A D.C. Circuit Court of Appeal’s panel recently issued a key opinion affirming the U.S. Treasury Department’s broad ability to enforce sanctions regulations through its Office of Foreign Assets Control (“OFAC”). While the court ultimately set aside a $4.07 million penalty, the decision established critical precedent for export compliance and future OFAC enforcement actions. Significantly, the court ruled that OFAC does not have to prove that a company’s exports actually reached a sanctioned destination in order to impose penalties for sanctions violations. Rather, OFAC simply has to show that a company knew or had reason to know that through its third-party distributor, the company’s exported goods would ultimately end up in a sanctioned country.
In reviewing OFAC’s penalty imposition, the D.C. Circuit first addressed the threshold question of whether OFAC was required to prove Epsilon’s electronics actually reached Iran in order to hold them liable under the ITSR. The court affirmed OFAC’s interpretation of the ITSR and held that an exporter could be found liable without proof of an actual sale or shipment of goods to end users in Iran. The panel found that 34 Epsilon shipments to Asra International violated the ITSR because Epsilon knew or had reason to know of Asra’s Iranian business ties, which were publicized world-wide on its English-language website. Further, the court concluded there was direct evidence Epsilon had actual knowledge of Asra’s website and distribution practice in Iran.
However, the opinion also concluded that the 5 latest Epsilon shipments included in OFAC’s allegations were completely unsupported by evidence and even rose to a level of arbitrary and capricious. For these shipments, Epsilon had presented evidence to OFAC of email exchanges with Asra International indicating those particular shipments were specifically intended for a Dubai retail store and not Iran. While the $4.07 million penalty was temporarily set aside, the case was remanded to district court and Epsilon still likely faces substantial civil fines for its export conduct despite the evidentiary concerns with its five latest shipments.
The Epsilon case provides valuable insight for U.S. exporters and highlights the importance of maintaining a robust trade compliance program to mitigate potential risks. Thus, companies must conduct due diligence on all potential distributors, particularly if they are likely to re-export your goods. Exporters should seek to find all publicly available information on a potential distributor to limit potential OFAC liability, particularly information about the distributor’s prospective links with sanctioned countries. As the Epsilon holding shows, it is simply irrelevant that your goods actually reach such a sanctioned destination for liability to attach.