Before we get started, this post is in no way intended to slam Houston, TX or the United States Attorney’s Office in the Southern District of Texas. Quite the contrary, I love Houston. It was the location where I did my first trial (obtained a mistrial), and I found their prosecutors to be really top notch lawyers and people. Moreover, I’ve always been fond of Texas generally, and still maintain my bar membership to the U.S. District Court in the Southern District of Texas.  That said, as I sit here on a Sunday afternoon reading a newly unsealed indictment concerning Iran sanctions violations coming out of that district, I’m left scratching my head.

The indictment, U.S. v. Bahram Mechanic, et. al, 15-cr-204, contains twenty-four (24) counts alleging violations of the International Emergency Economic Powers Act (“IEEPA”), Money Laundering, Failure to Report Foreign Bank Accounts (otherwise known as “FBAR” violations, and Aiding and Abetting.  That’s a lot of counts and a lot of charges for what is at its heart an IEEPA criminal case for Iran Sanctions violations.  And yet, there are certain things mentioned in the indictment which sound off, and other places where you thought they would have charged the defendants but didn’t.

By way of background, a general summary of the allegations contends that Bahram Mechanic, a U.S. person, ran a company in Iran, in addition to being the majority owner of a business in Houston, and used his Iranian company to procure microelectronics from the U.S.  The indictment further alleges that since July 1, 2010 that Mr. Mechanic and his alleged co-defendants conspired to export various commodities, including microelectronics, from the U.S. to Iran via Taiwan and Turkey.  The Indictment indicated that approximately 250 shipments of approximately 28 million parts valued at around $24 million took place.  Furthermore, the Indictment alleges that Mechanic, and another U.S. person co-conspirator, Tooraj Faridi, provided design services to Faratel (Mechanic’s Iranian company) in order for Faratel to manufacture new equipment for Iranian customers.  The Indictment makes no mention of whether they did so through Mechanic and Faridi’s Houston company–Smart Power Systems–or whether they did this from Iran.  Finally, Some of the money involved here was deposited into, and/or remitted from Bank Mellat, an Iranian financial institution.

As is so typical in criminal IEEPA cases for Iran sanctions violations, it appears that a lot of the evidence being relied upon by the government was obtained from emails sent between the co-defendants.  The manner in which the alleged scheme was carried out is also typical: falsification of invoices, transfer of funds through third country banks with no mention of Iran as the sending or receiving locations, and some questionably vague acknowledgments by email that what was taking place may not be legal.

So if everything sounds so typical, why am I scratching my head? There are a number of reasons for the head scratching, but for the sake of brevity I will only point out a few:

1. The Characterization of Bank Mellat.  Paragraph 13 of the Indictment notes that “Bank Mellat is an Iranian bank that the U.S. Department of the Treasury has placed on a watchlist of banks which may be trading in violation of United Nations Security Council Resolutions.”  The OFAC lawyer in me cringed a little when I read this.  Actually, Bank Mellat is not on a watch list, but on a black list–the Specially Designated Nationals and Blocked Persons (“SDN”) List administered by the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).  That designation was made pursuant to Executive Order 13382 for the role Bank Mellat has played in Iran’s proliferation efforts. Unlike a watch list, Bank Mellat’s identification results in all U.S. persons being prohibited from transacting with the bank except for certain authorized or exempted categories of activities.  This raises the question why the government didn’t include an IEEPA charge for a violation of 31 C.F.R. 544.201 for the transactions involving Bank Mellat.

2. No Charges for Violation of Export of Services.  Probably most interesting to me was the fact that the Indictment openly alleges that Mechanic owned and operated a company in Iran, and yet, there is no mention of a prohibited export of services. Owning and operating a company in Iran would clearly be a violation of 31 C.F.R. 560.204, however, no such allegation was included in this Indictment. Why not? My guess would be that the government did not have sufficient evidence of willfulness to bring the charge. In the criminal context, IEEPA violations require a showing that the defendant willfully engaged in the activity for which they were charged.  No willfulness equals no criminal liability.  That said, willfulness in the IEEPA criminally context has widely been interpreted to mean a violation of a known legal duty, and I have seen that standard met in other cases by a mere demonstration that the defendant knew the embargo existed, despite a lack of knowledge of the embargo’s specific prohibitions and licensing authorities.

3. Faratel’s Customer List.  Paragraph 15 of the Indictment states that among the entities on Faratel’s customer list were the Iranian Ministry of Defense, the Atomic Energy Organization of Iran, and the Iranian Centrifuge Technology Company.  That would make you think that Faratel was procuring the parts at issue in this case to those customers, right? Well there are no allegations that any of the prohibited conducted charged in the Indictment was in relation to transactions on behalf of any of those Iranian governmental entities.  Indeed, there is no other mention of those entities outside of that one paragraph. Then why put their name in there? Because at some point this Indictment could be read to a jury as part of a federal criminal proceeding. When a jury sitting in the Southern District of Texas hears that this company had customers with names that would link them to Iran’s military and nuclear program, they are likely going to become very concerned that these parts could have been intended for those entities.  That concern may very well impact their ability to view the information impartially.  Defense counsel should, and likely will, move to strike the language from the Indictment as surplusage, as it is not relevant to the charged conduct and seems only intended to inflame the passions of a jury.

4. Lack of Banking Channels Noted.  One of the things we have written extensively about on this blog is the difficulty parties experience in trying to transfer money to and from Iran for legally authorized or exempted purposes. Most people who know and understand Iran sanctions know that this is a common topic of conversation. However, this is the first time I have noticed such difficulties memorialized so explicitly in a criminal indictment.  This Indictment makes several times mentions the difficulties in remitting funds to and from Iran. For example, Paragraph 38d mentions a Faratel employee telling an alleged co-conspirator that transferring money directly from Bank Mellat was not workable “since there is no bank here to accept transaction from Iran now…”  A paragraph later in Paragraph 38e the co-conspirator referred to above emphasized the need to conceal the origin of funds, stating “most important–any intermediate bank or our above said bank must not be able to find out the original sending bank is in Iran, otherwise it will be returned.”  Later in the Indictment, a conversation between two of the defendants mentions that one of the defendants, Khosrow Afghahi, discussed money transfers and stated it had become difficult to process funds transfer without drawing the attention of the authorities.  Of course, these discussions are all occurring in relation to transactions which were allegedly criminal in nature, however, the larger point here is that the immense difficulty of processing transfers to and from Iran is apparent to anyone attempting to do so.

5. Mechanic’s Prior Conduct.  Paragraph 23 of the Indictment notes that between 1985 and 2012 Mechanic was involved in illegal trade activities which resulted in a criminal conviction and a civil action. The civil action undoubtedly refers to the $100,000 OFAC enforcement action against Mechanic’s company, Smart Power Systems (then known as IEPS Electronics), in June 2004 for violations of the Iranian Transactions Regulations in providing brokering services to Iran and importing financial services from Iran.  The nature of the criminal conviction is unclear, as a search of the Public Access to Court Electronic Records (“PACER”) database for any former criminal cases against Mechanic or any of the other named defendants did not return any results.

This case will be an interesting one to watch, and I wouldn’t doubt if there was a trial. The Indictment seems to have been hastily put together–which wouldn’t be surprising as the latest charged count was from conduct occurring merely 20 days ago on March 30, 2015–and there may be some holes that can be poked in the government’s case.  We should have a better idea if that will be the case soon as three of the defendant’s–Mechanic, Afghahi, and Faridi–have already been arrested, and will likely be arraigned on Monday.

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@ferrariassociatespc.com.