Date: July 29, 2016
By: Bruce Zagaris*

On June 16, 2016, U.S. District Court Judge Richard M. Berman in Manhattan denied bail for Reza Zarrab, a dual Turks-Iranian national and gold trader, charged with violating Iranian sanctions.1

Decision to Deny Bail

Judge Berman explained that “the Court respectfully denies Mr. Zarrab’s application of bail after finding both that Defendant is a flight risk and that there are no conditions or combination of conditions of release that will reasonably assure the appearance of the Defendant.”

On March 30, 2016, in a four count Superseding Indictment, the U.S. government charges Zarrab with the following crimes: 1) conspiracy to defraud the U.S. and impede the lawful functions of the U.S. Department of Treasury, Office of Foreign Assets Control under 18 U.S.C. §371; 2) conspiracy to violate the International Emergency Economic Powers Act (“IEEPA), 50 U.S.C §§1701-1706, and the Iranian Transactions and Sanctions Regulations (ITSR), 31 C.F.R. §§ 560.202-205; 3) conspiracy to commit bank fraud, under 18 U.S.C. § 1349; and 4) conspiracy to commit money laundering , in violation of 18 U.S.C. §§ 1956-1957.

According to Judge Berman, Zarrab is, at 33 years of age, a wealthy and successful international businessman and an experienced international traveler. He has no ties to New York or to the U.S. Zarrab travels on separate Turkish, Iranian, and Macedonian passports. He has been detained since his arrest in Miami, Florida on March 21, 2016 while enroute with his wife and five year old daughter to Disneyworld.

Zarrab’s defense counsel Benjamin Brafman unsuccessfully proposed the following bail conditions; 1) a $50 million personal recognizance bond secured by $10 million in cash; 2) travel restricted to the Southern District of New York; 3) surrender of all travel documents with no new applications; 4) strict Pretrial Services supervision; 5) home detention with GPS monitoring at Zarrab’s recently leased apartment in Manhattan. Zarrab proposed to leave the apartment only for medical treatment, legal counsel meetings, religious services, and court appearances, all with prior notification to Pretrial Services;  and 6) Zarrab’s presence at his apartment would be secured by Guidepost Solutions LLC, a security company, with the following additional restrictions: i) two or more armed (former or off duty) law enforcement officers at all times; ii) one supervisory security professional overseeing and scheduling Zarrab’s security detail; iii) security at both the apartment and whenever (and to wherever) Zarrab leaves the apartment building; iv) a security vehicle with driver when Zarrab travels to counsel’s office, court, religious services, or medical treatment; and v) regular Guidepost communication with the Court, Pretrial Services, and the U.S. Attorney’s Office.

His defense counsel argued that Zarrab is not charged with a violent crime, is not facing any mandatory minimum prison sentence and is otherwise eligible for bail.

The U.S. Pretrial Services Department (Southern District of Miami) concluded that there are no conditions or combination of conditions to reasonably assure Zarrab’s appearance in court based on: 1) the offenses charged; 2) his extensive foreign travel; 3) no family ties to the U.S.; 4) Turkish citizenship; and 5) unknown immigration status. The Pretrial Services Report also concluded that “the defendant may pose a financial danger to the community based on…the offense charged.”

Judge Berman found that the U.S. government met its burden under 18 U.S.C. §3142(b) of showing that pre-trial release would not reasonably assure Zarrab’s appearance; and that no condition or combination of conditions could be imposed on the defendant that would reasonably assure his presence in court.

In considering the weight of evidence against Zarrab, Judge Berman considered defense counsel’s argument that the case “hang[s] by a jurisdictional thread,” and “the only basis upon which the alleged conduct in this case could be subject to the jurisdiction of the United States is that the non-U.S. banks that Mr. Zarrab used to send the U.S. dollar payments to the non-U.S. recipients elected to do so by involving U.S. banks in the payment chain.” Defense counsel also argued that the Zarrab did not intend to defraud the bank, since he did not know those transactions were going to pass through a U.S. Federal Reserve, because they were sent by non-U.S. banks to other non-U.S. banks.

The U.S. government asserted that the charged offenses “apply to foreign nationals operating in foreign countries when they conspire to evade or avoid the IEEPA and the ITSR or to cause a violation of those provisions.” The U.S. government argued that Congress has the authority to enforce its laws beyond the U.S. territorial boundaries.

Judge Berman found that, for purposes of setting bail, the evidence against Zarrab appeared strong.

Judge Berman agreed with the Pretrial Services Report that Zarrab “may pose a financial danger to the community, since undermining U.S. sanctions against Iran may pose a threat to the U.S. and Zarrab’s release may exacerbate the threat by enabling him to communicate with business associates or others at or from his New Yok City apartment.

