On August 17, 2017, the United States District Court for the District of Maryland issued a memorandum opinion granting in part and denying in part the parties’ cross-motions for summary judgment in the case of Dastranj v. Dehghan, a civil action brought by an Iranian citizen Plaintiff (Dastranj) who brought a series of claims arising from the Defendant’s (Dehghan) refusal to return investment money after Plaintiff’s request for an EB-5 visa, and a B1/B2 visa to visit the EB-5 project site, were denied by the U.S. Department of State.
The Defendant–who was responsible with obtaining investor capital for a company who facilitated prospective EB-5 visa applicants’ investment requirements–met the Plaintiff, and signed him up as a potential EB-5 investor during a meeting in Iran in 2010. At that time, the Defendant also introduced Plaintiff to a lawyer in the D.C. area who could handle obtaining a license from the United States Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), as the Plaintiff was an Iranian seeking to make an investment in the U.S. which was prohibited by the Iranian Transactions Regulations (“ITR”) at the time. The ITR which later became the Iranian Transactions and Sanctions Regulations (“ITSR”) in October 2012.
As the Plaintiff didn’t have the funds immediately available, the Defendant informed Plaintiff that he could deposit the funds into the Defendant’s own Iranian bank account until such time as the funds were available and once the OFAC license was issued the funds could be transferred to the United States. Plaintiff thereafter made payments into Defendant’s Iranian bank account. Defendant also informed Plaintiff that he would be able to visit the United States prior to transferring the funds, however, in October 2012, Plaintiff’s application for B1/B2 visa was denied.
On June 30, 2012, the OFAC license was issued. However, prior to that time, Plaintiff informed Defendant to return his funds as he was not able to obtain the visa to travel to the U.S. and visit the site. Defendant failed to return the funds, and the Plaintiff filed suit.
There are number of claims and defenses presented that were presented in this matter, but what was interesting for sanctions practitioners is that the Defendant raised a claim that even if there was a contract arising from the parties’ oral agreement that it was unenforceable as its terms were illegal. In raising this defense Dehghan asserted that the Plaintiff’s transfer of funds from his account at Bank Saderat to the Defendant’s account at Bank Pasargad violated the ITR/ITSR.
In responding to that claim, the Court found that OFAC had carved out transactions surrounding the EB-5 program. In doing so, the court specifically referred to 31 C.F.R. § 560.505(c)(1) which states “U.S. persons are authorized to engage in all transactions necessary to export financial services to Iran in connection with an individual’s application for . . . an immigrant visa under category EB-5 (immigrant investor).” The court further noted that 31 C.F.R. § 560.505(c)(2) provides:
“In the event services are exported under paragraph (c)(1) of this section in connection with an application for an E-2 or EB-5 visa that is denied, withdrawn, or otherwise does not result in the issuance of such visa, U.S. persons are authorized to transfer, in a lump sum back to Iran or to a third country, any funds belonging to the applicant that are held in an escrow account during the pendency of, and in connection with, such visa application, provided that any transfer of funds pursuant to the authorization set forth in this paragraph is effected in accordance with § 560.516.”
The court found that it was undisputed that Plaintiff received the OFAC license authorizing funds to be transferred to the United States for the EB-5 project. Further, the court found that since the Plaintiff is not a U.S. person the oral agreement was not illegal as to him. As such, the court held the Defendant failed to show how the oral agreement was void as to illegality.
The Defendant also asserted that illegality arose from the transfer of the funds from Bank Saderat to Bank Pasargad, because both banks were “banned” under the International Emergency Economic Powers Act–and that since they were banned (SDN) banks that any funds transfers would have exposed him to civil penalties or criminal prosecution, and that his acceptance of the funds brought him to the transaction with unclean hands. The court stated that such a defense fails as it was not brought in a timely manner, and was therefore waived. The court then launched into an alternative reasoning stating that even had the unclean hands defense been available to defendant that it would have failed. IN making such a conclusion, the court make an interesting comment by stating “[f]urthermore, because the ITSR circumscribes transactions of “U.S. persons,” Dastranj, as a citizen of Iran, is not subject to its prohibitions.” More on this later.
Thereafter, court went on to make the following perplexing statement: “…no law prohibits Dehghan from repaying Dastranj the sum of money that Dastranj is owed pursuant to their agreement. The law, at best, may prohibit Dehghan from using the funds held in a banned Iranian bank to satisfy the debt owed to Dastranj. It does not prevent Dehghan from repaying Dastranj with other funds, as Dehghan conceded during the August 4th hearing. Because money is indeed fungible, Dehghan can repay Dastranj with funds from a source other than those held by the banned bank and avoid any claimed “illegality.” I think there is a four letter agency housed at the Treasury Annex which would beg to differ. (That’s OFAC, if you’re not good at geography).
