As I have noted over the past year, the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) has increasingly recently found itself defending its actions in U.S. District Court.  The latest lawsuit brought against OFAC was lodged by an Iranian entity, Fulmen Company (“Fulmen”), whose request for reconsideration of their designation under Executive Order (“E.O.”) 13382 was denied by OFAC on July 20, 2018. 

There are two interesting aspects about the Fulmen litigation that I will concentrate on in this post.  First, Fulmen seeks to assert that a court decision from the European Union’s Court of Justice for the European Communities compels a rescission of Fulmen’s E.O. 13382 designation and a  delisting from OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List.  Second, I will consider the propriety of relying on Fulmen’s continued relationship with a sanctioned party to maintain their designation, when Fulmen was not originally designated for dealing with that particular sanctioned party.  I’ll start by examining whether Fulmen’s delisting in the EU, and their successful legal challenges and defense on appeal in the cases that lead to that delisting, require a reciprocal delisting by OFAC. 

In short, Fulmen claims that they have extinguished the basis of their designation by achieving a delisting in the EU, and successfully defending that designation in the EU Court of Justice.  In Fulmen’s view, the EU designation was “the condition precedent to, and sole legal justification for” Fulmen’s inclusion on the SDN List.  Accordingly, Fulmen asserts that its removal from the EU sanctions list extinguishes the legal basis for OFAC’s designation of Fulmen, and thus compels the rescission of Fulmen’s designation and their removal from the SDN List.  Accordingly, Fulmen argues, OFAC has exceeded its statutory authority in denying Fulmen’s petition for delisting.

First, it should be noted that although OFAC was responsible for reviewing Fulmen’s request for reconsideration, the designation was actually imposed by the State Department.  Readers of this blog might recall, that under E.O. 13382 designations can be made either by OFAC or by the Department of State.  Indeed, it is the State Department that determines the primary designations under E.O. 13382–i.e., those foreign persons engaged, or attempting to engage, in activities that have materially contributed to, or pose a risk of materially contributing to, the proliferation of weapons of mass destruction or their means of delivery (including missiles capable of delivering such weapons).  Treasury/OFAC on the other hand, identifies and designates the derivative designees–i.e., those providing support or services to the primary WMD proliferators, and those owned or controlled by those parties.

Second, E.O. 13382 does not contain any language about reciprocity of designations.  The Order is issued solely under the International Emergency Economic Powers Act (“IEEPA”) and makes no reference to designations by other authorities as being a legal basis for designation under the Order. Indeed, unlike some other sanctions programs that are issued under multiple authorities–e.g., E.O. 13224 issued under IEEPA and the United Nations Participation Act (“UNPA”)–and thus allowing for reciprocity of designations by those authorities, E.O. 13382 contains no such language. 

Moreover, The State Department’s Fact Sheet describing the designations does not make any reference to the EU designation being a condition precedent to, or legal justification for, Fulmen’s designation under E.O. 13382.  The Fact Sheet does, however, reference the factual findings of the EU Council in designating Fulmen by stating “[t]he European Union noted in Council Implementing Resolution 668/2010 (July 26, 2010) that Fulmen was involved in the installation of electrical equipment on the Qom/Fordoo site at a time when the existence of the site had not yet been revealed.  The EU also noted that Arya Niroo Nik is a shell company used by Fulmen for some of its operations.  The Fact Sheet goes on to state that: “[t]he Fulmen Group was involved in procuring goods for the covert uranium enrichment facility at Qom while the facility was still an undeclared site from 2006 through 2008;” language that is substantially similar, if not identical to that found in the factual basis relied upon by the EU to designate Fulmen.  The Fact Sheet, however, goes beyond those findings to also describe its conclusion that from May 2006 until at least September 2008, Fulmen was involved in many facets of the construction of Qom, and that it worked with the U.S.- and UN-designated firm Kalaye Electric on the construction of elements of the Natanz Uranium Enrichment Plant.

It appears, however, that the State Department designation has a broader factual basis than that relied upon by the EU to designate Fulmen.  This is because E.O. 13382 designation of Fulmen also alleges that Fulmen worked with a sanctions firm, Kalaye Electric, on the construction of the Natanz Uranium Enrichment Plant.  Thus, even assuming that the court relies on the EU courts findings with respect to the conduct for which Fulmen was designated in the EU, there is alleged conduct underlying Fulmen’s E.O. 13382 designation that does not appear to have been at play in the EU case. 

