On 27 July 2017, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) published a settlement agreement with CSE Global Limited and CSE TransTel Pte. Ltd. Both companies, located in Singapore, agreed to pay $12,027,066 to settle potential civil liability for 104 apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”), 31 C.F.R. Part 560, and the International Emergency Economic Powers Act (“IEEPA”). Both the statutory maximum and base penalty civil monetary penalty amounts for the apparent violations were $38,181,161.
The settlement is another example of OFAC’s extra-territorial reach whereby it penalizes non-U.S. companies for violating U.S. Iran sanctions. It illustrates the risks which non-U.S. companies run when trading with Iran.
This enforcement action illustrates that OFAC is willing to enforce U.S. Iran sanctions when non-U.S. companies, i.e. CSE Transtel, supply items (in this case telecommunications goods and services) to Iran (Iranian energy sector). Mind you, OFAC did not allege that the supply of items to Iran originated in the U.S. or were U.S. origin goods, but rather that parties in the trade with Iran were paid in U.S. dollars, whereby CSE Transtel caused the export of financial services from U.S. banks to Iran in violation of section § 560.204 of the ITSR.
- OFAC has charged a non-U.S. company located outside the U.S. of “causing,” U.S. financial institutions to violate ITSR (§ 560.204) on the mere basis that it processed U.S. dollar transactions through U.S. financial system. No persons subject to the jurisdiction of the U.S. (U.S. nationals, companies or non-U.S. individuals in the U.S.) or U.S. origin items were involved.
- Doing business with U.S. sanctioned countries, especially Iran, in U.S. dollars also outside the U.S. and with non-U.S. financial institutions is a high risk.
Facts which led to OFAC Enforcement
OFAC alleges that, between June 2012 and March 2013, TransTel “appears to have violated § 1705(a) of IEEPA and § 560.203 ITSR by causing at least six separate financial institutions to engage in the unauthorized exportation or re-exportation of financial services from the United States to Iran, a prohibition of § 560.204 of the ITSR.”
Based on the published TransTel settlement Agreement by OFAC, Trans Tel, is a wholly-owned subsidiary of the international technology group CSE Global, based in Singapore and supplies telecommunications systems to the oil and gas sector. At the time the apparent violations, TransTel conducted business in Iran through, and owned a 49 percent stake in, TransTel Engineering Kish Co Ltd, an Iranian limited liability company.
Between August 2010 and November, 2011, TransTel entered into contracts with, and received purchase orders from, multiple Iranian companies to deliver and install telecommunications equipment for the South Pars Gas Field in the Persian Gulf (located between the territorial waters of Iran and Qatar), the South Pars Power Plant in Assalouyeh, Iran, and the Reshadat Oil Field in the Persian Gulf (operated by the Iranian Offshore Oil Company).
At the time of the contracts and the apparent violations described in the Agreement, at least two of the Iranian companies that TransTel contracted or engaged with, Petropars and SADRA, were identified or designated on OFAC’s List of Specially Designated Nationals and Blocked Persons (the “SON List”).
The other Iranian companies included Ayra Nafte Shahab Co., Oil Industries Engineering and Constructions, and the Iranian Offshore Engineering and Construction Company. In addition to providing goods, services, and equipment for these projects, TransTel hired and engaged a number of different third-party vendors-including several Iranian companies-to provide goods and services on its behalf in connection with the above-referenced contracts and purchase orders.
In the published settlement agreement, it is stated that CSE Global instructed TransTel to screen certain third-party vendors for OFAC purposes. All of the invoices associated with the third-party vendors required TransTel to make payments to the third-party vendors for goods and services provided in connection with the above-referenced projects. On this basis, we are led to believe that both CSE Global and TransTel were aware of the risks involving doing business with Iran.
