For more information about the case, read the opinion here.

On Monday, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) leveled one of the largest sanctions actions in OFAC’s history. OFAC sanctioned 271 employees of Syria’s Scientific Studies and Research Center (“SSRC”).

According to OFAC, the SSRC is responsible for developing chemical weapons that were used against civilians by Syrian government forces earlier this month in Khan Sheikhoun, Syria. OFAC has stated that these 271 designated individuals are scientists who have expertise in chemistry and related scientific disciplines and have supported the SSRC program since at least 2012. OFAC has stated that these individuals are working on developing chemical weapons for Syrian President Bashar Assad.

Because of the sanctions, U.S. persons are now generally prohibited from conducting business with these designated individuals. Any property or interest in property of the 271 individuals in the possession or control of U.S. persons or within the United States must be blocked. Additionally, U.S. banks have been ordered to freeze the assets of any employees that have been named.

The sanctions more than double the number of individuals and entities sanctioned by the United States pursuant to Syria-related Executive Orders.  These sanctions are intended to hold the Assad regime and those who support it accountable for the regime’s violations of the Chemical Weapons Convention and UN Security Council Resolution 2118.

 

In a recent enforcement action, the Treasury Department’s Office of Foreign Assets Control (OFAC), took what appears to be an unprecedented step in finding that a Taiwanese shipping company had violated the Iranian Transactions and Sanctions Regulations, 31 C.F.R. part 560 (ITSR).

Copyright: 1971yes / 123RF Stock Photo
Copyright: 1971yes / 123RF Stock Photo

The alleged violation surrounds a ship-to-ship transfer of oil between a vessel owned by B Whale Corp. (BWC), a subsidiary of TMT Group (TMT), and a vessel owned by the National Iranian Tanker Co., which is listed as a specially designated national (SDN).  BWC and TMT maintain that the transaction involved oil originating in the United Arab Emirates and was conducted by subcontractors who were contractually prohibited from dealing with SDNs.  Nevertheless, OFAC determined that by turning off vessel identification systems and using circuitous routes, the BWC vessel had taken efforts to conceal its actions and the origin of the oil.

The novel issue here, is how OFAC came to assert jurisdiction over BWC and TMT to make its finding.  In 2013, TMT brought a voluntary bankruptcy proceeding in the Southern District of Texas, seeking protection from US creditors.  The allegedly improper oil transfer occurred after the bankruptcy proceeding had commenced.  During that proceeding, there was a motion by TMT’s creditors to remove TMT’s management due to “fraud or dishonesty” under the Bankruptcy Code.  Shortly thereafter,  OFAC conducted its investigation and asserted that it had jurisdiction,  because “BWC was a U.S. person within the scope of the ITSR because it was present in the United States for the bankruptcy proceedings when the transaction occurred.” Further OFAC determined that the vessel “was subject to U.S. sanctions regulations because it was property under the jurisdiction of a U.S. bankruptcy court, and therefore the oil transferred to the vessel was an importation from Iran to the United States as defined in the ITSR.”

With the issuance of an enforcement action against a non-US company, there is concern among foreign companies that OFAC is pushing the bounds of its jurisdiction.  OFAC’s two statements regarding the basis for jurisdiction, however, permit contrasting views of OFAC’s intent and the what this decision means for the future of sanctions enforcement. On one hand, the first statement, that BWC was a US person “because it was present in the United States for the bankruptcy proceeding,” rightfully gives reason for pause as mere presence in the United States as a basis for jurisdiction would signal a massive expansion of OFAC’s understanding of its jurisdiction.  On the other hand, the second statement, that the vessel came under the jurisdiction of the bankruptcy court, may, however, circumscribe the impact of this enforcement action.  With this qualification, it is not the mere presence of the foreign company before a US Court which conferred jurisdiction, but the well established principal that assets of the debtor — regardless of location — fall under the jurisdiction of the bankruptcy court.  While any expansion of jurisdiction is concerning to foreign companies and the US companies who transact with them, this assertion of jurisdiction may well be limited to a foreign company that availed itself of US bankruptcy protection and then used its assets for an unlawful purpose.   Should OFAC find other means of extending its jurisdictional reach, however, a new era of enforcement may be beginning.

 

On January 16, 2016, the U.S. Department of State and the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) lifted certain nuclear-related “secondary sanctions” (sanctions targeting non-U.S. persons for certain Iran-related activities undertaken outside of the U.S.) against Iran pursuant to the Joint Comprehensive Plan of Action (JCPOA). This long awaited action took place in exchange for Iran’s commitment to limit its nuclear program and after the International Atomic Energy Agency verified that Iran carried out its nuclear commitments under the JCPOA.  Notwithstanding the sanctions relief, U.S. companies and persons continue to be barred from most transactions involving Iran and many secondary sanctions continue to stay in place.

Copyright: kagenmi / 123RF Stock Photo
Copyright: kagenmi / 123RF Stock Photo

WHO DOES THIS MOSTLY AFFECT?

The sanctions relief will be particularly important for global companies headquartered in the United States, U.S. private equity firms with foreign investments, and other United States entities with foreign subsidiaries.

WHAT CAN FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?

On January 16, 2016, OFAC issued General License H (GL H) “Authorizing Certain Transactions Relating to Foreign Entities Owned or Controlled by a United States Person”.

