The Office of Foreign Assets Control (“OFAC”) recently announced a fine of $391,500 agreed to by John Bean Technologies, a maker of aircraft ground support equipment, to settle charges that it violated the U.S. economic sanctions against the Islamic Republic of Iran Shipping Lines (“IRISL”). The announcement, however, or at least its description of the underlying facts, is a little odd.

The violation is described like this:

[F]rom on or about April 8 to April 17, 2009, JBT appears to have violated E.O. 13382 and § 544.201(a) of the Regulations when goods that JBT sold to a Chinese company were shipped by Islamic Republic of Iran Shipping Lines (IRISL) aboard a blocked vessel from Spain to China, and trade documents related to the shipment were presented to a U.S. bank for payment pursuant to a letter of credit (“L/C”) in the amount of $2,897,936 …

Notice first that the violation alleged here is not a violation of the Iran sanctions caused by shipping goods with IRISL; rather the violation is dealing in property blocked under the WMD sanctions, namely, the letter of credit.  Later in the announcement, OFAC notes that JBT reimbursed its Spanish subsidiary for payments it made to its freight forwarder in connection with the shipment, meaning it is likely the sale was made by the foreign subsidiary. Given OFAC’s apparently accidental reference later to “CSA” instead of  the “Chinese Company,” it is also likely that the sale is the one announced here involving the shipment of airport ground equipment, including cargo loaders, to China Southern Airlines. This means that the shipment of these EAR99 goods by a foreign subsidiary, which occurred before the restrictions on foreign subsidiaries imposed by the Iran Threat Reduction and Syria Human Rights Act of 2012, would not have been  a violation of the Iran Sanctions. Hence, the violation occurred here when the U.S. company presented the blocked letter of credit, along with the required bill of lading from IRISL, to a U.S. bank.

Now look what happens next:

[F]rom on or about May 8 to May 19, 2009, JBT appears to have violated E.O. 13382 and § 544.201(a) of the Regulations when it presented trade documents related to the IRISL shipment to Banco Santander, a Spanish bank, in the amount of $2,897,936, in order to receive payment for the goods sold to CSA, after the U.S. bank declined to advise the L/C and the trade documents had been returned to JBT pursuant to an OFAC license.

Notice anything unusual here? The U.S. bank, of course, could not return the letter of credit, which was blocked property, to JBT without a license, and in 3-4 weeks it received a license from OFAC to do just that. OFAC almost never grants licenses to release blocked property and almost never issues any license that quickly. Obviously, the unnamed bank and OFAC were setting up JBT, which promptly scurried off to a Spanish bank with the returned letter of credit to get its money. Oops.

OFAC further noted that JBT did not voluntarily disclose the matter to the agency. In reply, JBT told Samuel Rubenfeld at the Wall Street Journal that it did disclose the violation as soon as it knew about it, but the bank had disclosed the violation first. This story does not quite hold up. JBT obviously knew of the violation when the U.S. bank returned the letter of credit and explained its reasons for doing so. It would appear, then, that JBT went to the Spanish bank to get its money with what it knew to be a blocked letter of credit before it disclosed the issue to OFAC.

Also, notice the set-up here. When the bank notified OFAC of its blocking of the letter of credit, OFAC then gave the bank a license to return the blocked property to JBT. The purpose of this was to make it clear, if JBT again tried to negotiate the letter of credit, that JBT knew of the violation and could not claim that it had not examined the shipping documents to see the reference in the bill of lading to IRISL. And the bank was willing to cooperate to get future brownie points from OFAC. Game. Set. Match.

Moral of the story: beware of Greeks bearing gifts and banks bearing blocked letters of credit.

The Office of Foreign Assets Control (“OFAC”) announced that it had fined the New York branch of the National Bank of Pakistan $28,800 in connection by seven wire transfers made by the Bank in an amount totaling $55,952.14 to an entity on OFAC’s Specially Designated Nationals and Blocked Persons List. The transfers went to Kyrgyz Trans Avia, an airline headquartered in Bishkek, Kyrgyzstan. The transfers were from or to an account denominated “LC Aircompany Kyrgyztransavia.” Although the SDN List contains references to both Kyrgyz Trans Avia and Kyrgyztransavia, the Bank’s screening software failed to identify the match.

OFAC noted that the base amount for the penalty under its guidelines was $64,000. That the error was a software error, meaning that no one at the Bank was aware of the violation, was considered a mitigating factor. But this mitigation still resulted a substantial fine equal to approximately half of the funds transferred and far more than any conceivable profits the bank made on the transfers.

The interesting issue here is whether the Bank has any recourse against the unnamed software provider. The answer is probably no, given that it is quite likely that the software license includes standard language disclaiming any liability for consequential damages arising from any failures or errors by the software. The take-away is this: select your screening software carefully, audit it frequently and do your best to get an indemnification from the provider.