Judge Berman also reasoned that Zarrab’s “privately funded armed guard proposal is unreasonable because it helps to foster inequity and unequal treatment in favor of a very small cohort of criminal defendants who are extremely wealthy.”

Indictment and Charges

The indictment also names as defendants Camelia Jamshidy, aka Kamelia Jamshidy, 29, a citizen of Iran; and Hossein Najafzadeh, 65, a citizen of Iran, for engaging in hundreds of millions of dollars-worth of transactions on behalf of the Iranian government and other Iranian entities, which were barred by U.S. sanctions, laundering the proceeds of those illegal transactions and defrauding several financial institutions by concealing the true nature of these transactions.2

According to the allegations in the indictment, starting in 1979, the U.S. president found that the situation in Iran constituted an unusual and extraordinary threat to the national security, foreign policy and economy of the U.S. and declared a national emergency to deal with the threat. The U.S. IEEPA sanctions prohibit financial transactions involving the U.S. or U.S. persons that are intended for the Iranian government or specified Iranian-related entities.3

Between 2010 and 2015, the three defendants conspired to conduct international financial transactions on behalf of and for the benefit of, among others, Iranian businesses, the Iranian government and entities owned or controlled by the Iranian government.4 Among the beneficiaries of these schemes were Bank Mellat, an Iranian government-owned bank designated, during the time of the charged offenses, by the Treasury’s OFAC as a Specially Designated National (SDN) under the ITSR; Mellat Exchange, an Iranian money services business owned and controlled by Bank Mellat; the National Iranian Oil Company (NIOC), identified during the time of the charged offenses by OFAC as an agent or affiliate of Iran’s Islamic Revolutionary Guard Corp (IRGC); the Naftiran Intertrade Company Ltd. (NICO), Naftiran Intertrade Company Sarl (NICO Sarl) and Hong Kong Intertrade Company (KHICO), companies located in the United Kingdom, Switzerland and Hong Kong, respectively, that were acting on behalf of NIOC; and the MAPNA Group, an Iranian construction and power plant company. Bank Mellat, NIOC, NICO Sarl, NICO and HKICO are no longer designated as SDNs and NIOC is no longer identified as an agent or affiliate of the IRGC, though these entities remain “blocked parties,” with whom U.S. persons continue to be prohibited generally from engaging in unlicensed transactions or dealings.5

The scheme was part of an intentional effort to help the Iranian government evade the effects of U.S. and international economic sanctions. For instance, on or about December 3, 2011, Zarrab and Najafzadeh received a draft letter in Farsi prepared for Zarrab’s signature and addressed to the general manager of the Central Bank of Iran. The letter stated, in part, that “[t]he role of the Supreme Leader and the esteemed officials and employees of Markazi Bank [the Central Bank of Iran] play against the sanctions, wisely neutralizes the sanctions and even turns them into opportunities by using specialized methods.”

The letter goes on to state, in part, “[i]t is not secret that the trend is moving towards intensifying and increasing the sanctions, and since the wise leader of the Islamic Revolution of Iran has announced this to be the year of Economic Jihad, the Zarrab family, which has had a half a century of experience in foreign exchange…considers it to be our national and moral duty to declare our willingness to participate in any kind of cooperation in order to implement monetary and foreign exchange anti-sanction policies.6

The three defendants and their co-conspirators used an international network of companies located in Iran, Turkey and elsewhere to conceal from U.S. banks, OFAC and others that the transactions were on behalf of and for the benefit of Iranian entities. This network of companies includes Royal Holding A.S., a holding company in Turkey; Durak Doviz Exchange, a money services business in Turkey; Al Nafees Exchange, a money services business; Royal Emerald Investments; Asi Kiymetli Madenler Turzim Otom, a company located in Turkey; ECB Kuyumculuk Ic Vedis Sanayi Ticaret Limited Sirketi, a company located in Turkey; and Gunes General Trading LLC; and others. As a result of this scheme, the co-conspirators induced U.S. banks to unknowingly process international financial transactions in violation of IEEPA.7

Analysis

This case is under scrutiny in Turkey, where three years ago Zarrab was detained by the Turkish authorities as part of a wide-ranging corruption investigation of businessmen with ties to Recep Tayyip Erdogan, at the time Turkey’s prime minister and is now the president.8 In particular, he was entangled in graft allegations as an alleged associate of Babak Zanjani, the Iranian tycoon recently sentenced to death in Tehran.9 The allegations against Zarrab in Turkey were dropped after a clash between Erdogan and the U.S.-based cleric Fethullah Gulen and his network of supporters within the judiciary and the police. The Turkish opposition has cheered Zarrab’s arrest.10

Allegedly a criminal organization led by Zarrab distributed Tl 137 ($66 million) in bribes to the former economy and interior ministers, their sons and possibly to some other bureaucrats to conceal fictitious exports and money laundering. The ministers allegedly flew on Zarrab’s private jet several times.