Further, prior to entering into the contracts with the already mentioned companies, CSE Global and TransTel, committed themselves not to route any Iran related , including U.S. dollar, transactions through a non-U.S. bank. In this context, they signed a letter entitled “Sanctions – Letter of Undertaking,” dated 20 April 2012. Both CSE Global and TransTel separately maintained individual U.S. dollar (USO) and Singaporean dollar accounts with this non-U.S. bank located in Singapore.
Despite their commitment to the earlier cited non-U.S. bank, OFAC alleges that TransTel, as early as June 2012, begun originating Iran related U.S. dollar funds transfers from its U.S. dollar-denominated account with the non-U.S. bank. The settlement states that between 2012-2013 TransTel originated 104 funds transfers totaling $11,111,812 from its U.S. dollar -denominated account, which were processed through the United States and related to the provision or supply of goods or services to Iran and/or persons located in Iran.
The ultimate beneficiaries of the transactions were multiple third-party vendors (including several Iranian parties) that supplied goods or services to or for the earlier mentioned Iranian energy projects. According to OFAC, all of the funds transfers were processed through the U.S. None of the
transactions contained references to Iran, the Iranian projects, or to any Iranian parties.
OFAC determines that because the 104 fund transfers were processed through the United States, this caused multiple financial institutions – including several U.S. financial institutions- to engage in the prohibited (re)exportation of financial services from the United States to Iran.
Furthermore, given that TransTel did not fully identify the Iran nexus in the transfers, OFAC is of the opinion that it had explicit knowledge and reason to know that the transactions were destined for or involved, or that the benefit of these funds transfers would be received in, Iran.
As a result, OFAC deems this not only perfidious, but determines that TransTel violated § 1705 (a) of IEEPA, which makes it ” … unlawful for a person to violate … or cause a violation of any … regulation, or prohibition issued under this chapter,” and/or § 560.203 of the ITSR, which prohibits “any transaction … [that] causes a violation of … any of the prohibitions set forth” in the ITSR, by causing these financial institutions to engage in apparent violations of § 560.204 of the ITSR.
Analysis of OFAC’s enforcement
As a global trade compliance practitioner, based on the published facts, it seems incredible that CSE Global and TransTel find themselves in this pickle.
Although its far from clear how the controversial 104 fund transfers violated the IEEPA and ITSR, i.e. caused U.S. persons to engage in prohibited Iran-related transactions. OFAC does not explain how § 560.204 was exactly violated. However, it is clear that CSE Global and TransTel were aware of the risks of doing business with Iran. CSE Global’s instructions to screen parties for OFAC purposes and signing the Sanctions-Letter undertaking.
More stupefying is that U.S. dollar transactions (for that matter Iran related business) were ever entertained. All compliance practitioners are aware of OFAC’s enforcement record in this field. Although one can forgive TransTel’s error in judgement, as traditionally OFAC focused on penalizing financial institutions for processing prohibited transactions and not companies.
Furthermore, despite previous assurances from the U.S. Government, that conducting U.S. dollar transactions with no clear nexus to the U.S. (e.g. ensuring that no U.S. persons are involved in the trade with U.S. sanctioned parties) would not be subject to U.S. sanctions, this enforcement action clearly demonstrates OFAC’s willingness to charge non-U.S. entities of violating U.S. Iran sanctions. Given the current U.S. Administration’s attitude towards Iran, the risks remain high for anyone doing business with Iran.
Note that OFAC relies on the main statute underpinning U.S. sanctions – IEEPA to penalize both U.S. and non-U.S. persons – § 1705 (a) of IEEPA, which makes it “ … unlawful for a person to violate … or cause a violation of any … regulation, or prohibition issued under this chapter…“
Now there is some presumption that the word “person,” is not limited to persons subject to the jurisdiction of the U.S., although there is no evidence in the legislative history of the IEEPA to confirm this and § 1702 (a) explicitly refers to the authorities of the U.S. President to persons subject to the jurisdiction of the U.S.