Legally speaking, Fulmen’s argument does not, on its face, appear compelling.  As pointed out above, E.O. 13382 does not provide as a legal basis for designation reciprocity with another governmental authority’s designations.  Further, although the State Department relies on some of the same conduct–indeed, the same language–as the EU Council did in designating Fulmen, the State Department does not reference the EU designation as being a basis or justification for Fulmen’s E.O. 13382 designation.

Further, OFAC’s denial of Fulmen’s delisting petition cited that their conclusion that Fulmen continues to meet the basis for designation is due to Fulmen noting their business relationship with Niru Battery–an entity also designated under E.O. 13382 for being owned or controlled by the Iranian Ministry of Defense and Armed Forces Logistics (“MODAFL”).  As OFAC noted in their denial of the delisting petition, persons providing support, goods, or services in support of other persons on the SDN List are engaged in sanctionable conduct.  What’s interesting about this language, however, is that OFAC also appears to base the denial of Fulmen’s request for reconsideration on that finding alone.

Although OFAC acknowledges in its denial letter that it finds that Fulmen has not submitted credible arguments or evidence establishing an insufficient basis for the designation or that the circumstances resulting in the designation no longer apply, it does not expressly state that those are the reasons that support the denial.  What it does state–in noting the relationship between Fulmen and Niru Battery–is that “[i]n light of this information, we are unable to conclude that Fulmen Company has engaged in remedial steps that would warrant the removal of Fulmen Company from the SDN List.  Therefore, your client’s request for reconsideration is denied.”

It is unclear what Fulmen represented about its relationship with Niru Battery in its submissions during the OFAC administrative reconsideration matter.  According to the complaint, however, Fulmen alleges that it has taken steps to reduce the purchase of batteries for its electric motor cycles from Niru Battery–which it identifies as the only manufacturer of batteries in Iran.  Fulmen then goes on to argue that since they have no business relationships with Kalaye Electric, Arya Niroo Nik or Niru Battery, and since its purchase of batteries from Niru Battery is limited and occurring in the market place, their continued designation based on a relationship with Niru Battery is unsupported.

A quick look at these arguments might lead one to believe they their appeal of OFAC’s decision doesn’t stand a chance.  First, there is some precedent to suggest that the court will not consider the EU Court’s decision as probative. In Kadi v. Geithner, another lawsuit challenging OFAC’s refusal to rescind sanctions against a party and remove them from the SDN List, the U.S. District Court for the District of Columbia, was “reluctant” to rely on the decisions of other countries to determine the propriety of a party’s designation under U.S. sanctions.  In that case, the Plaintiff sought to introduce the fact that allegations of terrorism similar to those underlying his OFAC designation had been examined by other, foreign investigative bodies, and that the Plaintiff had been vindicated–i.e., delisted.  The court in Kadi did not consider such information, however, as it was submitted after OFAC’s denial decision under review in that litigation, and thus not part of the administrative record.  That aside, the court noted that even if it were part of the record, that the court would be reluctant to rely on the decisions of other countries based on information that likely differed from the administrative record compiled by OFAC, and that those decisions may have been reached under different standards of proof or review.  Thus, one could not be faulted for thinking that Judge Leon–the Senior U.S. District Court Judge presiding over Fulmen’s case–might not take too seriously the EU Court’s decision.

Upon a closer look, however, there are a few aspects of Fulmen’s use of the EU Court’s decision that differ from Kadi’s use of similar decisions .  First, Fulmen did provide copies of the EU Courts’ decisions during the administrative process. Thus, those decisions and their findings are present in the administrative record underlying OFAC’s denial of Fulmen’s request for reconsideration.  Second, the EU court’s decision was based on what appears to be something akin to a probable cause burden of proof standard. OFAC’s decision-making must satisfy a “reasonable cause to believe” standard–far lower than the probable cause standard relied upon by the EU.  Therefore, unlike in Kadi, the EU Court decisions may be more seriously considered in Fulmen’s case.

That said, the use of those EU court decisions still suffer from a few flaws. First, as noted above, the allegations underlying Fulmen’s designation under E.O. 13382 are broader than those relied upon for the EU decision. Thus, the information contained in OFAC’s record likely differs from that which was in the possession of the EU council when it originally designated Fulmen.  Second, the EU court’s decision to delist Fulmen wasn’t due to factual findings that it had not engaged in the activity which the EU Council relied upon to designate Fulmen.  Rather, Fulmen’s EU delisting appears to have been due to the EU Council refusing to reveal sufficient evidence in an adequate manner which was relied upon to conclude that Fulmen engaged in the activity for which it was designated.  It is therefore not entirely clear to me what probative value the EU court decisions would have on OFAC’s denial of Fulmen’s request for reconsideration.

