Archive for March, 2018

Mar

27

Indictment of Iranian over Housing Project in Venezuela Raises Questions

Posted by at 9:49 am on March 27, 2018
Category: Criminal Penalties • Iran Sanctions • OFAC
Ali Sadr Hasheminejad via http://www.prweb.com/releases/2017/07/prweb14531762.htm [Fair Use]
ABOVE: Ali Sadr Hasheminejad

Last week, Iranian national Ali Sadr Hasheminejad was arrested at Dulles Airport outside Washington DC in connection with a Venezuelan housing construction project undertaken by his family’s business in Iran. According to the indictment, the governments of Venezuela and Iran in 2005 agreed that Iran would cooperate in the building of new housing in Venezuela. Under the agreement, the parties would sign “commercial contracts” to complete the project. Thereafter, the Stratus Group, a private Iranian conglomerate, assumed the construction project.

Stratus incorporated Iranian International Housing Corporation (“IIHC”), an Iranian company which was responsible for carrying out and completing the housing project in Venezuela. IIHC then entered into an agreement with a Venezuelan company to construct the housing for $475,000,000 dollars. Mr. Hasheminejad, the defendant, was a member of the family that controlled the Stratus Group and its subsidiary IIHC.  He was responsible for overseeing the projects finances. Pursuant to Mr. Hasheminejad’s direction, the Venezuelan company transferred funds to IIHC to pay for the project. These funds, because they were to be in US Dollars, transited various unnamed banks in New York. As a result, the indictment alleges that Mr. Hasheminejad caused these banks to export financial services from the United States to Iran in violation of the Iran Transactions and Sanctions Regulations.

For reasons that are not entirely clear, the indictment does not provide any information as to where those wire funds ended up. As IIHC was engaged in a construction project in Venezuela it seems likely, indeed almost certain, that it had accounts in Venezuela and the funds in question were wired to that Venezuelan account so that materials and labor costs for the housing project could be met. There is no reason to believe that the Venezuelan company wired funds to Iran for the Venezuelan project and the indictment never even alleges that this happened.

The destination of the funds is a crucial piece of information. The Iranian Transactions and Sanctions Regulations (“ITSR”) prohibit exporting financial services (e.g. transferring funds) from the United States “to Iran or the Government of Iran.” The wire transactions at issue allegedly caused the U.S. banks to provide financial services, according to the indictment, “to Iran.” But, as those familiar with the ITSR know, the transfer to funds to an Iranian company or individual outside Iran is not a transfer of those funds “to Iran” and is not a violation of those rules. If the funds at issue went ultimately, as it seems they must have, to an IIHC account in Venezuela there would be no violation. Yet the indictment, in tracing the funds transfers, stops at bank accounts in the British Virgin Islands with the exception of some funds that went to the United States to buy property in California.

Perhaps the prosecution does have evidence that some of this money wound up in Iran but, if it does, it oddly chose to leave it out and instead wound up presenting an indictment that does not adequately allege a violation of law.

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Mar

20

OFAC Doesn’t Understand How Digital Currencies Work

Posted by at 1:50 pm on March 20, 2018
Category: Cryptocurrencies • OFAC • Venezuela
Nicolas Maduro via https://commons.wikimedia.org/wiki/File:Nicolas_Maduro_February_2017.png [Fair Use]
ABOVE: Nicolas Maduro

Yesterday the White House issued an executive order prohibiting U.S. persons from transactions in the Petro, the new Venezuelan digital currency. As you might recall, OFAC initially suggested that dealings in the Petro would violate restrictions on providing debt financing to the Venezuelan government, an idea that I said was a foolish misunderstanding of the difference between debt and currency.

The new executive order does what it should have done to begin with: restrict the digital currency directly. Of course, as the only current and guaranteed use for the Petro is to pay Venezuelan taxes and government fees, it is doubtful that the Petro will be of interest to U.S. persons and, as a result, it is hard to see that the new executive order will have much impact, other than, I suppose, preventing U.S. persons  or persons in the U.S. from operating nodes in the P2P network for the Petro.

