ABOVE: Cyan Headquarters

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Today’s question is this: say you are a UK-based company that manufactures a product with U.S.-origin content which you want to sell to Iran? How do you do it?

According to this article, you sell the stuff to Iran through your subsidiary in India. Yes, seriously, that’s the answer that was given:

Cyan was also required to check if an export license would be required to export its products from both the UK and the US, since there is an element of its product that originates in the US. “UKTI (UK Trade & Investment) was very helpful in assisting us and confirming that no license would be required if we ship our products from our subsidiary in India …,” explains John [Cronin, Chairman of Cyan].

Oh dear. Let’s hope that’s a misquote or a misunderstanding. If you are a foreign person with a product with U.S. origin content, section 560.205 of the Iran Transactions and Sanctions Regulations quite clearly state the circumstances in which that product can be sold to Iran. That export is permissible only if the U.S. content has been “substantially transformed” into a new product or if all such content which would require a license from the United States constitutes less than 10 percent of the total value of the foreign product.

It does not say that the foreign person can, as the article suggests the Cyan chairman says, sell the product with U.S. content to Iran if you simply try to sell it through another non-U.S. subsidiary in India or elsewhere. I suspect that, as European companies rush to exploit the Iran market after Implementation Day, this will not be the first possible misunderstanding of the scope of the remaining U.S. rules and when they apply. (I am, of course, assuming that Cyan, in fact, determined the exceptions in section 560.205 applied and that Cronin was either misquoted or misunderstood the actual reason his exports to Iran passed the test.)

Photo Credit:Cyan Headquarters via Google Maps [Fair Use]

We have followed the saga of Epsilon Electronics extensively, beginning with the The Auto Sound and the OFAC Fury Part I and Part II and ending most recently with Epsilon, Epsilon. Well, it seems that the story may be drawing to a close. On Monday, a federal district court granted OFAC summary judgment on its motion to dismiss Epsilon Electronics complaint challenging the $4.073 million dollar fine imposed on Epsilon by OFAC. The opinion can be viewed and downloaded here.

The court considered each of Epsilon’s arguments and easily dispatched all of them, only barely concealing its opinion that Epsilon’s arguments were largely frivolous. We discussed our own view of Epsilon’s arguments, particularly its bizarre claim that the fine violated the U.S. Constitution’s Excessive Fines clause, in The Auto Sound and the OFAC Fury Part II. The court, not surprisingly, held that the Excessive Fines clause did not preclude the $4 million fine given that Epsilon sold $3.4 million in goods to Iran and given that this fine was only one-third of the statutory maximum.

Epsilon’s due process claim fared no better with the court.   The court paid particular attention to what was, perhaps, Epsilon’s gravest error in its dealing with OFAC, one we noted in Epsilon, Epsilon, our third post on this case.  Two separate subpoenas, the court noted, provided Epsilon with adequate notice of OFAC’s investigation.   The court went on:

Almost two years later, on May 6, 2014, OFAC issued its pre-penalty notice, which informed the plaintiff that it had 30 days to provide a written response to the pre-penalty notice. … The plaintiff provided a two-page response to the pre-penalty
notice on June 6, 2014 … . This series of events shows that the plaintiff had ample opportunity to respond to OFAC’s inquiries into its dealings with Asra International and to OFAC’s detailed pre-penalty notice. Procedural due process demands nothing more.

The court’s reference to the “detailed” pre-penalty notice and the plaintiff’s “two-page” response make clear that the court had little patience for a due process claim once Epsilon had squandered its opportunity to provide an adequate response to the pre-penalty notice.

Finally, the court dismissed Epsilon’s arguments that its sales to Iran were permissible under the “inventory exception” embodied in OFAC’s “Guidance on Transshipments to Iran.” According to the court, the guidance does not permit sales into non-U.S inventory outside Iran where the U.S. exporter has “reason to know” that the goods were ultimately destined to Iran. The court cited, as we have, the distributor’s website as ample evidence that Epsilon had reason to know that its distributor was dealing principally, if not exclusively, with Iran.

I have spoken before about the weirdness surrounding the E.O. 13599 List, which has some (but unaccountably not all) of the entities controlled by the Government of Iran that were removed by the Office of Foreign Assets Control from the SDN List as part of Implementation Day. As far as U.S. persons and companies are concerned, entities owned or controlled by the Government of Iran are still blocked whether they are on the SDN List or not, and the E.O. 13599 List was designed to flag some (but not all) of those entities owned or controlled by Iran that were once on the SDN list but are still off-limits.

What seems odd is this “some but not all” nature of the E.O. 13599 List. OFAC in its guidance made clear that U.S. persons could not assume that just because an entity was removed from the SDN List but not put on the E.O. 13599 List that it was okay to do business with that entity. Whether any such omission was the result of incompetence, uncertainty, a desire to lay a trap for U.S. exporters or some super secret reason only known to OFAC, no conclusion, OFAC said, should be drawn from such omission.

That being said, the most puzzling instance of an Iranian government entity falling into the uncertain limbo between the SDN List and the E.O. 13599 List is Iran Air. Although it appears that Iran has made several unsuccessful attempts to privatize Iran Air, the best evidence appears to be that Iran Air is owned and controlled by the government of Iran. The Iran Air website is, not surprisingly, cagey about revealing its ownership.

It seems clear that Iran Air was removed from the SDN List in order to make it eligible as an end-user under the new policy permitting licensing the sale of aircraft and parts to Iran. But why it was not added to the E.O. 13599 List is a complete mystery. Certainly OFAC, with the vast apparatus of the U.S. intelligence and spying apparatus, knows precisely whether Iran Air is owned and controlled by the government of Iran. The rest of us are forced to rely on the markedly less reliable Internet which seems to say, in some places and probably inaccurately, that Iran Air may have been privatized and in other places confirms that it is state-owned.

One has to imagine, but hope that it is not the case, that the omission of Iran Air from the E.O. 13599 is simply a trap for the unwary with OFAC hiding in the bushes, poised to pounce on the first U.S. company that dutifully checks the lists and concludes that it can deal with Iran Air.