In October 2014, Istanbul prosecutors dropped the charges. In December 2015, Turkish law enforcement returned a large sum of money and two kilograms of gold seized by the police as part of the same corruption investigation to Zarrab’s employee Abdullah Happani.11

The arrest of Zarrab may be good news for Iranian President Hassan Rouhani. The sanctions on Iran led to the rise of individuals subcontracted to circumvent the restrictions. The shady web under the administration of former Iranian President Mahmoud Ahmadinejad and its affiliates in the IRGC fostered corruption and lawlessness. Rouhani has systematically tried to discard corrupt remains of this shadowy web and counterbalance the IRGC and other hardline elements. Although triggered by U.S. law enforcement, the Rouhani Administration may welcome the arrest of Zarrab. However, the implementation of the Joint Comprehensive Plan of Action (JCPOA) and the subsequent victory of Rouhani’s allies in the February 26 parliamentary and Assembly of Experts elections, have exacerbated the split between Rouhani and his foes. In this regard, the economy is the most important issue. Until now, the sanctions relief has yet to be felt.12

Zarrab’s arrest may implicate Iranian-Turkish relations. The Iranian Oil Ministry’s effort to claim Zanjani’s airline in Turkey and the U.S. government’s effort to seize Zarrab’s assets could complicate Iranian relations with Turkey.13

From a legal point of view the extraterritorial enforcement of U.S. laws against a non-U.S. person who did not act in the U.S. is quite aggressive. U.S. courts have upheld extraterritorial enforcement of U.S. criminal laws based on the “effects” doctrine. Objective and subjective territoriality are closely related and often occur simultaneously. Subjective territoriality requires an element of the case to occur within the asserting state. Objective territoriality exists when the effect or result of the criminal conduct affects the assessing state, but the other elements of the offense occur wholly beyond the territorial boundaries.14

Traditionally, the U.S. and U.K. have at least theoretically denied the ability of a state to assert criminal jurisdiction outside of its territory against a non-national. However, they believe that in certain circumstances a crime may be committed within the territory of a state and hence be justifiable by its criminal courts, even though the actor is physically outside the territory. In addition, these states assert jurisdiction when an act is committed physically outside their territory but injures, harms, or affects its citizens or interests located within its territory. In such cases the basis for jurisdiction is often referred to as “objective territorial jurisdiction.” In recent years U.S. prosecutors and courts have increasingly relied on objective territorial jurisdiction – also called the effects doctrine.15 This case seems to potentially test the outer limits of the effects doctrine.

*Article reprinted with permission from: IELR, Volume 32, Issue 7, July 1 – 31, 2016, P. 294-297. Bruce Zagaris is partner with the law firm of Berliner, Corcoran & Rowe, LLP. He can be reached at bzagaris@bcr-dc.com.

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1 United States v. Reza Zarrab, U.S. District Court S.D.N.Y. 15 Cr 867, Decision and Order, June 16, 2016.

2 U.S. Department of Justice, Turkish National Arrested for Conspiring to Evade U.S. Sanctions Against Iran, Money Laundering and Bank Fraud, Press Release, Mar. 21, 2016.

3 United States v. Reza Zarrab, U.S. District Court S.D.N.Y. 15 Cr 867, Indictment, parag. 2-3.

4 Id. at parag. 13.

5 Id at parag. 6-12.

6 Id. at parag. 14j.

7 U.S. Department of Justice, supra.

8 Benjamin Weiser, Reza Zarrab, Charged With Violating Sanctions on Iran, Seeks Bail Deal, N.Y. TIMES, May 18, 2016.

9 Enis Erdem Aydin, What Zarrab’s arrest means for Rouhani, AL MONITOR, March 29, 2016.

10 Id.

11 Reza Zarrab arrested in US for scheme to evade Iran sanctions, TURKISH MINUTE, March 21, 2016.

12 Aydin, supra.

13 Id.

14 Christopher Blakesley, Extraterritorial Jurisdiction, in INTERNATIONAL CRIMINAL LAW: PROCEDURAL AND ENFORCEMENT MECHANISMS 33, 47 (M. Cherif Bassouni ed., 2d ed. 1999

15 RESTATEMENT OF FOREIGN RELATIONS LAW OF THE U.S. (3rd), § 40, Commend (d).

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