This week the U.S. Court of Appeals for the Ninth Circuit released its opinion in Sacks v. OFAC, upholding the right of OFAC to adopt rules prohibiting travel to Iraq. Additionally, the court dismissed, in unusually harsh language, OFAC’s argument that it could use collection agencies to collect penalties imposed by OFAC for violation of the travel rules.

Bertram Sacks, the plaintiff in the case, travelled to Iraq nine times between 1990 and 2003 to provide medicine and toys to Iraqi civilians and children. Following a 1997 trip, OFAC fined Sacks $10,000. When Sacks did not pay the penalty, OFAC assigned the debt to a collection agency. The collection agency then sent a letter to Sacks demanding the payment of $10,000 plus $3,767.08 in interest and late fees. Sacks challenged the right of OFAC to use a collection agency to collect the penalty. Both the district court and the appeals court agreed with Sacks.

In agreeing with Sacks, the Ninth Circuit quoted OFAC’s own regulations which provided, in 31 C.F.R. §575.705 that

In the event that the person named does not pay the penalty imposed . . . the matter shall be referred to the United States Department of Justice for appropriate action to recover the penalty in a civil suit in a Federal district court.

The Court rather sensibly informed OFAC that “shall” means “shall” not “might” or “may” or “can.”

OFAC’s efforts to slither around the word “shall” were not convincing to the court. First, OFAC tried to rely on its amendment of the rule in 2005 to add language permitting the use of collection agencies. The opinion dismissed this argument, noting that the amendment had been adopted in response to the earlier decision of the district court in this case holding that collection agencies weren’t authorized by the rule. The court termed efforts to cite the amended rule as nothing more than a “post hoc rationalization.”

But the harshest language from the Court was reserved for a bizarre argument from OFAC which it called the “Rule of the Silent Disjunctive.” Under this argument, according to OFAC, all remedies are permitted unless explicitly forbidden by a rule. To which the court retorted:

In other words, a regulation or statute mandating that an agency “shall” do x in fact means that it “shall” do x or y, unless the statute or regulation explicitly states that it “shall not” do y. This proposed “rule of the silent disjunctive” is patently absurd.

To drive the point home, the Court, with more than a hint of sarcasm, gives these examples:

By OFAC’s rationale, the Endangered Species Act’s requirement that the final determination of whether a species is threatened “shall be published in the Federal Register” could also be satisfied by publishing that information in USA Today. Though the Mandatory Victims Restitution Act requires that the sentencing court shall order the defendant to pay restitution, applying OFAC’s proposed interpretive rule, the sentencing court could also comply with the statute by ordering the defendant to make a public apology.

Ouch.

OFAC announced last week that it had reached a settlement with Koch Foods, a major chicken processing firm, arising out of shipments by Koch to Iraq in August 2002. The OFAC announcement follows OFAC’s general policy of providing minimal guidance to the export community and, thus, has few details of Koch’s violation other than this:

OFAC alleged that Koch shipped under contract with a company located in a third country four shipments (consisting of 20 containers) of frozen poultry that had a final destination of Iraq. Koch has reported to OFAC corrective measures and improvements to its OFAC compliance program. Koch did not voluntarily disclose this matter to OFAC.

Since Koch’s contract was with a third-party outside Iraq, it is not clear from this barebones factual statement whether Koch knew, or even should have known, that the chicken was destined for Iraq. If, for example, this was a case where Koch didn’t know, but should have known, where the chicken was being shipped, then OFAC could educate exporters and prevent future violations by detailing the factors that should have alerted Koch that the poultry was headed for the markets of Saddam Hussein’s Baghdad.

On Tuesday Congress finally passed the Darfur Peace and Accountability Act of 2006, which broadens somewhat the existing sanctions scheme in place against Sudan.