In addition to banning U.S. persons, the new order gave OFAC the opportunity to wade into digital currencies again and shows fundamental misconceptions about how digital currencies work. Astonishingly, the new FAQs on digital currencies issued with the executive order propose to add digital currency addresses as identifiers on the SDN List:

To strengthen our efforts to combat the illicit use of digital currency transactions under our existing authorities, OFAC may include as identifiers on the SDN List specific digital currency addresses associated with blocked persons.

Oh. My. Goodness. They really said that. Next OFAC will be adding an SDN’s favorite unicorn name as identifiers on the SDN List.

Here’s what’s wrong with this idea of using  digital currency addresses as identifiers on the SDN List: they are only used once (unless you’re particularly clueless). For each payment request, the requester generates a unique public and private key pair. The digital address is a hash of that key pair. The payment request is signed with the private key and sent with the public key, allowing the authentication of the request. When the individual wants to make another payment request, a new key pair and address is generated.

So, if OFAC puts an address on the list, hoping to prevent U.S. persons from sending digital currency to that address, it is a waste of time because it is highly unlikely that address will ever be used again for a payment request (particularly once the address is on the SDN List). Nor will it prevent U.S. persons from receiving money from that address, because  the digital currency can be transferred to a newly-generated address prior to sending the currency. (And this problem is not solved by looking at the last-sent-to address in a blockchain explorer, because that will not establish that the new address is controlled by the same, presumably blocked person. If sent by the blocked person to an address of an unblocked person, the transferred digital currency is no longer blocked because the blocked person no longer has any interest in it.)

Of course, in the unlikely event that the SDN is not savvy enough to use a different address for all of his/her digital currency transactions (or to use wallet software preventing address reuse), then he will get caught by listing his reused address as an identifier. But, I’m guessing the only people re-using the same address for all their digital currency transactions are working at OFAC.

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Mar

13

White House Sides with Qualcomm and Tries to Block Broadcom Hostile Takeover

Posted by at 9:26 pm on March 13, 2018
Category: CFIUS

Broadcom HQ by Coolcaesar [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via https://commons.wikimedia.org/wiki/File:Broadcomheadquarters.jpg [cropped]Late yesterday, the White House issued an order forbidding Broadcom from continuing with its efforts to takeover Qualcomm. The surprise move by the White House seems to have been designed to prevent Broadcom from playing its, er, trump card by reincorporating in the United States. This would block the power of the Committee on Foreign Investment in the United States (“CFIUS”) from reviewing the transaction and prevent the President from prohibiting or setting the transaction aside. Under the Defense Production Act, CFIUS and the President may only rely on national security considerations to block a “covered transaction,” which is defined as “any merger, acquisition, or takeover … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States.” If Broadcom, a Singapore corporation traded on NASDAQ, reincorporated in the United States, as it announced that it intended to do after the tax bill was passed, it would no longer be a foreign person as defined in section 800.216 of the CFIUS regulations. At that point, both the President and CFIUS would have no power to block the takeover.

The timeline here is informative. On March 4, CFIUS issued an order to Qualcomm to delay its annual shareholders meeting from March 6, 2018, to April 5 to give it time to investigate the transaction. Then on March 12, Broadcom announced that it would complete its re-domiciliation in the United States by April 3, giving it plenty of time to continue its efforts to acquire Qualcomm at the April 6 shareholders meeting, except not as a foreign person but as a U.S. person immune from CFIUS review. A few hours later that day, the White House released its order blocking the Broadcom bid.

The most interesting part of that order is Section 2(g), which states:

Any transaction or other device entered into or employed for the purpose of, or with the effect of, avoiding or circumventing this order is prohibited.

Both the timing and language of this section clearly suggest that it is intended to prohibit Broadcom from re-domiciling in the United States for the purpose of continuing its hostile takeover campaign. In addition, section 2(d) orders Qualcomm to hold its annual meeting 10 days after shareholder notice is given, which notice is to be given as soon as possible. Ten days is the shortest notice period permissible under section 222 of the Delaware General Corporation Law. This, of course, is clearly designed to have the meeting before the date, April 3, by which Broadcom announced it would no longer be a foreign person.

