Halloween was yesterday, but there was still something scary on my desk when I walked into the office this morning: the Appellees’ Brief in Epsilon Electronics, Inc. v. United States Department of the Treasury’s Office of Foreign Assets Control (OFAC), an appeal pending before the United States Court of Appeals for the District of Columbia Circuit. Although filed back on September 22, I just got around to reading this gem. If you’re not familiar with the case here is a link to a piece we did a while back. Basically, OFAC found that Epsilon had reason to know that the car audio equipment it was exporting to a Dubai entity would be reexported to Iran. As such, OFAC found that Epsilon violated section 560.204 of the Iranian Transactions and Sanctions Regulations (ITSR)–prohibited exportation of U.S.-origin goods, services, and technology to Iran–and penalized Epsilon to the tune (no pun intended) of $4,073,000. Epsilon appealed OFAC’s decision to the United States District Court for the District of Columbia which upheld OFAC’s penalty. Since then Epsilon has appealed the district court’s entry of summary judgment on behalf of OFAC. There’s a lot that could be, and has been, said about this case. Oral argument is set for November 9, 2016 for those who are interested, and will happen to be in DC that day. In this post, however, I intend to only focus on one short statement from page 29 of Appellees brief, and explain to you why it’s terrifying from the perspective of OFAC compliance personnel and any OFAC lawyer. Page 29 of Appellees brief contains the following language in reference to a discussion of 31 C.F.R § 560.204:
“Under the unambiguous terms of the regulation, actual reexportation to Iran by the person in the third country is not required for a violation. All that is necessary is that the United States person knew or should have known that the person in the third country intended specifically to reexport the goods to Iran. If the Court finds the provision ambiguous on that point, however, OFAC hereby informs the Court of its understanding of its regulation. See Shieldalloy Metallurgical Corp. v. Nuclear Regulatory Comm’n, 786 F. 3d 1205, 1208 (D.C. Cir. 2014)(“Deference [to an agency’s interpretation of its own regulation] is appropriate even if the agency’s interpretation first appears during litigation.”).”
Yikes. Let’s break that down. What OFAC–actually, the Department of Justice on OFAC’s behalf–is saying here is that if you (as a U.S. person) has reason to know that a party in a third country to whom you are exporting goods intends on reexporting those goods to Iran, then you have violated the ITSR’s ban on prohibited exportation to Iran. This appears to be true even if the party in a third country ultimately does not reexport the goods to Iran, or if they change their mind. So what is reason to know? Well, in Epsilon’s case the majority of the proof that Epsilon had reason to know the Dubai reexporter intended to reexport Epsilon’s goods to Iran was based on pictures and representations made on both Epsilon’s and the Dubai reexporter’s websites. In all fairness to OFAC, however, some of the information was fairly damning–for example, the Dubai reexporter’s website contained information that stated they “only distribute products in Iran” and only listed dealers in Iran to whom they sold products.
To understand this in context, one needs to consider that OFAC needs to show that their decision to penalize a party for violating 560.204 was based on substantial evidence. However, the substantial evidence standard is not as substantial as one might imagine. In short, substantial evidence merely means “such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.” (emphasis added) See Koch v. Securities & Exch. Comm’n, 793 F.3d 147, 151 (D.C. Cir. 2015). In short, does the evidence reasonably support the conclusion? Before you answer that, you should keep in mind that a court’s review of OFAC’s decision making is subject to an “extremely deferential” standard of review. See Islamic Am. Relief Agency v. Gonzales, 477 F.3d 728, 732 (D.C. Cir. 2007). Thus, all OFAC has to do is find something that could reasonably support a conclusion upon which their decision rests–with the court providing OFAC extreme deference on what’s considered reasonable–and OFAC’s action will be upheld in light of their reliance on “substantial evidence”.
In the immortal words of Sticky Fingaz on Onyx’s 1993 breakthrough single “Slam”: but, but, but wait it gets worse! This is because OFAC loves websites, and I have participated in a number of cases–much like in Epsilon’s case–where OFAC relied heavily on information contained on websites of all varieties to support their conclusions to impose penalties, designate parties pursuant to blocking sanctions programs, etc. The courts have said it’s ok for OFAC to rely on such information, so they are completely within their legal right to do so. Thus, not only can OFAC find a violation of its regulations based on what you or the other parties to your transactions had, have, or will have on your websites. And not only do they merely need to show it was within reason to draw a certain conclusion based on the information on that website. But the courts also provide OFAC extreme deference on what their interpretation of reasonable is. And keep in mind, this is all in the context of whether you (as a U.S. person) had reason to know that someone else intended to reexport an item to Iran, even if they never did reexport that item. That’s downright scary. I’m not saying OFAC is necessarily–I know lots of good folks over there–but the way the law has developed and the seemingly unchecked authority OFAC exercises is terrifying.
I have said all of this to underscore the expansiveness of OFAC’s authority. When they want to take action against a party, they can typically find a way to do so, and courts are unlikely to stand in their way. Thus, the necessity of OFAC compliance, seeking proper advice on OFAC regulations, and conducting due diligence is more apparent than ever. As such, you might want to start by navigating away from this website and checking your own.
The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or email@example.com