Under the existing scheme, U.S. companies and individuals may not engage in transactions with senior officials of the government of Sudan that have been named as Specially Designated Nationals and all the assets of such officials in the United States have been blocked. Under the new legislation, beginning 30 days after its enactment, the President may name as SDNs (in addition to senior government officials of Sudan) any individual who the President determines is responsible for acts of genocide, war crimes, or crimes against humanity in Sudan. As with designated senior government officials, no U.S. individual or company may engage in any transactions with the named individuals, and their assets in the United States will be blocked.

Additionally, the new legislation provides that these newly named individuals will be denied visas to enter the United States. Finally, the new legislation gives the President the power to deny access to U.S. ports to oil tankers or cargo ships involved in the Sudanese oil trade or involved in shipment of arms for the use of the Sudanese military.

These new sanctions are not likely to have much effect on the on-going crisis in Darfur. The provision denying visas to people guilty of genocide is, frankly, somewhat risible. It is hard to imagine that someone intent on committing crimes against humanity will reconsider that course of action if he realizes that it might prevent him from taking his family to Disneyland or Sea World.

A prior version of the legislation had a provision that would have permitted state pension funds to divest from companies doing business in Sudan. That provision was eliminated at the request of the National Foreign Trade Council that is involved in litigation with the state of Illinois over its divestment provision.

In its relentless quest to keep America safe from terrorism, OFAC recently fined a group of Baptists missionaries $34,000 who were on licensed travel to Cuba and who stayed in a hotel near the beach and visited Old Town Havana. Under OFAC rules, American missionaries must devote every single moment in Cuba to their mission and are subject to fine if they engage in any activity that might be considered a tourist activity. I am certain that we will all sleep better tonight knowing that OFAC has a watchful eye on Baptist missionaries in Cuba.

OFAC has also been doing its share to make sure that traveling Cuban officials stay at Le Meridien instead of the Intercontinental. The Chicago Tribune reported yesterday that a meeting between Cuban officials and U.S. oil executives in Mexico City in February was disrupted after OFAC forced the American-owned hotel (which may or may not have been the Intercontinental) to evict the Cuban officials. The meeting between the Cubans and the oil interests had been prompted by the U.S. Geological Survey’s recent estimate that Cuba’s northern offshore basin contains 4.6 billion barrels of oil.

In today’s Federal Register, OFAC announced new restrictions it is imposing on Iran’s Bank Saderat. The bank, which is state-owned, is one of the largest banks in Iran. Under the new rules, effective retroactively to September 8, 2006, exceptions in the Iranian Transaction Regulations (“ITR”) which permit certain Iran-related transactions will no longer be applicable to Bank Saderat. Iran responded by calling the U.S. actions “childish.”

Under the new rules, Bank Saderat will no longer be eligible for the exception in Section 560.516(a)(1) of the ITR which permits “U-Turn” transactions. These are transactions which involve transfers between a U.S. branch of a foreign bank and an overseas branch of a foreign bank. For example, Bank Melli Iran can send funds from its account at a German bank through the German bank’s correspondent in New York to an Italian bank. This is called a “U-turn” transaction because the instructions from Bank Melli do a “U-turn” in New York and route the funds immediately back outside the United States.

In addition to such “U-turn” transactions, the new rules eliminate Bank Saderat’s eligibility for the exceptions in sections 560.516(a)(2)-(4). These exceptions permit U.S. financial institutions to handle certain other transfers, including transfers relating to licensed transactions, family remittances and humanitarian donations, between U.S. financial institution and foreign banks (including Iranian banks). These are permissible as long as no U.S.-based accounts of Iranian residents or the Government of Iran are credited or debited.

Effective September 8, 2006 (but with certain exceptions for transactions already in process by that date), none of the above exceptions will any longer apply to Bank Saderat. OFAC premised this action on its finding that Bank Saderat had been a “significant facilitator” of the financial activities of Hizballah and had been a conduit between the Government of Tehran and various terrorist organizations including Hizballah and Hamas. Other Iranian financial institutions are not covered by the amendment, so that licensed transactions, family remittances and humanitarian donations will not be affected; they will simply have to be handled by other Iranian banks.