On Tuesday, the Office of Foreign Assets Control (“OFAC”) revised the FAQs on its website to address a problem in interpreting guidance it issued last February on transactions with a company in which a Specially Designated National (“SDN”) had an interest That guidance stated:

A person whose property and interests in property are blocked pursuant to an Executive order or regulations administered by OFAC (a “blocked person”) is considered to have an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50% or greater interest. The property and interests in property of such an entity are blocked regardless of whether the entity itself is listed in the annex to an Executive order or otherwise placed on OFAC’s list of Specially Designated Nationals (“SDNs”).

That guidance raised, but didn’t answer, what sort of, and degree of, due diligence was required to ferret out ownership interests by SDNs.

The new FAQ responds to a question posed by a bank with respect to wire transactions in which it was a correspondent bank and had no relationship with the sending or receiving account holders:

OFAC would not expect the bank to research the non-account parties listed in the wire transfer that do not appear on the SDN List and, accordingly, would not pursue an enforcement action against the bank for having processed such a transaction.

If a bank handling a wire transfer currently has information in its possession leading the bank to know or have reason to know that a particular individual or entity involved with or referenced in the wire transfer is subject to blocking, then the bank will be held responsible if it does not take appropriate steps to ensure that the wire transfer is blocked.

But even if the correspondent bank isn’t required to conduct due diligence on the parties to the wire transfer, OFAC reiterated that banks are required to conduct due diligence on their own account holders to determine whether an SDN has a direct or indirect 50 percent interest in the account holder:

OFAC expects banks to conduct due diligence on their own direct customers (including, for example, their ownership structure) to confirm that those customers are not persons whose property and interests in property are blocked.

This due diligence is more complicated than it seems a first glance given the way OFAC phrased the restriction. If an SDN “owns, directly or indirectly, a 50% or greater interest” in another entity, that entity is blocked. At first glance it might seem that the due diligence obligation could be fulfilled by asking an account holder to supply a list of all entities with a 50% of greater interest.

But consider a few examples. Suppose the SDN owns a 50% interest in a company that owns 100 percent of the account holder. That would seem to be covered by the OFAC guidance, and would require an inquiry well beyond the shareholders of the account entity, but also the shareholders of the shareholders, and on and on up the tree until all individual shareholders are found. Now consider a case where an entity that owns 51 percent of the account holder is itself 51 percent owned by an SDN. Although the SDN controls the account holder it only owns an indirect 26 percent interest in the account holder and appears not to be covered by the guidance. Let’s complicate things further and consider a case where the account holder has a 40 percent shareholder in which the SDN has a 100 percent interest and a 60 percent shareholder in which the same SDN has a 40 percent interest. In that situation the SDN has a 64 percent indirect interest in the account holder and requires blocking the account holder even though the SDN wouldn’t have control over the account holder.

The bottom line is that although the rule in the OFAC guidance appears simple, it actually imposes complicated due diligence requirements and also potentially captures situations where the SDN has no control over the account holder.

While looking for background on the recent action of the Office of Foreign Assets Control (“OFAC”) extending a General License permitting transactions with two sanctioned Belarusian companies, I stumbled across this post at Bielar.us. That site is a DC-based blog run by dissident Belarusians opposed to the current dictatorial regime of Alexander Lukashenko. Apparently, the web hosting provider for Bielar.us blocked the anti-Lukashenko site based on — of all things — the U.S. sanctions against Lukashenko and related individuals and entities. The website was migrated to another hosting company and is now up and running again.

Of course, those familiar with the targeted, regime-based sanctions against Belarus’s dictator and his cronies might be more than a little surprised by the web hosting provider’s action and its more than slightly ironic outcome. Those sanctions target specified individuals and companies related to the Lukashenko regime only and do not target all Belarusians wherever located.

However, the web hosting provider’s terms of service used to terminate services to the dissident bloggers state:

Each individual which is a National or Citizen of a Sanctioned Country is hereby prohibited from registering or signing up with, subscribing to, or using any service of [this webhosting service], regardless of where said individual is located.

Those terms also define Belarus as a “sanctioned country,” along with Balkans, Burma, Côte d’Ivoire, Cuba, Democratic Republic of the Congo, Iran, Iraq, former Liberian Regime of Charles Taylor, North Korea, Sudan, Syria, and Zimbabwe. The terms of service’s provision that denies services to all “nationals” of Belarus clearly goes beyond the sanctions themselves.

The problem here, among other things, is that if the Internet is a public accommodation (an unsettled question at the moment), this provision in the terms of service and its application to a blogger because of his national origin might raise issues under state and federal anti-discrimination laws. This is one good reason why companies need to be careful in applying OFAC sanctions with too broad a brush.

The same hosting provider has used this provision to shut down other websites that oppose the regimes in sanctioned countries. Iranian dissident bloggers in Iran have been shut down by this hosting provider, as have anti-government bloggers in Zimbabwe.

The issue with respect to the Iranian bloggers is more difficult because the Iranian sanctions are comprehensive, unlike the targeted regime-based sanctions against Belarus and Zimbabwe. In this case, the sanctions are properly applied by the provider against the Iranian-based bloggers unless the information exception applies. And it seems to me that the information exception does apply here. Section 560.538 of the Iranian Transactions Regulations permits a U.S. company to engage in all transactions “necessary and ordinarily incident to the publishing and marketing of manuscripts, books, journals, and newspapers … in paper or electronic format.” Here, the web hosting provider is merely a publisher of the electronic content and provides no other services, including some that would be allowed under section 560.538 such as editing and formatting. Indeed, the web hosting provider’s activities would seem to have been allowed even under the old, and much-maligned, “camera-ready copy” rule.