Can the White House get away with this? Although section 721(e) says that the actions by the President under section 721(d) are not reviewable by any court, the actions here still have to be taken under section 721(d). The actions permitted by section 721(d) are those that “the President considers appropriate to suspend or prohibit any covered transaction.” But here the President is clearly trying to prohibit a transaction that is not covered. If Broadcom completes its transition to a U.S. person before Qualcomm can hold its annual shareholders meeting, nothing — and that includes section 2(g) of the order — can stop Broadcom from pursuing its takeover bid.

As they say praise the Lord, pay the lawyers, and pass the popcorn.

Photo Credit: Broadcom HQ by Coolcaesar [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via https://commons.wikimedia.org/wiki/File:Broadcomheadquarters.jpg [cropped]. Copyright 2007 Coolcaesar

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Mar

8

The Norky Horror Picture Show: Let’s Do The UNPA Warp Again

Posted by at 4:13 pm on March 8, 2018
Category: North Korea Sanctions • OFAC

The House of Leaves - Burning 4 by Learning Lark [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/7iW4zL [cropped]On March 5, the Office of Foreign Assets Control (“OFAC”) released a completely revised and revamped version of the North Korea Sanctions Regulations. The intent of the revision was to catch up with Executive Orders 13687, 13722, and 13810, as well as with the North Korea Sanctions and Policy Enhancement Act of 2016 and Title III of the Countering America’s Adversaries Through Sanctions Act, all of which came into force since the regulations were originally promulgated in 2010.

Not surprisingly, OFAC continues its war on the Congressionally mandated travel and information exemptions in 50 U.S.C. § 1702(b)(3) and (4), apparently worried that someone might give a copy of the Declaration of Independence or The Federalist Papers to a Nork SDN. Section 510.213 of the new regulations contains the normal travel and informational materials exemptions but section 510.213(a) says this:

(a) United Nations Participation Act. The exemptions described in this section do not apply to transactions involving property or interests in property of persons whose property and interests in property are blocked pursuant to the authority of the United Nations Participation Act, as amended (22 U.S.C. 287c(b)) (UNPA).

And the note to that section says this:

Persons whose property and interests in property are blocked pursuant to the authority of the UNPA include those listed on both OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List) and the Consolidated United Nations Security Council Sanctions List (see https://www.un.org) as well as persons listed on the SDN List for being owned or controlled by, or acting for or on behalf of, such persons.

Of course, to add extra unnecessary confusion, the introductory text to the new rules in the Federal Register says this:

The exemptions described in this section do not apply to any transactions involving property or interests in property of certain persons whose property and interests in property are blocked pursuant to the provisions of E.O. 13551, E.O. 13722, or E.O. 13810 and that are blocked pursuant to the authority of the UNPA in addition to IEEPA.

This pretty much renders the Note to section 510.213 useless. The list of persons blocked under the UNPA includes everyone designated under those three orders and given program tag listing of DPRK2, DPRK3 and DPRK4. The problem is that is a much bigger list than those on the Consolidated United Nations Security Council Sanctions List. There are 133 North Korean individuals and entities on the UN List, whereas there are 314 North Korean individuals and entities designated on the SDN List under DPRK2, DPRK3 and DPRK4.

The UNPA gives the President the power “whenever the United States is called upon by the Security Council to apply measures which said Council has decided are to be employed to give effect to its decisions under said Charter” to issue executive orders “to the extent necessary to apply such measures.” Without question, when a Security Council Resolution requires member states to block particular entities and individual, the President has the power to block them under UNPA.  So OFAC can, if it wants, forbid U.S. persons from giving copies of The Interview, The Bible or John Stuart Mill’s On Liberty to any party on the UN List, no matter how silly and pointless such a restriction would be.

But the Security Council Resolutions at issue here under which the Executive Orders were issued do not say block these particular individuals and whoever the heck else you want to block while you’re at it. So individuals blocked by OFAC that aren’t also blocked under UN Security Council Resolutions are not lawfully blocked under the UNPA and the full extent of the travel and informational materials exemptions in section 1702(b) of IEEPA have to be applied by OFAC to those individuals not also on the UN Sanctions List. Don’t bet on that ever happening.

