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June 15, 2017

U.S. Appeals Court Sets Aside $4.07 Million OFAC Penalty

By: Ashley R. Moore and Mike Wilson

On May 26, 2017, the U.S. Court of Appeals for the D.C. Circuit (“the Court”) set aside the $4.073 million penalty imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) on Epsilon Electronics Inc. – a wholesaler of car accessories – for violations of U.S. sanctions on Iran.  Below we provide a high-level overview of important aspects of the case and discuss certain implications for companies.

Overview
In July 2014, OFAC levied a $4.073 million penalty on Epsilon for 39 shipments it sent to Asra International Corporation, a Dubai-based distributor, between 2008 and 2012.  Specifically, OFAC determined that the shipments violated the Iranian Transactions and Sanctions Regulations (ITSR) because they were sent by Epsilon with knowledge or reason to know that the goods were intended specifically for reexportation to Iran based in part on information readily available on Asra’s English-language website that indicated all Asra sales were made exclusively in Iran.

While the Court’s review of the case was “highly deferential” to the agency and found that the evidence supported OFAC’s liability determinations for the first 34 shipments to Asra, the Court further concluded that OFAC’s determinations for the last five shipments were “arbitrary and capricious” because OFAC failed to explain why it disregarded evidence indicating that the items contained in those last five shipments were intended for resale in Dubai rather than Iran.  During the period in which the last five shipments were sent (between February and May 2012), emails between Epsilon’s sales team and Shahriar Hashemi, an Asra manager, suggested that the shipments were actually intended for a retail store that Hashemi planned to open (under the “Asra” umbrella) in Dubai.  The Court points to the fact that “the emails record Hashemi and Epsilon negotiating several orders, and show Hashemi mentioning plans for his showroom, complaining about another Dubai shop selling Epsilon products, worrying about whether Epsilon products could endure Dubai’s heat, and anticipating sales to African and Central Asian customers,” among other things. 

The Court stated that OFAC did not adequately explain why it discounted this evidence when finding that Epsilon knew or had reason to know that these last five shipments were intended specifically for reexport to Iran.  The Court was clear in that it did not hold “that OFAC could not have imposed liability for the last five shipments;” instead, the Court merely found that the absence of express consideration of this countervailing evidence meant that OFAC failed to exercise its judgment in a reasoned way.  The Court (quoting a prior Supreme Court case) said that OFAC is required to “articulate a satisfactory explanation for its action including a rational connection between the facts found and choice made.”

Even though OFAC upheld the liability determinations for the first 34 shipments, the Court was forced to set aside the entire penalty amount – rather than just the amount assessed for the final five shipments – because OFAC had determined that the last five shipments were “egregious” and applied that as an aggravating factor when calculating the penalty amounts for all 39 shipments.  OFAC found the last five shipments to be “egregious” because they were made after OFAC had sent Epsilon a cautionary letter as part of a parallel investigation related to alleged violations of the Iran sanctions program with regard to a previous transaction with Asra (which was subsequently closed).  Because OFAC set the base penalty amounts for all 39 transactions at the statutory maximum, the Court found that OFAC must have taken this aggravating factor into account for all 39 transactions, rather than just the final five.  The Court thus set aside the entire $4.073 million civil penalty, and remanded the case to the district court, with instructions to remand the matter to OFAC for further consideration of the five alleged 2012 violations and the total monetary penalty imposed in a manner consistent with the opinion.

The Court rejected, however, Epsilon’s separate argument that liability for violations of section 560.204 of the ITSR must be predicated on evidence that that the goods sent to Asra actually ended up in Iran.  Instead, the Court held that section 560.204 only requires an exporter to know or have reason to know that, at the time of export, its goods are intended specifically for reexportation to Iran, regardless of whether the goods actually end up reaching Iran. 

Implications for Companies
This case can be considered a partial win for the agency and a partial win for exporters.  The case shows, on the one hand, that while OFAC has broad enforcement authority, the agency must consider all evidence available in the record and adequately explain why it made liability determinations in light of any evidence that contradicts OFAC’s ultimate determination.  On the other hand, the Court affirmed OFAC’s broad authority to penalize companies who know or who have reason to know that the goods they ship are intended for reexportation to Iran, regardless of whether OFAC can prove that the items actually did get reexported to Iran. 

U.S. companies who do business overseas must ensure that they have adequate trade compliance programs in place, including a process for reviewing all export or reexport transactions for their potential for unlawful diversion to a prohibited country, end-user, or end-use.  They should also have a process for screening customers and vendors not only against the various denied parties lists, but also for the purpose of determining any “red flags” concerning business dealings in countries subject to U.S. sanctions.  This is particularly true given that the majority of the evidence that OFAC relied up to find liability constituted statements made on the foreign customer’s website regarding that customer’s contact with Iran.  U.S. companies must have a plan in place for fully vetting its foreign customers, primarily where, as here, that customer is a distributor or reseller.

While not the topic of choice for most, we’ve found that when it comes to compliance, it is far better and safer for companies to adopt the adage of the world-renown athletics footwear company: “Just Do It.”