As we reported in a recent post, The Auto Sound and the OFAC Fury Part II, auto audio manufacturer Epsilon Electronics responded to the $4 million fine imposed by OFAC by filing a lawsuit with what we think has little chance for success. One question that this raises is whether Epsilon might have had better alternatives than filing a long-shot Eighth Amendment lawsuit, and I think, after reviewing the exhibits to the complaint, that it did.

Epsilon was fined for its sales of $3.5 million in auto audio equipment from its subsidiaries Power Acoustik and Soundstream to Iran through its Dubai-based distributor Asra International. OFAC’s detailed, six-page pre-penalty notice leveled serious charges at Epsilon, including that Epsilon lied to OFAC in its subpoena response and other communications, that it knew or should have known that Asra only sold to Iran, and that it tried to obfuscate its Iran sales by eliminating a web page on its own site showing its products in Iran.

In response, Epsilon hired a Beverly Hills tax lawyer who filed a brief five-paragraph response amounting to less than a full page of text. This half-hearted response was mostly devoted to arguing, in its longest paragraph, that the owners of Epsilon were observant Jews and would never sell anything to Iran. It also argued, somewhat astonishingly, that OFAC’s prepenalty notice contained no evidence that any Epsilon products were sold to Iran and that the website references to its products in Iran were a false attempt by Epsilon to exaggerate its global reach in order to remain competitive with other major players in the electronics industry.

One can imagine the response over at OFAC to this letter, particularly given that the company, which claims it was prohibited by its religious beliefs from shipping to Iran, had already received a cautionary letter from OFAC arising from its own direct shipment of monitor parts to Iran in 2008. Nor could OFAC have thought much of Epsilon’s general inclination toward truthfulness given its claim that any indication on its own website that it sold products to Iran was a lie and thus no proof that any of its products actually were shipped to Iran.

Frankly, it’s hard to imagine how on earth this response was even filed with OFAC in the first place. Indeed, it seems to me that replacement counsel that filed the lawsuit against OFAC would have had an argument that it should be given a chance to prepare and submit a proper response to the pre-penalty notice. Of course, I don’t know if new counsel tried this and was refused by OFAC but I doubt this occurred or this would have been mentioned in the complaint. And even if OFAC had been asked, it may have refused. But given the problems with the original response and given the difficulty of overturning agency action on review, this was certainly what I would have tried.

On a slightly different topic, we noted in the first post on this case that the website of the distributor, Asra,  was now mysteriously under construction.  Of course, nothing ever dies on the Internet thanks to the Wayback Machine, and we found archived versions of the Asra website alive and well.  The archived websites make clear that Iran was Asra’s principal, if not its only, market.  Even its Farsi-language catalog of Epsilon’s Soundstream products, a page from which is pictured above, can still be downloaded here.

This blog previously reported the $4,073,000 fine imposed by the Office of Foreign Assets Control (“OFAC”) on Epsilon Electronics for selling automobile stereo equipment to a company in the UAE that resold the items to Iran. OFAC documents indicated that the reseller’s website made clear that it only sold its products to Iran, that Epsilon had attempted to conceal its dealings with Iran by eliminating a web page showing its products and labelled Iran, and that Epsilon under a prior business name had shipped a monitor to Iran for which it had received a cautionary letter from OFAC.

Epsilon has now filed a complaint in the United States District Court for the District of Columbia challenging the fine, alleging, among other things, that the fine violates the Eighth Amendment to the United States Constitution which prohibits cruel and unusual punishment. Epsilon is invoking specifically the language in the Eighth Amendment which prohibits “Excessive Fines” from being imposed. It’s an odd claim given the Supreme Court’s statement in Browning-Ferris Industries v. Kelco Disposal, 492 U.S. 257 (1989), one of the Supreme Court’s few cases on the Excessive Fines clause, that the amendment “places limits on the steps a government may take against an individual.” No court, to my knowledge, has applied the clause to a civil penalty against a corporation. And, even if a court decided to apply the clause to a corporate fine, the principal of proportionality embodied by the clause would not likely be offended by a $4 million fine for the shipment of $3.5 million in goods to Iran.

The complaint further claims that OFAC properly failed to consider mitigating circumstances, namely that Epsilon had no idea that its distributor was shipping to Iran and engaged in no acts of concealment. The complaint includes as exhibits the OFAC documents stating Epsilon knew, or had reason to know, that all of its distributor’s business was conducted solely with Iran and that Epsilon had removed a web page on its site associating its products with Iran.  So it is more than a little odd, given that a reviewing court is going to give a great deal of deference to the findings of the agency under review, that the complaint makes these claims without even attempting to addressthese unfavorable findings by OFAC clearly set forth in the complaint’s own exhibits.

I said in my original post that, as a matter of policy, I thought OFAC had better things to worry about than pimped out cars cruising the streets of Tehran. But, sadly, I don’t think this complaint has the firepower to convince a court to force OFAC to spend more time on centrifuges and less on subwoofers.

Today the Office of Foreign Assets Control cryptically announced a change in its FAQs relating to foreign aircraft that overfly or make emergency landings in Iran. The agency merely stated that it had revised FAQ 417 without describing the difference between the old and new FAQ or why the change was made. Of course, you might assume that OFAC wanted to make it clear that if your plane was about to fall out of the sky it was okay to make an unscheduled landing in Iran — passenger safety, and all that. But you would be wrong.

The old FAQ, which you can find here, said that non-U.S. airlines could overfly Iran and make emergency landings there as long as no payments were made to or through any of the specifically designated banks in Iran (like Bank Melli) or any entities on the SDN list (other than, of course, agencies and instrumentalities of the Iranian government). The new FAQ, however, adds a new wrinkle: the payments now cannot involve the U.S. financial system if a foreign carrier is involved; the U.S. financial system may only be used for U.S. carriers, which, under 31 C.F.R. § 560.522, are permitted  to overfly and make emergency landings in Iran.

This policy change comes on the heels of news reports (like this one and this one) that foreign carrier overflights over Iran have recently increased. Why? Because no one wants to get blown out of the sky while flying over Iraq or Ukraine. Both Air France and Virgin Atlantic have suspended flights over Iraq.

Of course, you may say, certainly foreign carriers can find non-U.S. financial institutions to handle the payments to Iran. That, of course, may be the case, although given all the recent huge fine on foreign banks for Iran transactions, many of these banks may simply be unwilling to run the risk of further penalties given the small amounts they are likely to make handling these payments.