The sanctions relief offered by GL H allows foreign entities “owned or controlled” by a U.S. person or entity to engage in most transactions with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that were previously prohibited by Section 215 of the Iranian Transactions and Sanctions Regulations (ITSR) with certain important exceptions outlined below.  An entity is “owned or controlled” by a U.S. person if the U.S. person: (1) holds a 50% or greater equity interest by vote or value in the entity; (2) holds a majority of seats on the board of directors of the entity; or (3) otherwise controls the actions, policies, or personnel decisions of the entity. This does NOT include foreign branches of US persons as these are considered “U.S. persons” and, therefore, do not qualify for the sanctions relief.

WHAT CAN’T FOREIGN SUBSIDIARIES OF U.S. COMPANIES NOW DO?

Foreign subsidiaries of U.S. companies cannot engage in transactions involving:

  • Exportation or reexportation of U.S. origin goods – the direct or indirect exportation, reexportation, sale or supply of goods, technology, or services from the United States or a U.S. person with knowledge or reason to know that these items are intended for Iran or the Government of Iran;
  • Reexportation from a third country of items containing 10% or more U.S.-controlled content with knowledge or reason to know that these items are intended for Iran or the Government of Iran; and reexport from a third country of foreign produced direct product of U.S. technology and software;
  • Any activity involving any item (including information) subject to the Export Administration Regulations (EAR), that is prohibited by the EAR, or requires a license, based on its end-user or end-use;
  • Any transfer of funds to, from, or through the U.S. financial system (foreign subsidiaries cannot use U.S. banks to process Iran-related transactions, including as correspondent banks for U.S. dollar-denominated transactions);
  • Any military, paramilitary, intelligence, or law enforcement entity of the Government of Iran, or any official, agent, or affiliate thereof;
  • Any person, entity, aircraft or vessel on OFAC’s list of Specially Designated Nationals (SDN) (or entities owned 50% or more individually, or in the aggregate, by one or more SDNs), or Foreign Sanctions Evaders, or who has been denied export privileges by Executive Order or otherwise;
  • Any activity related to the proliferation of weapons of mass destruction or ballistic missiles, support for international terrorism, Iran’s support for the Syrian regime, Iran’s destabilizing activities in Yemen, or Iran’s commission of human rights abuses against its citizens; and
  • Any covered nuclear activity involving Iran outside of the official procurement channel established by the JCPOA.

Additionally, trade with Iran in defense articles and defense services subject to the U.S. International Traffic in Arms Regulations (ITAR) is still broadly prohibited.

Copyright: pressmaster / 123RF Stock Photo
Copyright: pressmaster / 123RF Stock Photo

WHAT CAN AND CAN’T U.S. PARENT COMPANIES (AND US EMPLOYEES WORKING ABROAD) DO?

As a general rule, U.S. persons are still prohibited from ALL actions “facilitating” Iran-related activities of foreign entities (including subsidiaries). As such, virtually any involvement in Iran-related business by U.S. parent companies of foreign subsidiaries or their U.S. person employees, officers, or directors is prohibited. U.S. persons cannot facilitate, assist, guarantee, or otherwise participate directly or indirectly in any Iran-related business (without OFAC’s authorization).

The exception to the rule, is that U.S.-persons are authorized to be directly involved in the following:

  • Establishing operating policies and procedures under which its non-U.S. subsidiary can achieve the operational separation necessary for it to transact with Iran; and
  • Providing its non-U.S. subsidiary with business support, including common email, enterprise resource planning, and other services in connection with the foreign subsidiary’s Iran trade, provided the services are fully “automated” (they must operate passively and without human intervention, other than maintenance of the systems) and are “globally integrated”.

BOTTOM LINE

With the two narrow exceptions above, the prohibitions on U.S. persons with respect to Iran remain in place.  This includes prohibitions against all actions facilitating Iran-related activities of foreign subsidiaries.  GL H, which lifts certain sanctions against transactions with Iran for foreign subsidiaries of U.S. parent companies, has important restrictions and U.S. parent companies remain liable for their foreign subsidiaries’ transactions that are not covered by GL H.

As such, U.S. parent companies need to carefully consider the risks in determining whether to allow their foreign subsidiaries to do business with Iran.  For those who choose to use GL H, it will be very important to conduct careful due diligence regarding the identity, ownership and sanctions status of the parties that they do business with involving Iran and to strictly comply with GL H in order to avoid slipping over the fine line of permitted transactions.

Copyright: kgtoh / 123RF Stock Photo
Copyright: kgtoh / 123RF Stock Photo

The Joint Comprehensive Plan of Action (the JCPOA), between the so-called P5+1 countries (United States, United Kingdom, Germany, France, Russia and China) and Iran was formally adopted on Oct. 18, 2015 (Adoption Day) to lift certain sanctions on Iran. Please see our previous blog post for a summary of the JCPOA.

Adoption Day is the initial milestone in implementation of the JCPOA. Accordingly, the President took the first steps to implementation by directing the Secretary of State, the Secretary of the Treasury, the Secretary of Commerce, and the Secretary of Energy to take all appropriate preparatory measures to ensure the prompt and effective implementation of the U.S. commitments under the JCPOA.

While Adoption Day marks an important milestone, the U.S. will not begin to lift sanctions on Iran until “Implementation Day,” which is the date on which the International Atomic Energy Agency confirms that Iran has implemented certain key nuclear-related measures. Implementation Day (and hence the lifting of additional U.S. sanctions) is not expected to occur until spring 2016.

OFAC issued a Frequently Asked Questions Memorandum to answer questions about Adoption Day and what that means for US businesses.

OFAC will provide further guidance on the sanctions measures that will be lifted pursuant to the JCPOA, as well as those measures that will remain in place, prior to Implementation Day. We will continue to keep you informed of any new issued guidance.