Archive for October, 2015

Oct

15

Federal Court Gives OFAC Carte Blanche to Seize Funds

Posted by at 9:12 pm on October 15, 2015
Category: OFAC • SDN List

OgKKO Gas Station via OKKO's Facebook Page (https://www.facebook.com/okkoua/photos/pb.115758917345.-2207520000.1444957116./10153638688832346/?type=3&theater)[Fair Use]A federal court recently upheld, in OKKO Business v. Lew, a decision by the Office of Foreign Assets Control  (“OFAC”) to refuse to unblock funds sent by a Ukrainian company as an auction deposit for an auction conducted by a Belarusian company on OFAC’s List of Specially Designated Nationals and Blocked Persons.  The court’s opinion, a thinly-disguised love note addressed to OFAC, endorsed OFAC’s overly broad interpretation of what constitutes an “interest in property” held by an SDN and leaves open the question of what, if any, limits can ever be placed on OFAC’s authority.

At issue was an auction deposit sent by OKKO Business, a filling station operator in Ukraine.  OKKO sent a €200,000 bidder’s deposit in 2012 to UE Belarusian Oil Trading House, an entity that was designated as an SDN in 2008. The deposit was required to participate in an auction to be conducted by UEB. If the bidder lost the auction, the deposit would be returned to the bidder. If the bidder won the auction, the deposit would be returned to the bidder upon its execution of a sales contract with the seller. If the bidder won but refused to enter into such a contract the funds would be forwarded to the seller. There was no contingency under which UEB would ever be entitled to all or any part of the funds. Because the deposit transited a U.S. bank, the funds were blocked

OKKO sought unsuccesfully to unblock the funds, arguing that it did not know that UEB was sanctioned when it transferred the funds, that it had terminated the contract with UEB, and that it would not conduct further business with UEB. OFAC denied the request, stating simply that because UEB has an “interest” in the deposit, it was required to be blocked and that OFAC did not normally unblock funds in cases involving “commercial activity.”

Notwithstanding the difficulty in determining what “interest” UEB could be said in the deposit in this situation, the federal court ate up OFAC’s rationale with a spoon of extreme judicial deference stating that there was “no limit on the scope of interest” that could be blocked by OFAC. The court went on to state that it was completely irrelevant that UEB had no “legally enforceable ownership interest” in the auction deposit. Finally, the court bolstered it’s argument that UEB had an interest in the auction deposit because it was “not certain” that Okko would demand the funds back if it lost the auction. (Yeah, right, they are just going to walk away from €200,000; perhaps the district court judge had no idea of the value of the Euro and thought that €200,000 was worth something like $2.00.)

But if the SDN’s interest need not be a “legally enforceable” interest to be blockable, it’s hard to see where this stops. Consider this: an SDN hacks into an account, steals money and deposits it at a U.S. bank in its own name. The bank blocks its and, under the rationale of the court in this case, the victim of the hacking can’t get the funds back without OFAC’s permission because the hacker has an interest, even if not legally enforceable, in any account he controls. The only principle left in determining what is a blockable interest is that it is whatever OFAC says it is.

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Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Oct

13

We Read the Zimbabwe Herald So You Don’t Have To

Posted by at 10:13 pm on October 13, 2015
Category: OFAC • Zimbabwe Sanctions
U.S. Navy photo by Mass Communication Specialist 2nd Class Jesse B. Awalt/Released (DefenseImagery.mil, VIRIN 090202-N-0506A-310) [Public domain], via Wikimedia Commons http://commons.wikimedia.org/wiki/File%3ARobert_Mugabe%2C_12th_AU_Summit%2C_090202-N-0506A-310.jpg
ABOVE: Robert Mugabe

The Zimbabwe Herald, the alleged newspaper and confirmed propaganda organ of the sanctioned Mugabe regime, is all excited by the launch of the China International Payment System (CIPS). The system, which was launched earlier this month, seeks to use SWIFT-formatted messages to facilitate cross-border payments in renminbi. Although the renminbi is the fourth most utilized currency for cross-border payments, it still only accounts for less than 3 percent of all such payments, making it doubtful that CIP will, at least any time soon, cause the renminbi to challenge the dollar, the euro or the pound sterling as an international currency.