According to a report last week in Syrian state-run newspaper Al-Baath, the Bureau of Industry and Security (“BIS”) has approved the export of aircraft parts and repair services from the United States to Syria for the purpose of putting two mothballed Syrian Arab Airlines 747s back in service.

Although some may see this as a sign that the Obama administration may be easing back on sanctions against Syria, that prediction may be a bit premature. BIS’s regulations already state that the agency will consider licenses to export “parts and components intended to ensure the safety of civil aviation and the safe operation of commercial passenger aircraft” on a case-by-case basis.

Yesterday the Office of Foreign Assets Control (“OFAC”) released its civil penalties report for January. Among the settlements announced was one under which Stena Bulk LLC, the Houston-based subsidiary of the Swedish oil tanker company, agreed to pay OFAC $426,486 for “providing transportation related services for the transportation of oil to Sudan and the exportation of Sudanese-origin oil without an OFAC license.” Stena Bulk voluntarily disclosed the matter to OFAC.

OFAC’s policy of providing as little information as possible with respect to settlements leaves some nagging questions unanswered here. Stena Bulk, the parent company in Sweden, is not a U.S. person as defined by the Sudan regulations and couldn’t violate the sanctions. Stena’s U.S. subsidiary in New York and and Stena Bulk LLC, its subsidiary in Houston, aren’t liable for the parent company’s dealings with Sudan unless they participated in some way in the oil shipment transactions. It certainly would be useful for OFAC to reveal what actions by the subsidiaries were sufficient to lead to a fine of this magnitude, although in this case I can posit a reasonable speculation.

Stena Bulk’s involvement in oil shipments to Sudan arises from the unique nature of Stena Bulk’s fleet, most of the ships in which are designed to maximize oil cargo capacity and yet maintain low drafts necessary for ports, harbors and canals, such as the Suez Canal, with draft limitations. Stena Bulk has a number of Suezmax ships in its fleet. These ships can traverse the shallow Suez Canal to reach the Red Sea, where Sudan is located, from the Mediterranean. These ships should also be able to make calls at the Port of Sudan, where berths in the harbor range from 9 to 13 meters.

Interestingly, all of the company’s Suezmax fleet is managed from Stena Bulk’s Houston subsidiary, which may explain how the American subsidiary wound up in deep and hot water with OFAC. And while I am engaging in ripe, if not rank, speculation it also seems reasonable to assume that the Stena Bulk employees in Houston probably thought, incorrectly of course, that the Sudan sanctions wouldn’t apply to a foreign-flag ship owned by a foreign company that wasn’t making a call at any U.S. ports.

On January 22, the Bureau of Industry and Security (“BIS”) issued a temporary denial order (“TDO”) purportedly to prevent the export of a Bladerunner 51, a “go-fast boat” favored by drug smugglers, from South Africa to Iran.

Although the boat is manufactured in Great Britain by Ice Marine International, the BIS premised its jurisdictional hook over the boat on its two U.S.-origin Caterpillar C18 engines and two Arneson surface drives. According to the TDO, BIS has evidence to believe that the vessel is destined for the Iranian Revolutionary Guard Corps for use as an attack craft.

[T]he Respondents are about to engage in conduct prohibited by the EAR by re-exporting U.S.-origin items, which are subject to the Regulations and classified as Export Control Classification Number (“ECCN”) 8A992.f and .g, from South Africa to a Specially Designated National (“SDN”) [the Iranian Revolutionary Guard Corps] located in Iran using a specially designated blocked vessel, owned by a Specially Designated National [the Islamic Republic of Iran Shipping Lines], to complete the transaction.

Given that U.S. persons are already prohibited from doing business with the Islamic Republic of Iran Shipping Lines (“IRISL”) and the specially designated blocked vessel, it’s completely unclear what the TDO actually accomplishes. Certainly IRISL is not going to pay any attention to BIS’s order that it not engage in the export of the Bladerunner 51, nor is IRISL likely to be swayed by the TDO’s denial of export privileges since that has already been effectively accomplished by its SDN status. The other two respondents — Tadbir Sanaat Sharif Technology Development Center (TSS), based in Tehran, Iran, and Icarus Marine (Pty) Ltd. of Cape Town, South Africa — are unlikely to try to block the transaction, even if they could, based on the TDO’s provisions forbidding exports to them.

Even though BIS based the TDO on fears that the vessel will be used as an attack craft, the folks at the United States Naval Institute, a private think tank, suspect something much more sinister is going on — namely that the Bladerunner 51 is merely an expensive wrapping package for South African yellowcake uranium. Here is their full-tin-foil-cap reasoning:

Why are the Iranians looking to get this 51-foot asset from South Africa? Isn’t there lots of cross-gulf smuggling going on? Plenty of big, roomy fast boats transit from UAE to Iran every single night! Why go through all the trouble of shipping something from South Africa? In a big Iranian ship, a known proliferation tool? Wouldn’t it be easier to look closer to home? Nab a cigarette smuggler and take ownership from there? Or find some nearby disenfranchised recipient of oil proceeds and encourage the fellow to, ah, buy and transfer his fine vessel?

Just seems odd that Iran is reaching so far afield, when there are plenty of go-fasts within easy reach. But then, if we note that South Africa holds 7 percent of the worlds economically recoverable uranium reserves and is the eleventh biggest producer of uranium, alarm bells start ringing.

Um, okay. Personally, I think it would be easier and safer for Iran to put yellowcake in an unmarked box than in a potential attack vessel with U.S. parts, particularly if Iran wanted to, you know, avoid detection. Stuffing the yellowcake into the go-fast boat is rather like a drug dealer deciding to smuggle heroin in a shoulder-fired rocket launcher.