Two companies in Singapore, CSE Global and CSE Transtel, agreed to pay the Office of Foreign Assets Control (“OFAC”) $12,027,066 to settle charges that they violated the Iran Transactions and Sanctions Regulations (“ITSR”). The charges arose from CSE Transtel supplying telecommunications goods and services to energy projects in Iran. OFAC did not allege that these goods and services originated in the United States. Rather, OFAC alleged that because the vendors were paid in U.S. Dollars that CSE had caused the export of financial services from U.S. Banks to Iran in violation of section 560.204 of the ITSR.

Now we’ve been through this U.S. dollar business with OFAC before. In the typical case, OFAC’s claim of jurisdiction over the foreign company is based on the fact that the foreign company’s bank and the foreign company’s customer’s bank would have used correspondent accounts denominated in dollars and held in U.S banks to effectuate the transaction. Of course, whether the transfer of dollars between U.S. banks in connection with a foreign company’s sale of goods to Iran is the export of a financial service to Iran is not entirely clear. But at least in this scenario you can see a direct flow of dollars related to a specific Iranian transaction.

But the Singapore situation is different because Singapore is authorized to engage in offshore dollar clearing transactions. And, as the OFAC release admits, the transactions in question were effectuated through U.S. Dollar accounts held in Singapore banks. The way that U.S. Dollar transactions are cleared in Singapore is described here. Suffice it to say, there are cases where U.S. Dollar transactions can be cleared in Singapore under this system without a U.S. bank ever being involved. If, for example, CSE and its vendor had U.S Dollar accounts at the same bank, or were the only dollar transactions between two Singapore banks on a clearing day, the Singapore clearing house would clear the transactions without the need for either bank to make up a dollar deficit as part of the clearing process.

But in the other possible (and more likely) situations where the dollars clear in Singapore but dollar transfers are needed to make up differences between banks, it still can’t be said that the dollar transfers to settle the dollar position of the Singapore bank is the export of a financial service to Iran. Say a bank in Singapore pays $10,000 for a customer’s Iran transaction but during the day pays out $200,000 and receives $100,000 where none of these other dollar transactions have anything to do with Iran. It will need to transfer $100,000 to the Singapore clearing house, which will be effectuated through a U.S. Dollar correspondent account in the United States. In that case the bank in the United States has not transferred any financial service to Iran because the payment relates to an aggregate of transactions valued at $300,000, almost all of which have nothing to do with Iran.

The only scenario in the Singapore clearing situation where the U.S. bank would transfer a financial service to Iran would be where the Iran payment by the Singapore bank is the only U.S. dollar transaction by the Singapore bank during the clearing day. In that case, the transaction looks like a traditional one where the dollar payment is cleared through the U.S. bank. But there is no reason to believe that any or all of the CSE Iran transaction were the only dollar transactions during that clearing day. But that doesn’t stop OFAC from inaccurately claiming that every dollar transaction conducted by CSE through its Singapore accounts caused a transfer of financial services from the United States to Iran.

Yesterday, and only hours after the ISIS attack on Tehran, the Senate voted to invoke cloture by a vote of 91-8 to allow a vote on S.722, the Countering Iran’s Destabilizing Activities Act of 2017. News reports suggest that further action on the bill, which is otherwise likely to pass the Senate, is being delayed for the moment based on a desire to tack onto the bill new Russia sanctions.

The pending legislation follows the pattern of recent Iran sanctions legislation. Rather than affirmatively imposing specific sanctions, the legislation would require the President to impose a variety of sanctions, including asset blocking, against companies and individuals, including foreign companies and individuals, who the President determines has assisted Iran in certain activities. Those activities are aiding Iran’s ballistic missile program, assisting Iran’s violations of human rights, and materially contributing to the transfer of arms to Iran.  Additionally, the President is directed to impose blocking and transactional sanctions on the “officials, agents, or affiliates” of the Iranian Revolutionary Guard Corps.

Iran has argued, not surprisingly, that the Senate Bill is inconsistent with the JCPOA, otherwise known as the Iran nuclear deal. The strongest argument in this regard concerns the secondary sanctions imposed on non-U.S. companies involved in arms sales to Iran. Under section 1.8 of Annex II to the JPCPOA, the E.U. commits to lift its arms embargo on Iran. And under section 5.1.2 of Annex II, the United States commits to “license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA.”
The proposed legislation would require the President to impose sanctions on foreign subsidiaries of U.S. companies that engage in arms deals with Iran, which would appear to violate that commitment. Although nothing in the U.S. commitments forecloses it from imposing secondary sanctions on wholly-foreign companies that engage in arms trading with Iran, it would difficult to argue that the JPCPOA prevented secondary sanctions on foreign subsidiaries of U.S. companies but not on wholly-foreign companies.

Of course, any violation here would be purely prospective. Under section 20.1 of Annex V, the arms embargo is not lifted until eight years after Implementation Day. Moreover, no violation would occur until the President actually designated a company under the proposed legislation, which may or may not ever happen. So although the proposed legislation might ultimately lead to a potential violation of the JCPOA, the simple adoption of the bill itself would not.

Last week I posted on the D.C. Circuit Court of Appeals’s opinion setting aside the $4 million fine that the Office of Foreign Assets Control (“OFAC”) imposed on Epsilon Electronics for shipping weapons of mass destruction (namely, subwoofers and other car audio pimping items)  to Iran.  As noted in the prior post, the D.C. Circuit came to the somewhat astonishing conclusion that you could violate the prohibition on exporting to Iran if there were red flags that your shipment might be diverted from the country of export to Iran even if that shipment ultimately did not wind up in Iran. Even so, the Court set aside the jaw-dropping fine and sent the case back to OFAC for further consideration.

Having found that OFAC did not need evidence of a shipment to Iran to fine someone for exporting to Iran, the Court then took the paradoxical position that OFAC erred by not considering evidence that five of the thirty-nine shipments involved might not have actually gone to Iran. The emails in question were ones that “contemplate[d] [Epsilon] products being sold out of the Asra store in Dubai.” The Court explains this apparent inconsistency by saying that these emails tended to show that Epsilon “did not have reason to know those shipments were specifically intended for reexport to Iran.” Remember, the Court has taken the position that, in the Court’s version of “ordinary English usage,”  you are “exporting” something to someone if you have reason to know it might go to that party even if it never does.

Leaving aside this metaphysical and linguistic conundrum about un-exported exports, the Court’s discussion of OFAC’s treatment of the ignored evidence is instructive.

Government counsel explained at oral argument that OFAC did not consider the emails credible evidence. We can infer as much from the agency’s liability finding. But we lack an explanation, from the record, of why they are not credible, and why they do not counsel against liability for the final five shipments.

The only discussion of the credibility of these emails in the record was an internal OFAC memorandum not provided to Epsilon, but the Court dismissed its reasoning. That memo argued that the Asra store opened after all but two of the five shipments in issue had been sent, but the Court noted that this would not rebut an inference that the earlier shipments were meant for sale at the store when it opened. Even more significantly, the Court noted:

We also note the low value of the last five shipments, two of which were worth just over one hundred dollars apiece. At the
time those shipments were sent, Epsilon knew its dealings with Asra were under OFAC investigation. OFAC did not explain why Epsilon would knowingly risk fines of up to $250,000 per shipment in return for such a small reward.

This is, of course, an excellent point and it could go much further than the case at hand. It is, indeed, a legitimate question that can be raised almost any time OFAC or the DOJ go after low-value exports.  Of the many things in the opinion for OFAC to dislike, I bet this part of the opinion is at the top of their list.