Recent court decision provides insight into OFAC S enforcement

On March 7, the District Court for District of Columbia issued a memorandum opinion granting the government’s motion for summary judgment in Epsilon Electronics, Inc. v. U.S. Department of the Treasury, Office of Foreign Assets Control, et al., Civil Case No. 14-2220 (RBW), __ F.Supp.3d __ (DDC 2016). The case arises from a $4,073,000 civil penalty that the Office of Foreign Assets Control (OFAC) assessed against Epsilon Electronics (plaintiff) in July 2014 for violating the Iran embargo. According to the penalty, plaintiff violated the Iran Transactions and Sanctions Regulations by shipping automotive audio and video equipment that it knew or had reason to know would be re-exported to Iran. The opinion dismissing the penalty complaint serves as a cautionary tale about how OFAC can assess significant civil penalties using a few administrative subpoenas and circumstantial evidence provided by financial institutions and simple Internet research.

Seven-year OFAC investigation

In 2008, OFAC received a bill of lading indicating that Plaintiff had sent a shipment to Tehran, Iran. OFAC subsequently issued an administrative subpoena to Plaintiff to investigate this potential embargo violation. Plaintiff responded to the subpoena by stating that it had no knowledge of the shipment in question.

In December 2011, OFAC issued an administrative subpoena to Union Bank. The bank provided information indicating that the plaintiff had received $1.1 million in payments from Asra International Corporation that “may have been for products destined for Iran.” OFAC responded to this information by issuing a second administrative subpoena to the plaintiff. Unlike the first subpoena, which sought documents related to a single transaction, the second subpoena requested documents related to transactions with Asra International. The plaintiff provided documents related to 41 transactions valued at approximately $3.4 million that occurred between August 2008 and May 2012.

OFAC determined, through a review of various websites, that Ansra International distributed one of Plaintiff’s products in Iran and also maintained an office in Tehran. Plaintiff apparently sent the 2008 shipment that prompted this investigation to the same address in Tehran.

OFAC sent a warning letter to plaintiff in January 2012, warning that the 2008 shipment “appears to violate” the Iran embargo and advising plaintiffs of the potential for continued investigation and assessment of penalties for additional noncompliance. The timing of this letter proved to be a significant factor in calculating the base amount of the civil penalty. OFAC determined that five shipments that occurred after the date of this letter constituted egregious violations that resulted in the statutory maximum base amount of $250,000 per transaction.

Key conclusions

First, any company that is the target of an OFAC investigation should take into account that courts grant OFAC significant authority in interpreting its own regulations. This is due in part to the agency’s unique role “at the intersection of national security, foreign policy, and administrative law.”(1) It is therefore crucial that these companies properly defend their positions with the agency and not rely on judicial review for relief.

Second, the case serves as a cautionary tale that compliance with OFAC risk-based sanctions may require companies to not only know their customers but also their customers’ customers. This is especially true for distributors in the Middle East.

International trade typically involves many different entities, including the seller and buyer, insurance companies, brokers, freight forwarders, freight forwarders, and typically three to four banks (the payer, the recipient, and their correspondent banks). While all companies are equally responsible for compliance, financial institutions tend to have robust programs that regularly report to OFAC.

We will continue to monitor legal complaints filed with OFAC and post updates as new information becomes available.

_{^{(1) Islamic Am. Relief Agency v. Gonzales, 477 F.3d 728, 734 (DCCir.2007)}}