ABOVE: Pinnacle Aircraft Parts HQ

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The Office of Foreign Assets Control (“OFAC”) released civil penalty information revealing that Pinnacle Aircraft Parts, Inc., agreed to pay $225,000 to settle allegations that Pinnacle had failed to comply with an OFAC subpoena. OFAC had issued the subpoena as part of its investigation of Pinnacle’s involvement in the sale of a jet engine that may have been ultimately destined for Iran. Principally at issue was an email that Pinnacle had given its lawyer “indicating that the aircraft engine was likely destined for Iran” but which the company had failed to supply to OFAC in its response to the subpoena.

You don’t have to be Perry Mason to figure out why the lawyer didn’t want to hand over that email. Because the email appeared to indicate an awareness by the company and its employees that the engine was going to Iran, that email could have served as a basis for criminal prosecution of Pinnacle and/or some of its principals or employees.

There is no mention by OFAC whether Pinnacle attempted to assert a privilege or not in connection with its failure to turn over the email. A problem, of course, with asserting a Fifth Amendment privilege here is that although the principals and employees of Pinnacle might have had that right for documents in their possession, the corporation did not have that privilege. See, e.g., Couch v. United States, 409 U.S. 322 (1973).

In calculating the appropriate penalty, OFAC called the failure to provide the email “egregious,” suggesting that Pinnacle’s lawyer did not even try to assert any privileges with respect to the email and simply locked it up in a file cabinet. The penalty was slightly mitigated by OFAC based on the fact that Pinnacle relied on advice of counsel in deciding not to turn over the email.

Although Pinnacle relied on the advice of counsel in determining not to produce the e-mail and other documents, Pinnacle is the party legally responsible for compliance with OFAC’s subpoena and the actions of its counsel (in this case, the determination that clearly responsive documents need not be produced to OFAC) are attributable to Pinnacle for purposes of calculating a base penalty and settlement amount.

Well, at least OFAC had the courtesy of teeing up a malpractice suit by Pinnacle against its unnamed attorney for the amount of the fine.

Earlier this month, a federal district court judge in New York ruled that the Office of Foreign Assets Control (“OFAC”) was required to disclose to the New York Times the names of all individuals who had been granted licenses relating to activities in foreign countries, such as Iran, where such activities would otherwise be illegal. OFAC had previously agreed to disclose the names of corporate licensees to the New York Times after it filed its lawsuit seeking names of all companies and individuals with OFAC licenses. (The New York Times lawsuit likely explains OFAC’s decision earlier this year to advise corporate licensees that it would release their identities to the public notwithstanding Exemption 4 of the FOIA which exempts confidential business information from release under the act.)

In the case of individual licensees, Exemption 6 allows the government to withhold from disclosure under the FOIA “personnel and medical files and similar files.” The court held that Exemption 6 did not apply in this case because, although the names constituted “similar files” under Exemption 6, the individuals’ interest in privacy was outweighed by the public’s interest in disclosure of the names.

OFAC requested and was granted a 45-day stay of the decision. As a result, it seems likely that OFAC will appeal the district court’s decision

On Monday, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) repealed the Iraqi Sanctions Regulations, formerly found at 31 C.F.R. § 575.101 et seq. and replaced them the Iraq Stabilization and Insurgency Sanctions Regulations which will be found at 31 C.F.R. § 576.101 et seq. This, among other things, formally ends the import and export restrictions found in the Iraqi Sanctions Regulations, although these had been substantially ameliorated by four general licenses issued by OFAC on May 8, 2003. Imports of Iraqi cultural property into the United States would remain prohibited under the provisions

The stabilization regulations now put in place follow the model of other targeted sanctions programs designed to prohibit transactions by U.S. persons with individuals and entities deemed a threat to Iraqi stability and to block the assets of such individuals. Interestingly, section 576.412 of the new regulations codifies guidance that OFAC has previously set forth only in informal documents issued by OFAC on its website. The section reads:

A person whose property and interests in property are blocked pursuant to § 576.201(a) has an interest in all property and interests in property of an entity in which it owns, directly or indirectly, a 50 percent or greater interest. The property and interests in property of such an entity, therefore, are blocked, and such an entity is a person whose property and interests in property are blocked pursuant to § 576.201(a), regardless of whether the entity itself is listed in the Annex to Executive Order 13315, as amended, or designated pursuant to § 576.201(a)(2) or (3).

As this blog has noted before, to the extent that the regulation deals with indirect ownership interests, it can be difficult to determine whether the rule applies or not. Suppose that the entity in question is 51 percent owned by a company that is, in turn, 51 percent owned by an SDN. The SDN only owns a 25.5 percent interest indirectly in the company, although the SDN may well have effective control of that entity. Or maybe OFAC means that in this case the SDN has a 51 percent interest because it controls the company with a 51 percent interest.

On the other side of this conundrum, consider this example: suppose the company in question has two shareholders, one of which has a 40 percent interest. Suppose further that an SDN has a 100 percent interest in the 40 percent shareholder and a 40 percent interest in the 60 percent shareholder. In that situation the SDN has a 64 percent indirect interest in company in question and arguably requires blocking the company in question even though the SDN wouldn’t have control over that company.

Because of these ambiguities OFAC really has an obligation to clarify the interpretation of the 50 percent rule, particularly now that it is part of the agency’s printed regulations. Don’t hold your breath.