Ok, what’s wrong here? Everything. Although the Honorable Paula Xinis is far smarter and more accomplished than I can ever hope to be, I know a thing or two about the subjects discussed in her opinion as I have represented a number of EB-5 regional centers and other persons who have been involved in circumstances similar to those in Dastranj v. Dehghan. So here’s my take on the facts of this case:
1. Dehghan’s Iranian bank account was in violation of the ITR/ITSR. OFAC has traditionally found the maintenance of an Iranian bank account or an interest in an Iranian bank account by a U.S. person to be in violation of 31 C.F.R. §§ 560.201 and 560.206 as importation of, or dealings in, Iranian-origin services, and payments into that account would be in violation of 31 C.F.R. § 560.207. As such, Defendant Dehghan’s having a bank account at Bank Pasargad and remittances from Dastranj being received in that account certainly appears to have been in violation of the ITR/ITSR. Only once have a seen OFAC allow a U.S. person to maintain a bank account in Iran, and that was when that U.S. person moved permanently to Iran with no intent of returning to the U.S.
2. There was a potential violation 31 C.F.R. § 560.203 for an attempt to export financial services to Iran–in violation of 31 C.F.R. § 560.204–when Dehghan began receiving the investment funds prior to obtaining the OFAC license. This is a bit of tricky one, but follow me here. The OFAC license authorizing the EB-5 regional center–the U.S. person in these transactions–to receive the investment funds was granted on June 30, 2012. At that time–while the ITR was still in effect–EB-5 centers required OFAC license authorization to receive funds from Iranian investors. Failure to have a license would have been considered an exportation of financial service to Iran in violation of 31 C.F.R. § 560.204. Also in existence during that period of time was a separate prohibition–31 C.F.R. § 560.203–for attempts to violate the ITR. As the D.C. Circuit recently noted, attempts of ITR/ITSR violations only required a substantial step towards the commission of the proscribed act and the requisite mental state. The D.C. Circuit offered the example of a merchant signing a contract for the export of goods to Iran, as such a substantial step that could prove a violation of 31 C.F.R. §§ 560.203 and 560.204. As such, Dehghan’s soliciting the investment funds to be remitted into his account and to be held for the EB-5 certain was likely a substantial step towards the violation of an unlicensed export of services to Iran. As such, there was an attempt and 31 C.F.R. § 560.203 appears to have been implicated by such activity.
3.The transfer from Dastranj’s Bank Saderat account to Dehghan’s Bank Pasargad account would have been prohibited by the ITR/ITSR, as well as by the Global Terrorism Sanctions Regulations (“GTSR”), 31 C.F.R. Part 594. Nit picky, I know, but just saying.
4. Dastranj wasn’t a U.S. person, so therefore couldn’t have violated the ITR/ITSR. Thank you for saying that Judge Xinis, but I must refrain from any further comment given my status as counsel of record in another case where the judge didn’t agree.
5. Payment of the refund would have required a license. I have specifically dealt with this issue in a prior case–which occurred after the general license contained at 31 C.F.R. § 560.505(a) was promulgated. This is because the section the court refers to–authorizing the refund of investment funds in the event that a EB-5 application is withdrawn, denied, or otherwise doesn’t lead to the issuance of a visa–requires that the funds be held in an escrow account, and the transfer must have been effectuated in accordance with 31 C.F.R. § 560.516. However, there was no information contained in the opinion that the funds that Dehghan received from Dastranj were held in an escrow account. Moreover, I have seen OFAC issue a license to authorize a refund of EB-5 investment funds to that were not held in escrow. Further, there is no way the transfer could have been conducted in accordance with 31 C.F.R. § 560.516 as that section provides a general license authorization for two categories of persons: 1) U.S. depository institutions, and 2) U.S. registered brokers or dealers in securities. Thus, I would respectfully submit that the court has interpreted 31 C.F.R. § 560.505(c)(1) to cover the transactions at issue in a manner inconsistent with how OFAC has traditionally administered it.
In short, the Dastranj v. Dehghan case is an interesting study for those of us who have handled similar licensing and compliance issues before OFAC. The court’s ruling is seemingly far out of line with how OFAC has viewed and handled similar fact patterns in the past, and may cause confusion amongst practitioners dealing with such issues in the future. That confusion should be mitigated, however, by the fact that at least a portion of the transactions at issue in this case are now generally authorized by the ITSR. Nonetheless, when a court’s interpretation of OFAC’s regulations is so vastly different than OFAC’s own interpretation and administration of those same regulations, it goes to show how confusing and complex the sanctions regimes truly are.
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 firstname.lastname@example.org