October 3, 2018
On September 13, 2018, Epsilon Electronics Inc, a car audio and video equipment manufacturer, agreed to pay the U.S. Treasury’s Office of Foreign Assets Control (OFAC) $1,500,000 to settle a case related to alleged violations of the Iranian Transactions and Sanctions Regulations.
The case, which is a culmination of a 2014 penalty notice and two court cases, contains four vital lessons for U.S. exporters whose products may be found in Iran.
The September 2018 settlement is a re-consideration of a disputed penalty notice from 2014, at which time OFAC fined Epsilon $4,000,000. In the 2014 notice, OFAC alleges that from 2008 to 2012, the electronics manufacturer broke the law by selling audio and video equipment to Asra International, LLC. Epsilon sold these goods despite having reason to know that Asra International, a company incorporated in Dubai, UAE, would more than likely distribute the goods to Iran.
In 2016, Epsilon challenged OFAC’s 2014 Penalty Notice in court. Epsilon lost their case, but upon appeal, the case was sent back to OFAC for reconsideration. The latest settlement is the result of this “reconsideration”.
Lesson 1: Conduct CDD on Foreign Distributor Who May not be Similarly Restricted in Doing Business with Iran
The case underscores the importance of proper due diligence with regard to foreign distributors that are not similarly restricted under their local law in doing business with Iran.
Some of the 39 invoices involving Epsilon’s Iran sanctions violations were issued through a distributor of Epsilon, namely; Power Acoustik Electronics, Inc.
According to the 2016 court documents, Power Acoustikallegedly sent a shipment to Iran in 2008. When OFAC found out about the shipment, it promptly issued a subpoena on Power Acoustik. Power Acoustic responded to OFAC thatit had no knowledge of the shipment. OFAC closed the investigation with the issuance of a cautionary letter in January 2012. In this letter, OFAC told Power Acoustik that the regulations “prohibit virtually all direct or indirect commercial financial or trade transactions with Iran by U.S. persons (…)”, and that the 2008 shipment appears to have violated the regulations. OFAC also told Power Acoustic that it could “take further action in the future should additional information warrant renewed attention.”
Despite this warning from OFAC, five more transactionstook place from Epsilon to Asra International followingOFAC’s 2012 cautionary letter.
Though OFAC did not find direct evidence that the Epsilon shipments to Asra International subsequently made their way into Iran, the agencydid find some evidence that the Dubai-based company was shipping goods to Iran regularly. On their website, in an English-language “about us” tab, it indicatedthat Asra International and AsraElectronic Trading held “10 long years of experience in Iran’s car audio and video market”. The website also listed an address in Iran for Asra Electronic Trading, which OFAC discovered was the same address listed on the airway bill for the 2008 shipment of goods from Power Acoustik to Iran
The U.S. District Court for the District of Columbia issued an order in favor of OFAC, upholding the $4 million civil penalty imposed by OFAC in 2014.
Lesson 2: Actual delivery of goods to Iran is not required
Epsilon appealed its $4 million penalties and the U.S. Court of Appeals for the District of Columbia affirmed in part and reversed in part the D.C. District Court’s order.
One of Epsilon’s arguments during the appeal was that Regulation31 CFR § 560.204, relating to transshipments to Iran, could not be violated when there was no actual export to Iran.
The majority of the Appeals Court did not agree, and said that the actual delivery of U.S. origin products to Iran is not required for the regulation to be violated. Instead, it held that the regulations restrict a U.S. exporter at the point of shipment from the U.S.where that exporter knows or should know that a third country specifically intends to re-export the goods to Iran, regardless of whether the goods ultimately arrive in Iran.
Lesson 3: ITRS Transshipment regulation is not a strict liability provision
Another take away from the Appeals court case is the acknowledgement that Regulation 31 CFR § 560.204, unlike several other OFAC regulations, does not impose“strict liability”.
The transshipment regulation rather prohibits U.S. persons from exporting “goods, technology or services to Iran”, including exports to third countries with “knowledge or reason to know” that the exports “intended specifically” for a shipment to be sent to Iran.
Nevertheless, according to the 2002 OFAC “Guidance on Transshipments with Iran”, reasonable care must be taken to ensure that exports to third countries are not specifically intended for Iran and that third-country customers do not deal exclusively or predominantly with Iran. Therefore, while an exporter may satisfy themselves that its exports to a third country are not specifically intended for Iran, some due diligence is required to demonstrate the exporter had no “reason to know” that a customer was exclusively or predominantly doing business with Iran.
In this case, the Circuit Court upheld theOFAC determination that the transshipment provision could be triggered where substantial evidence (including website materials from Epsilon and the customer) supported a conclusion that, during one period of time, all of the relevant third-country customer’s sales were to Iran.
The Appeals Court sent the case back to the lower court, with instructions to remand the case to OFAC for further consideration.
Lesson 4: Having no OFAC Compliance Program at the time of the violations is an aggravating factor
On September 13, 2018, OFAC issued the final settlement in the matter. The reduced September 2018 settlement amount reflects OFAC’s consideration of the case, “in light of the D.C. Circuit’s decision and pursuant to the General Factors under OFAC’s Economic Sanctions Enforcement Guidelines.”
OFAC mentions the following to be aggravating factors:
(1) the Alleged Violations constituted or resulted in a systematic pattern of conduct;
(2) Epsilon exported goods valued at $2,823,000 or more; and
(3) Epsilon had no compliance program at the time of the Alleged Violations.
OFAC considered the following to be mitigating factors:
(1) Epsilon has not received a Penalty Notice or a Finding of Violation in the five years preceding the transactions that gave rise to the Alleged Violations;
(2) Epsilon is a small business; and
(3) Epsilon provided some cooperation to OFAC, including entering into an agreement to toll the statute of limitations for one year.
OFAC also notes that, following litigation of the Alleged Violations, Epsilon took additional remedial actions to address the conduct that led to the Alleged Violations, including terminating its relationship with Asra International and instituting an OFAC sanctions compliance program.