Now, if we take a step back from the hustle and bustle of OFAC sanctions enforcement, many have asked the question whether the U.S. Government has the right to assert this type of prescriptive jurisdiction.
In other words, does the U.S. Government have the authority to penalize non-U.S. companies for violating U.S. Iran related sanctions.
There are no clear answers to these questions.
Firstly, from a legal perspective – both at the U.S. domestic level and at the international law level, there are no court rulings which conclusively shed light on the legality of OFAC’s enforcement actions. Companies tend to settle with OFAC instead of taking their chances in Federal Court.
Furthermore, the question is whether the U.S. would accept (enforce) a judgment of an international tribunal challenging OFAC’s authority to sanction non-U.S. companies. Think of the Medellin v. Texas, 128 S. Ct. 1346 (2008) case, in which the application of the Vienna Convention for Consular Relations was declined (a judgment of the International Court of Justice to remedy violation of the consular convention).
In this context, serious complaints of the U.S. asserting extra-territorial jurisdictional claims, have ultimately also been settled through non-legal avenues, e.g. WTO complaints have been effectively dropped through back-door diplomacy or the U.S. has applied Presidential waivers to avoid awkward confrontations with U.S. major trading partners.
Another possible reason that impedes the development of conclusive legal rules in regard to OFAC enforcement actions, at least with U.S. allies – which invariably are also U.S. major trading partners – with the possible exception of China, is that there is a broad consensus regarding the aims of U.S. sanctions policies. This would especially apply to Iran.
Thus, many U.S. allies might welcome the U.S.’s enforcement actions, although they have consequently pushed back when their essential interests are at stake, e.g. Helms-Burton Act and most recently, EU’s objections to expansive U.S. sanctions against the Russian Federation.
In the face of fierce opposition, the U.S. has traditionally backed-down. Therefore, the U.S. cannot in good faith claim that it’s sanctions policy is always accepted.
Following the Nuclear Deal with Iran, i.e. JCPOA, the question is whether U.S. allies will support a new wave of U.S. unilateral sanctions, at least not without evidence that Tehran has comprehensively violated it’s JCPOA commitments.
Therefore, the legality of OFAC’s enforcement actions in these cases remains wanting.
U.S. sanctions, especially secondary-sanctions and it’s U.S. item-origin based export controls, have proven to be controversial, at times politically counterproductive, and have generally been lambasted by academics.
Although it would go beyond the aims of this blog to fully explain the international jurisdictional aspects, the issue remains controversial, given the fact that there is no consensus concerning the laws governing the application of jurisdiction under international law.
Generally speaking, under international law, prescriptive jurisdiction, the authority to regulate conduct in which nations have an interest in, is determined by the following (sometimes overlapping) factors:
Active Nationality Principle: countries have traditionally been allowed to exercise prescriptive jurisdiction over persons subject to their jurisdiction (citizens, permanent residents, companies – and their foreign branches registered under their laws) for activities in their territories and outside their territories (e.g. if they commit criminal acts outside the territory of the home-country). This lastly is based on the legal concept that these persons owe allegiance to their home-country.
Passive Nationality Principle: the exercise of jurisdiction over foreign persons by the home-country of a victim of crimes committed outside the territory of that state (e.g. crimes against diplomatic staff or property, acts of terrorism or other crimes). In this context, home-countries reserve the right to start prosecutions against foreign persons if the country in which they committed the crime (or the suspect’s home-country) refuses or is unable to prosecute the perpetrator of the crime.
Objective Territorial Principle (or Effects Doctrine): prescriptive jurisdiction may be asserted over acts that occur outside the territory of country but have harmful or detrimental “substantial effect within,” the territory of the country claiming jurisdiction (e.g. anti-trust conspiracies of foreign companies which affect the interests of consumers in their territories or freezing of financial assets of foreign based terrorists which have committed acts of terrorism in a country’s territory).
