On August 24, 2017, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement agreement with COSL Singapore Ltd. for apparent violations of the Iranian Transactions and Sanctions Regulations (ITSR), 31 C.F.R. Part 560, stemming from COSL Singapore’s procurement of U.S.-origin parts for its oil rigs located in the territorial waters of Iran. Pursuant to the Settlement Agreement, COSL Singapore Ltd. agreed to pay $415,350 to settle its potential civil liability for what OFAC alleged were 55 apparent violations of the ITSR.
More interestingly, OFAC’s most recent settlement agreement reflects its curious view as to the scope and application of 31 C.F.R. § 560.204. This regulatory provision states, in substantive part, that:
…the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation, re-exportation, sale, or supply of any goods, technology, or services to a person in a third country undertaken with knowledge or reason to know that:
(a) Such goods, technology, or services are intended specifically for supply, transshipment, or re-exportation, directly or indirectly, to Iran or the Government of Iran; or
(b) Such goods, technology, or services are intended specifically for use in the production of, for commingling with, or for incorporation into goods, technology, or services to be directly or indirectly supplied, transshipped, or reexported exclusively or predominantly to Iran or the Government of Iran.
OFAC alleged that COSL Singapore Ltd. engaged in apparent violations of §§ 560.204 and 560.203 when it – acting through its subsidiary companies COSL Drilling Pan-Pacific (Labuan) Ltd. and COSL Drilling Pan-Pacific Ltd. – “exported or attempted to export 55 orders of oil rig supplies from the United States to Singapore and the United Arab Emirates, and then re-exported or attempted to re-export these supplies to four separate oil rigs located in Iranian territorial waters.” OFAC’s settlement notice states that “[p]rocurement specialists located in Singapore or assigned to an oil rig’s base of operations are responsible for the day-to-day procurement and purchase orders associated with routine maintenance of the oil rigs, including initiating requests for quotation, obtaining quotations, and issuing purchase orders.” These specialists engaged in conduct leading to the apparent violations at issue by “purchas[ing] at least 55 orders of supplies from vendors located in the United States on behalf of, and that were specifically intended for shipment and/or re-export to, four COSL Singapore oil rigs located and operating in Iranian territorial waters…”
Neither COSL Singapore Ltd. nor its subsidiary companies are alleged to be U.S. persons for purposes of application of the ITSR nor is their conduct alleged to have taken place in the United States. That would appear to place COSL Singapore Ltd. and its subsidiary companies outside the reach of § 560.204, insofar as the predicate condition for application of § 560.204 is either that the exporter is a U.S. person or engaged in the export of the items from the United States. But it would be curious to argue that COSL Singapore Ltd. is the “exporter” here at all, considering it sought, ordered, and received oil rig supplies from U.S. vendors, which shipped the items to COSL Singapore Ltd. located in the UAE.
More appropriate would appear to be the argument that COSL Singapore Ltd. engaged in the re-export of U.S.-origin goods in potential violation of § 560.205, which prohibits the re-exportation of goods, technology, or services to Iran by non-U.S. persons. It is unclear why § 560.205 was not charged, though there are several possibilities. For instance, § 560.205 prohibits “the re-exportation from a third country, directly or indirectly, by a person other than a U.S. person, of any goods, technology, or services that have been exported from the United States…if: (1) undertaken with knowledge or reason to know that the re-exportation is intended specifically for Iran or the Government of Iran; and (2) the re-exportation of such goods, technology, or services from the [U.S.] to Iran was subject to export license application requirements…” It is plausible (though unlikely) that the supplies were not subject to export license application requirements under U.S. regulations in effect on May 6, 1995 or thereafter made subject to such requirements, thus placing the re-export of such items outside the scope of § 560.205.
But if OFAC could not argue that COSL Singapore Ltd. engaged in an apparent violation of § 560.205, that does not make its recourse to § 560.204 any more reasonable. As a strictly textual matter, OFAC’s interpretation of § 560.204 to capture the conduct of non-U.S. persons taking place abroad has long befuddled OFAC sanctions practitioners. How can a non-U.S. person that has never stepped foot in the United States meet either of the predicate conditions for a § 560.204 violation, particularly if a U.S. vendor is performing the export as a matter of fact? Moreover, as a purely conceptual matter, OFAC’s application of § 560.204 to non-U.S. persons whose conduct takes place abroad defies the apparent division-of-labor being performed by §§ 560.204 and 560.205 – i.e., exports from the United States or by U.S. persons trigger application of § 560.204, while re-exports of U.S.-origin items by non-U.S. persons abroad trigger application of § 560.205.
Despite these apparent textual and conceptual hurdles, OFAC has yet to be deterred from continuing to charge non-U.S. persons acting abroad with violations of § 560.204. Moreover, OFAC is unlikely to do so unless and until charged parties challenge OFAC’s regulatory interpretation in U.S. federal court – what would no doubt be a risk-prone move considering the substantial mitigation parties receive for settling any potential civil liability for apparent ITSR violations.