So why are Mugabe’s minions so excited about CIPS? The headline says it all: China Unveils International Payment System – Checkmates Piracy of U.S. Treasury.” The image of OFAC flying a Jolly Roger over Treasury while the agency roams the seas, swigging rum and saying “Yo Ho Ho!” is, of course, a lively piece of propaganda right up there with that old chestnut “running capitalist dogs.” The story refers to sanctions on Zimbabwe as “illegal” no less than four times (for its slower readers) but fails to offer any theory of why exactly they are “illegal,” other than, I suppose, because Mugabe says so. (Dictators, naturally, have wide berth to say what is and isn’t legal.)

Of course, sanctions against Mugabe and his cronies and crony companies do make it difficult to engage in international trade given that the dollar constitutes about 45 percent of all such payments. Any dollar payment involving a sanctioned individual or company in Zimbabwe will be blocked the moment it hits a U.S. bank as it almost inevitably will. It’s doubtful that a renminbi payment system will provide any immediate or significant relief to Mugabe and company.

But I suppose everyone can dream, can’t they?  (I’m a Cubs fan, so I should know.)

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Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Oct

7

New Sanctions Against the Norks Introduced in Congress

Posted by at 11:21 pm on October 7, 2015
Category: North Korea Sanctions

Kim Jong Un Official Photo - Fair Use

Yesterday Senator Cory Gardner introduced S.2144, entitled the “North Korea Sanctions Enforcement Act.” (The official text of the proposed bill is not yet available at congress.gov but a discussion draft can be found here.)

Not surprisingly, the new bill seems mostly to be a feel-good exercise or a little Congressional chest-beating after not being able to sink the Iran deal.  Whether or not this bill has a chance of passage is difficult to predict.

The bill would do the following:

  • designate North Korea as a jurisdiction of primary money laundering concern;
  • instruct the President to come up with a plan to make U.N. members enforce U.N. sanctions against Korea;
  • require export licenses under section 6(j) of the (expired) Export Administration ACt for goods that contribute to North Korea’s military or terrorism capabilities;
  • enact an arms embargo against North Korea;
  • withhold foreign assistance from countries that supply lethal military equipment to North Korea;
  • prohibit federal procurement from persons engaging in certain activities with North Korea, such as exporting luxury goods;
  • increase customs inspections of goods transported through foreign ports that do not engage in adequate inspection activities to prevent exports of certain goods to North Korea; and
  • require the State Department to issue enhanced travel warnings regarding travel to North Korea.

Some of these provisions certainly seem unnecessary. Licenses are already required for all exports to North Korea other than food and medicine designated EAR99, and North Korea is already designated under section 6(j) as a country supporting international terrorism. Further, there is already an arms embargo in place against North Korea. I suppose these provisions might limit the ability of the White House to lift these sanctions but, frankly, it seems unlikely that this White House, or any White House in the foreseeable future is likely to start selling arms to the Norks or drop licensing requirements for other exports to them.

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Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Oct

6

That Was Then; This is Now: DDTC’s Shifting Definition of “Public Domain”

Posted by at 10:49 pm on October 6, 2015
Category: DDTC

Gagged by Clif Burns via Flickr https://flic.kr/p/povfuw

As discussed here in a previous post, the proposed definition of “public domain” by the Directorate of Defense Trade Controls (“DDTC”) has a Catch-22. Information that is in the “public domain,” i.e. information that has been published on the Internet or made available in a public library, is exempted from the definition of technical data in the ITAR and can be freely exported without license. Then there is the Catch-22, which is more like a Catch-22,000,000: except when the information has been released without the prior approval of DDTC or three other enumerated government agencies.

The idea that technical data (like, say, a picture of a B-52 bomber or a video explaining the bullet manufacturing process) is not public domain until the government explicitly authorizes its release has been, needless to say, a disturbing notion to many. DDTC tried to tamp down the outrage by saying this in connection with the proposed rule:

The requirements of paragraph (b) are not new. Rather, they are a more explicit statement of the ITAR’s requirement that one must seek and receive a license or other authorization from the Department or other cognizant U.S. government authority to release ITAR controlled ‘‘technical data,’’ as defined in § 120.10.