Protective Principle: the claim of jurisdiction over criminal acts committed by foreigners directed against the fundamental security of a country (e.g. acts such as the overthrow of the government, espionage, conspiracy to violate immigration laws, and forging of its currency). This type of jurisdiction originates from the concept of self-preservation or self-defense of countries.
Universal jurisdiction principle: exercise of jurisdiction over crimes committed by foreigners outside of their territory that are of universal concern to the community of nations (e.g. piracy, slave-trade, war crimes, crimes against the peace, crimes against humanity, genocide or torture). Theoretically speaking, this could apply to sanctions, although a prosecutor would have to prove that, for instance, the sale of an export controlled good or the facilitation, i.e. enabling evasion or circumvention, of a financial transaction aimed to bring about such a crime or was intended to support it.
In short, if a nation’s extra-territorial claim falls within one of the above-mentioned categories, it is said, that the nation does not violate the international law rules governing “prescriptive jurisdiction.” The problem here is that nations, e.g. the U.S. in this case, do not generally fully explain or justify their claims to assert extra-territorial jurisdiction.
Given the controversies that OFAC enforcement actions provoke, it’s easy to understand why OFAC justifies its enforcement under § 560.204 ITSR – the prohibition to (re)export, sell or supply goods from the U.S. (or by U.S. persons) to Iran (Active Nationality Principle). This is less controversial, although in this case there are several factors which are debatable.
Firstly, given that OFAC has not published how U.S. persons were “caused,” to violate the ITSR the U.S. nexus has not been clarified. If for instance U.S. persons, e.g. banks or vendors, had knowledge of the perfidious nature of the Iran-related transactions, then OFAC’s extra-territorial jurisdictional claim would be a lot stronger.
Secondly, one can question whether the processing of U.S. transactions through U.S. financial system can be effectively qualified as a U.S. nexus. In other words, to what extent can this be considered to have detrimental effects on the territory of nation (Effects Doctrine – arguably enshrined in § 560.203)?
The risk of applying the Effects Doctrine is that nations can sometimes exaggerate their claims under this jurisdictional principle. For instance, nations, the U.S. secondary sanctions are sometimes prone to this, claim that their sanctions aim to redress human rights abuses or other anti-democratic conduct by nasty dictators perpetuated in far away countries that objectively have no real prospect of substantially jeopardizing their national security interests (think of the U.S. embargo against Cuba). This is clearly demonstrated in the debates within the UN Security Council; Council members, especially the Permanent Members, regularly do not agree what constitutes a security threat or the ensuing detrimental effects hereof.
I would personally argue that given the aims of sanctions policies, especially in the twenty-first century, the virtual world – including the global financial system, governments have an interest to regulate conduct extra-territorially, e.g. impose sanctions against terrorists and their financial supporters and WMD proliferators. One could defend such claims, based on the Effects Doctrine – regulate conduct outside of one’s territory which can have detrimental effects on the security of a nation.
The problem in the case of CSE Global and TransTel is that OFAC has not justified how U.S. persons, i.e. U.S. financial institutions, were involved. Thus, how was the Active Nationality Principle triggered. In other words, how does OFAC define U.S. territory in this case.
Is it reasonable to define the processing of off-shore U.S. dollars transactions by U.S. financial institutions, which may only be done in mere seconds, as being part of the U.S. territory? Even if this is done without knowledge of the U.S. persons involved – that could be the case given that OFAC only charged CSE Global and TransTel. By not charging U.S. persons, e.g. U.S. banks, the justification of the enforcement under the Active Nationality Principle becomes even more awkward. This opens the OFAC action to criticism.
The decision to charge CSE Global and TransTel, and subsequent enforcement actions of this nature in the future, then becomes legally tenuous and can in the long term become politically problematic. The exercise of this type of extra-territorial jurisdiction quickly becomes vulnerable to claims that the harm or effects to the U.S. is not real or has been exaggerated. This can have the potential to snap the effectiveness of U.S. sanctions to deal with real threats to global security.