Fulmen’s saving grace in this matter–insofar as it seeks to rely on the EU court decisions–is the fact that OFAC’s denial letter makes absolutely no reference to Fulmen’s submission of the EU courts’ decisions and why it may have discounted that evidence.  The reason why this would be a good thing for Fulmen is because when OFAC denies a designated party’s request for reconsideration, then are required to identify their reasoning for discounting certain evidence submitted to militate against a finding that the designated party was involved in sanctionable conduct.  Failure to do so, constitutes arbitrary and capricious action that could cause the court to remand the matter to OFAC, or compel OFAC to rescind the designation.

It’s too early to jump the gun on whether that will happen, however. It is quite possible that OFAC considered the EU court decisions, and explained their reasoning for discounting them in the evidentiary memorandum created in support of OFAC’s denial of Fulmen’s reconsideration request. We won’t know for sure whether this occurred until the administrative record in support of that decision is filed with the Court and made public.

Legal arguments aside, Fulmen still has a factual issue to contend with–i.e., its relationship with Niru Battery.  First, the fact that we are even talking about Niru Battery with respect to Fulmen’s designation highlights the dangers inherent in OFAC’s administrative reconsideration process.  The dangers to which I refer arise when a designated party enters into the reconsideration process and successfully rebut the allegations underlying their designation, but because OFAC asks for information that might not be material to the factual basis of the initial designation, ends up remaining on the list for reasons other than those for which they were originally designated.

Looking at the facts of the case, and the arguments made in the filings, I think Fulmen has an uphill battle in challenging OFAC’s decision to deny it’s delisting petition, as OFAC is granted extreme deference and Fulmen has admitted it maintains at least an indirect or limited relationship with Niru Battery.  As long as that relationship exists, and Niru Battery remains designated under E.O. 13382, OFAC likely has a basis to keep Fulmen on the OFAC SDN List for providing material support or services to a party designated under E.O. 13382.  The question, however, is should they?

OFAC’s determination that Fulmen meets the criteria for designation under E.O. 13382 due to a relationship it has with a sanctioned party other than those parties it was originally designated for dealing with seems to undermine OFAC’s stated policy that “[t]he power and integrity of the Office of Foreign Assets Control (OFAC) sanctions derive not only from its ability to designate and add persons to the Specially Designated Nationals and Blocked Persons List (SDN List), but also from its willingness to remove persons from the SDN List consistent with the law…” and that “[t]he ultimate goal of sanctions is not to punish, but to bring about a positive change in behavior.”

The reason why this policy would be contradicted is simple: OFAC finding reasons other than a continuance of the conduct for which the original designation occurred would permit OFAC to engage in bait and switch tactics if the contemporary political will is against delisting.  In other words, a sanctioned party could come into OFAC and demonstrate a change in circumstance–thereby negating the basis of their designation–but OFAC can simply find some other reason to maintain the designation. 

Remember, Fulmen’s designation was not initially imposed for providing support and services to anyone designated under E.O. 13382, but for providing support and services to specific parties and for specific projects.  Although, OFAC found Fulmen’s rebuttals of those original bases of designation incredible, OFAC did not base Fulmen’s continued designation on that lack of credibility, or on a continuing relationship with those parties or those projects.  Rather, by the express language of their denial, they based it on the relationship with Niru Battery–an E.O. 13382 designee that has no discernible relationship to the parties or projects which led to Fulmen’s initial designation. 

OFAC’s reliance on relationships with other non-related sanctioned parties–no matter how limited–coupled with a general practice of limiting disclosure of information and reasoning relied upon by to designate a party, significantly disincentives an SDN from changing their behavior or circumstances in pursuit of delisting.  Rather than having SDNs satisfy the delisting criteria by credibly addressing the conduct or status for which they were originally designated as described in the press release or Federal Register Notice announcing the designation, OFAC has demonstrated that the bases of designation can be shifting, and require an SDN to account for all relationships and all conduct, regardless if the SDN itself is aware of the relationship or if their conduct meets the threshold of “material” in order to be sanctionable conduct.  

It used to be that the delisting process required the SDN to shoot in the dark due to OFAC’s withholding of information. Now, it’s only shooting in the dark, it’s shooting in the dark at a moving target, since OFAC appears to be willing to switch bases of designation to maintain sanctions on a party.  Thus, Fulmen’s case–although seemingly a slam dunk for the agency that enforces the sanctions–may be a losing proposition for sanctions as a whole since it might encourage SDNs to forego the whole practice of changing behavior, which…you know…is the whole point of sanctions in the first place.

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 ferrari@falawpc.com