By Jim McShane, Export Solutions

We all know that OFAC can impose civil penalties against any person who exports goods to a third party, when that person has reason to believe the goods are destined for Iran. But how far does OFAC have to go to prove that the goods were actually reexported to Iran? A recent decision by the U.S. Court of Appeals sheds some light. (Spoiler Alert: Turns out the answer is, “Not very far.”)

Epsilon Electronics vs. OFAC

Epsilon is a California-based wholesaler of sound systems, video players, and other accessories for cars. The company's products are sold and exported globally. They are also reexported by Epsilon’s trading partners. Between 2008 and 2012, Asra International Corporation, a distributor based in Dubai, had been one of Epsilon's trading partners. During that period, Epsilon exported 39 shipments of consumer goods to Asra, valued at about $3.4 million.

In 2011, Epsilon became the subject of an OFAC investigation for an alleged 2008 export to an address in Tehran. Epsilon denied knowledge of the shipment and suggested that a lower-level employee had sent the package without the company's knowledge. In January 2012, OFAC sent a warning letter to Epsilon explaining that the shipment appeared to have violated Iranian trade regulations. OFAC explained that it would not penalize Epsilon for the shipment, but did advise that it could take this apparent violation into account in any future case. The closure of this investigation merely set the stage for future actions.

These actions were based on new information suggesting that Epsilon’s exports to Asra were, in fact, being reexported Iran. OFAC opened a second investigation in December 2011 – just one month prior to the closure of the first investigation and the issuance of the warning letter.

The new information included claims made on Asra’s website about the company's success in Iran, along with photos from trade shows in various Iranian cities. A number of the photos on Asra’s website were also displayed on Epsilon's website. In May 2012, OFAC issued an administrative subpoena to Epsilon to provide details related to Epsilon’s transactions with Asra and with Iran. Epsilon denied dealings with Iran and declared none of its shipments to Asra were intended for Iran. In compliance with the administrative subpoena, Epsilon provided invoices for 34 exports to Asra.

Epsilon continued its relationship with Asra based (in part) on Asra’s alleged plans to open a Dubai retail store to sell Epsilon products. Between February and May of 2012, Epsilon exported and additional five shipments to Asra.

In May 2014, OFAC issued a Prepenalty Notice, declaring its intent to impose a civil monetary penalty of $4,073,000 subject to Epsilon's response. The Prepenalty Notice alleged that “all thirty-nine of Epsilon's shipments to Asra violated 31 C.F.R. § 560.204 because each was made with knowledge, or reason to know, that Asra intended to reexport the goods to Iran.” In response, Epsilon denied any knowledge or reason to know that Asra had reexported its products to Iran. OFAC issued a final notice formally imposing the $4,073,000 penalty.

Exporting “with knowledge” is a slippery slope

Naturally, Epsilon appealed the penalty. The Court of Appeals considered various elements of the company’s challenges. With respect to 34 of the 39 exports alleged to have been reexported to Iran, the Court reverted to the statutory language:

“Except as otherwise authorized pursuant to this part . . . the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran is prohibited, including the exportation, reexportation, sale, or supply of any goods, technology, or services to a person in a third country undertaken with knowledge or reason to know that:

  1. Such goods, technology, or services are intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran . . . .”

The Court held that Epsilon had violated 31 C.F.R. § 560.204 when it issued 34 invoices for car audio and video equipment (valued at $3,407,491) and exported to Asra – a company with offices in Tehran, Iran, and Dubai, which reexports most (if not all) of its products to Iran. The Court upheld that Epsilon knew or had reason to know that such goods were intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran. The Court reasoned that with respect to the 34 earlier exports there was substantial evidence to indicate that Asra distributed exclusively in Iran as late as December 2011.

Most damaging was Asra’s website that stated: “Asra International as an affiliate of the Asra Electronic Trading Company of Tehran.” The website’s Contact Us page only listed two addresses for Asra – Dubai and Tehran. The Court also considered Epsilon’s own website which contained photos copied from Asra’s website, displaying them in a photo gallery labeled "Iran," thereby bolstering the claim that Epsilon had “knowledge or reason to know.”

With respect to the last five exports (occurring between February and May 2012) the Court accepted that Astra’s communications with Epsilon were related strictly to Astra opening a retail store in Dubai to sell Epsilon products. These communications brought into question whether Epsilon had exported this shipment with knowledge that exports were “…intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran . . . .”.

Ultimately, the decision of the Court of Appeals was to remand the matter to OFAC for further consideration of the five alleged 2012 violations, and of the total monetary penalty imposed for all liability findings, in a manner consistent with this opinion. The instructions to reconsider the total monetary penalty was based upon the fact that in establishing the penalty amount, OFAC found that none of Epsilon violations were voluntarily disclosed, and that the last five shipments, made after Epsilon received OFAC's January 2012 cautionary letter, were egregious.

Lessons Learned

  • U.S. exporters can be liable. OFAC does not need to prove that the items exported were actually reexported to Iran (or any sanctioned destination) to constitute a violation;
  • Knowing your customer is more than just screening for restricted parties. Proper due diligence in ascertaining the customer’s business activities can prevent violations;
  • If exporting to distributors, it’s important to ascertain the scope of their distribution network. Do they distribute only within one country? Exclusive distribution to a single (third) country? Distribution to multiple countries?;
  • As in all things export-related, document your decision process before exporting.

And finally, be careful what you place on your website! People read those pages. (And this includes people in export enforcement.)

Click here to read the Court of Appeals decision about this case.

If you need help evaluating or improving your company’s export compliance, please complete a No-Charge Consultation Request. We would like to learn more and discuss how we can help!

Jim McShane is a Sr. Consultant, Trade Compliance for Export Solutions -- a full-service consulting firm specializing in ITAR and EAR regulations.