So they say now, but DDTC had something very different to say about the definition of “public domain” in United States v. Bernstein. That case dates back to 1996 when encryption items were on the USML. An encryption developer brought suit against DDTC (then ODTC) and the State Department claiming that export controls on encryption products violated his First Amendment rights by foreclosing him from discussing in public the technical aspects of his encryption software.

Nonsense, DDTC replied. To begin with, there were many exceptions, like the public domain exception, which permitted plaintiff Bernstein and others like him to chat away to their heart’s content. Problem is Bernstein called up Charles Ray at DDTC and posed a hypothetical of putting materials containing technical data in a public library without government approval. Ray told him that could be an export violation. So Bernstein argued to the court that the public domain exception was not a significant exception because technical data could never be in the public domain unless the Government approved the release

Here’s where it gets really good. DDTC, in a pleading filed with the court, called that an “unreasonable” interpretation of the public domain exception:

Plaintiff’s attack on the “public domain” exemption is also meritless. That provision contains several specific exceptions as to what is controlled as technical that any ordinary person can understand — information in bookstores, newsstands, or disclosed at conferences. Plaintiff sees a “Catch-22” “lurking” in the provision that, unless something is already published, it is subject to export controls. He would construe the definition to mean, in other words, that nothing can be published without the government’s approval. Not only is this wrong as a factual matter, […] it is by far the most un-reasonable interpretation of the provision, one that people of ordinary intelligence are least likely to assume is the case.

Oops.

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Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)
Oct

2

Cuba Sanctions Confuse Miami Television Station

Posted by at 3:47 pm on October 2, 2015
Category: Cuba Sanctions • OFAC

Baracoa Main Street by Jorge E. San Roman http://commons.wikimedia.org/wiki/File:Baracoa_5705.JPG (CC BY-SA 2.5)The NBC affiliate in Miami on September 29 issued an “investigative report” with the title “Millions of Dollars Sent to Cubans Abroad Being Blocked by U.S. Government.”  It starts as follows:

As the U.S. continues to ease sanctions against Cuba, more money is being allowed to flow from the states to the island. While the changes have benefited those living in Cuba, the NBC6 Investigators found that millions of dollars being sent to Cubans abroad are being blocked by the U.S. government.

The report says that it heard that money being sent to Cuban nationals outside of Florida was disappearing and that “after months of investigation,” it finally determined what should have been obvious. The money had been blocked because of OFAC rules. This led to the money quote in the story from one of the victims who sent money and had it blocked:

“That’s people’s money and they can’t keep it just because,” Cruz said.

Oh, yes they can. (Of course, I sympathize with Mr. Cruz’s point and certainly believe that OFAC shouldn’t keep money “just because,” but that’s what they do.)

So what’s going on here? The “investigative report” doesn’t really help much, probably because the reporters probably have no clue as to how OFAC’s regulations work here. The starting point in figuring this out, as regular readers know, is that section 515.201 prohibits transfers of funds to Cuban nationals, wherever located, whether they are in Cuba or Mexico. Blocking transfers to Cuban’s outside Cuba is pretty much an example of blocking “just because,” if the purpose of the sanctions is to deprive the Castro regime of money.

Of course, there are two exceptions that come into play here that may permit transfers to funds to Cubans wherever located. The first is the provision for personal remittances in section 515.570. There is no dollar cap on those now, but we can speculate that prior wires to Cuban nationals would have been blocked because they exceeded the limits (in terms of amounts and permissible transferees) that were in place prior to these restrictions being (mostly) lifted.

The second, of course, is the general license (beloved to Major League Baseball) in section 515.505. That general license unblocks Cuban nationals that have taken up permanent residence outside Cuba. You have to suspect this would have applied to many, if not most, of the transfers at issue. Since permanent residence can be documented under section 515.505 by a sworn statement that the individual does not intend to return to Cuba, it shouldn’t be that hard to transfer money, particularly now, to Cubans outside Cuba.

So, when the “investigative report” left the misleading impression that money couldn’t be sent to Cubans outside Cuba, that was simply because the reporters had not figured out that the dollar amount and permissible transferee restrictions have been, largely, lifted and that no restrictions are imposed on Cubans that have decided to move permanently to countries other than Cuba.  The moral of the story is this: don’t believe everything you see on TV news.

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Copyright © 2015 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)

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