Photo Credit: The House of Leaves – Burning 4 by Learning Lark [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Flickr https://flic.kr/p/7iW4zL [cropped]. Copyright 2009 Learning Lark

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Mar

2

Refueling Zarif: A Sad Saga of Secondary Sanctions Averted by German Military

Posted by at 4:35 pm on March 2, 2018
Category: Iran Sanctions • OFAC

By Dreamliner 2012 (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons https://commons.wikimedia.org/wiki/File%3AA320SYZ.JPG [cropped and processed]A few weeks ago, the attendance of Iranian Foreign Minister Javad Zarif at the Munich Security Conference led to a little brouhaha when German fuel companies, worried about U.S. sanctions on Iran, indicated that they would not be able to refuel Zarif’s airplane for his trip home, citing their fear of U.S. sanctions and presumably not wishing to be thrown into a U.S. jail the next time they took their family on a trip to Disneyland. Zarif was able to attend the conference and return home only because the German military stepped in and refueled his airplane.

Although that might seem a bit of an overreaction by the German fuel companies, it probably was not. For starters, based on reports (here and here) from plane spotters, Zarif has been ferried around on an Airbus operated by Meraj Airlines, an Iranian charter company that the U.S. thinks has carried around not just tourists and Iranian officials but also arms and reinforcements for Syria. As a result, Meraj is on the SDN list and sanctioned under the Global Terrorism Sanctions Regulations. This meant that Meraj remained on the SDN List even after the implementation of the JCPOA. The problem then, for the German fuel companies, is that section 2 of Executive Order 13645, which allows OFAC to designate anyone who supplies “goods or services to or in support of any Iranian person included on the SDN list,” would apply to any refueling of a Meraj aircraft.

But wait, what about the travel exemption? You know, OFAC’s least favorite exemption, right up there next to the information exemption. Wouldn’t refueling the plane be, to quote 50 U.S.C. 1702(b)(4), a transaction “ordinarily incident to travel to or from any country”? Of course it is, but OFAC, in FAQ J.7, says this:

U.S. persons are allowed to engage in transactions that are ordinarily incident to travel to or from Iran, including flying on Iranian airlines, with the exception of airlines, such as Mahan Air, that are designated under the Global Terrorism Sanctions Regulations, 31
C.F.R. part 594 (GTSR).

Sigh. We’ve been here before when OFAC recently said you could go to jail for giving a Bible to a member of the Islamic Revolutionary Guard Corps. The argument that OFAC tried to make in that case was that since the sanctions are authorized under a statute other than the International Emergency Economic Powers Act, it was free to ignore the travel and information exemptions. The problem with that argument in the IRGC case was that the other statute cited by OFAC directed it to impose sanctions under IEEPA.

In this case, the Executive Order in question relies on Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) and the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”). But neither of those acts authorizes  permitting designation of anyone providing material support to any Iranian on the SDN List. Section 112 of CISADA allows imposition of travel restrictions on affiliates of the IRGC, but that does not authorize such restrictions on every other Iranian on the SDN list that is unaffiliated with the Islamic Revolutionary Guard Corps (“IRGC”).  For Iranian SDNs that are not IRGC affiliates, section 2 of Executive Order 13645, is authorized by IEEPA alone; and the travel exemption, therefore, remains in force for those cases.

The designation of Meraj did not rely on any affiliation with the IRGC. So, the travel exemption should apply to the foreign refueling of Meraj aircraft. That being said, one can certainly understand why the German companies would simply rather refuse to service the plane rather than relying on an argument that the travel exemption applies.  The question is now whether OFAC will go after the German military and designate it under Executive Order 13645.   I have to admit that these days nothing, including OFAC saber rattling over the German military letting Zarif go home, would surprise me.

Photo Credit: By Dreamliner 2012 (Own work) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons https://commons.wikimedia.org/wiki/File%3AA320SYZ.JPG [cropped and processed]. Copyright 2014 Dreamliner 2012

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Copyright © 2018 Clif Burns. All Rights Reserved.
(No republication, syndication or use permitted without my consent.)