Appeals Court Says That Actual Arrival In Iran Is Not Necessary For OFAC To Find Violation
On May 26, the U.S. Court of Appeals for the DC Circuit remanded for further consideration OFAC’s imposition of a $4 million penalty against Epsilon Electronics for 39 shipments found to violate the Iranian Transactions and Sanctions Regulations (“ITSR”). According to the DC Circuit, OFAC failed to meet its burden to justify its finding of violation with respect to five of the 39 shipments in question. The Court therefore directed OFAC to reconsider its findings with respect to the five violations and to recalculate the penalty. Despite this being a rare circumstance in which a company (temporarily?) successfully challenged an OFAC determination in court, this ruling is not a broad rebuke of OFAC’s authority to interpret its regulations.
Even in remanding a portion of OFAC’s determination to the agency, the Court upheld OFAC’s broad interpretation of the ITSR. OFAC’s final Penalty Notice imposed liability for 39 exports of car audio/visual equipment to the UAE that Epsilon knew, or should have known, were intended for reexport to Iran. OFAC relied on evidence from the UAE company’s site advertising extensive relationships with Iran, among other factors, to draw its conclusion. Epsilon argued that OFAC did not prove that any of the 39 shipments actually arrived in Iran. The Court agreed with the government that actual arrival in Iran is not necessary to find a violation – that exporting with reason to know the items were intended for Iran is sufficient to sustain a finding of violation.
With respect to five shipments, the Court held that OFAC did not appropriately articulate its reason for determining that evidence demonstrating Epsilon had reason to believe the items were for the Dubai market were unreliable. These five shipments occurred during a time that Epsilon had extensive e-mail communications with its UAE partner discussing specifically the Dubai market and the opening of a store to serve that market. The Court held that none of the pre-penalty notice, final notice, and internal OFAC record sufficiently articulated a basis for OFAC’s finding that these items were intended for Iran. However, the Court was careful to note that it did not hold that the record could not support OFAC’s finding – only that OFAC did not sufficiently articulate its reasoning. For that reason, it appears likely that Epsilon’s victory in this case will be short-lived.
The most important aspect of this case is that it reaffirmed that OFAC has broad discretion to make determinations under its regulations, and that “knowledge or reason to know” that a transaction will violate sanctions is sufficient to find a violation. However, this case does demonstrate that exporters can successfully challenge OFAC’s determinations under certain circumstances, and should encourage OFAC to more clearly articulate its rationale when imposing penalties.