On March 7, the District Court for the District of Columbia issued a Memorandum Opinion granting the government’s Motion for Summary Judgment in the matter of Epsilon Electronics, Inc. v. United States Department of the Treasury, Office of Foreign Assets Control, et al., Civil Action No. 14-2220 (RBW), __ F.Supp.3d __ (D.D.C. 2016).  The case arises from a $4,073,000 civil penalty the Office of Foreign Assets Control (OFAC) assessed against Epsilon Electronics (the plaintiff)  in July 2014 for violations of the embargo on Iran.  According to the announcement of this penalty, the plaintiff violated the Iran Transactions and Sanctions Regulations by shipping car audio and video equipment that it knew or had reason to know would be reexported to Iran.  The opinion dismissing the challenge to this penalty serves as a cautionary tale of how OFAC may assess significant civil penalties with the aid of a few administrative subpoenas and circumstantial evidence provided by financial institutions and simple internet research.

OFAC’s Seven Year Investigation

In 2008 OFAC received an airway bill indicating that the plaintiff sent a shipment to Tehran, Iran.  OFAC subsequently issued an administrative subpoena to the plaintiff to investigate this potential violation of the embargo.  The plaintiff responded to the subpoena by claiming that it had no knowledge of the subject shipment.

In December 2011, OFAC issued an administrative subpoena to Union Bank.  This bank provided information indicating that the plaintiff received $1.1 million in payments from Asra International Corporation that “may have been for products destined to Iran.”  OFAC responded to this information by issuing a second administrative subpoena to the plaintiff.  Unlike the first subpoena, which sought records relating to a single transaction, the second subpoena demanded  records regarding its transactions with Asra International.  The plaintiff produced documents related to 41 transactions worth approximately $3.4 million which occurred between August 2008 and May 2012.

OFAC determined, through a review of various websites, that Ansra International distributed one of the plaintiff’s products in Iran, and also maintained an office in Tehran.  Apparently, the plaintiff sent the 2008 shipment which gave rise to this investigation to that same Tehran address.

OFAC issued a cautionary letter to the plaintiff in January 2012, warning that the 2008 shipment “appears to have violated” the embargo on Iran and advised of potential continuation of the investigation and an assessment of penalties for additional noncompliance.  The timing of this letter proved to be an important factor in the calculation of the base amount of the civil penalty.  OFAC determined that five shipments that occurred after the date of this letter were egregious violations resulting in the statutory maximum base penalty amount of $250,000 per transaction.

Key Takeaways

First, any company that is the target of an OFAC investigation should consider that courts grant OFAC substantial deference in the interpretation of its own regulations. This is due in part to the agency’s unique role “at the intersection of national security, foreign policy, and administrative law.”[1]  It is therefore crucial for those companies to properly advocate their position in front of the agency and not rely on judicial review for redress.

Secondly, this case serves as a cautionary tale that OFAC  prescribed risk based sanctions compliance may require companies to not only know their customers, but their customers’ customers as well.  This is especially true when dealing with distributors in the Middle East.

International trade generally involves many different entities, including the seller and buyer, insurance companies, brokers, shippers, freight forwarders, and typically three to four banks (the payor, the payee and their correspondent banks).  Although all companies are equally responsible for compliance, financial institutions tend to have robust programs that regularly submit reports to OFAC.

We will continue to monitor court challenges to OFAC and publish updates as new developments arise.

_{^{[1] Islamic Am. Relief Agency v. Gonzales, 477 F.3d 728, 734 (D.C.Cir.2007)}}