U.S. District Court Judge Richard M. Berman denied a motion to dismiss the indictment in the closely followed criminal prosecution of Reza Zarrab, a Turkish/Iranian businessman charged with conspiring to evade U.S. economic sanctions against the Islamic Republic of Iran on October 17, 2016.1 The decision serves as a reminder of the broad reach of U.S. economic sanctions on Iran, which remain in effect even after the recent nuclear deal, and highlights the U.S. government’s commitment to prosecuting alleged attempts to evade economic sanctions measures.

Zarrab, one of the wealthiest men in Turkey, is a gold trader who owns and operates a network of money exchange and transfer service companies in Turkey and the United Arab Emirates. He was arrested on March 19, 2016, after flying to the United States to visit Disney World with his wife, a Turkish pop star, and their five-year-old daughter. The case also has significant political and foreign policy implications – at his bail hearing, the government emphasized Zarrab’s purported influence at the highest levels of the Turkish government, claiming that bribery charges against Zarrab in Turkey had been dropped after intervention by then Prime Minister, now President, Recep Tayyip Erdogan. Zarrab remains detained without bail.

Superseding Indictment

Mr. Zarrab has been charged with, among other crimes, conspiracy to defraud the United States and to impede the lawful functions of the United States Department of Treasury’s Office of Foreign Assets Control (“OFAC”),2 and conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”)3 and the Iranian Transactions and Sanctions Regulations (“ITSR”).4 The relevant regulations prohibit, among other things, the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States Person, of goods, technology, or services to Iran or the Government of Iran without a license from OFAC.5 The regulations further prohibit transactions and/or conspiracies designed to evade or avoid the sanctions imposed by the ITSR.6

According to the superseding indictment, between 2010 and 2015, Zarrab conducted financial transactions on behalf of Iranian entities sanctioned by the United States government, including entities owned or controlled by the Government of Iran and entities affiliated with the Islamic Revolutionary Guard Corps (“IRGC”), such as Bank Mellat (an Iranian government-owned bank) and the National Iranian Oil Company (identified at the time by OFAC as an affiliate of the IRGC). The indictment describes about a dozen transactions involving the transfer of funds between non-U.S. companies in either U.S. dollars or euros for the benefit of sanctioned entities. One example involved U.S.-dollar transfers among companies and banks in Turkey, the United Arab Emirates, and Turkmenistan for the benefit of an IRGC affiliate. The transaction was apparently cleared through a U.S. correspondent bank.

Motion to Dismiss

Zarrab’s motion to dismiss the indictment challenged the government’s ability to enforce U.S. economic sanctions against a non-U.S. citizen conducting financial transactions that were lawful outside of the United States. Zarrab argued, in essence, that a non-U.S. person could not be prosecuted in the United States based solely on the supposedly incidental involvement of a U.S. bank. The government responded that Zarrab knew that the alleged transactions would be cleared through U.S. banks and conducted the transactions in a way that was intended to conceal the Iranian beneficiaries so that they would not be blocked by U.S. banks. In other words, the government argued, Zarrab deliberately exploited the U.S. financial system for the benefit of the Government of Iran.

In his decision denying Zarrab’s motion, Judge Berman sided entirely with the government.

First, the court held that the indictment properly charged a so-called Klein conspiracy to defraud the U.S. government.7 In the court’s view, all that is required is a scheme that makes it more difficult for the U.S. government (e.g., OFAC) to carry out its lawful functions.8 Allegations that Zarrab intentionally used shell companies and omitted Iranian entities from payment instructions met the charging standard because such actions allegedly impeded U.S. banks from screening sanctionable conduct in connection with their efforts to comply with economic sanctions. Such alleged conduct arguably impeded OFAC’s efforts to administer sanctions against certain Iranian entities.

Second, the court held that the indictment properly charged the “export” of financial services from the United States. Zarrab argued that he didn’t “export” anything and that application of the sanctions to conduct outside the United States would transform economic sanctions into an illegal blockade of Iran. Citing Second Circuit precedent,9 however, the court held that execution of money transfers from the United States for a fee constitutes the “export” of financial services within the meaning of the ITSR.

Zarrab also argued that the criminal statutes under which he was charged, including the improper export of financial services in violation of IEEPA and ITSR, should not be read to apply to conduct outside of the United States, citing Morrison v. Nat’l Austl. Bank Ltd.10 The court ultimately did not reach Zarrab’s argument that the statutes do not apply extraterritorially, finding that the indictment pleaded a sufficient nexus between the alleged crimes and the United States.11 The court further noted that even if the issue were reached, Zarrab’s arguments would be unpersuasive, because statutes prohibiting crimes against the United States government may be applied extraterritorially.12

The court emphasized that it was not ruling on the merits of the charges against Zarrab, only that the indictment was proper. Zarrab may still prevail at trial or on appeal. In the meantime, the decision serves as an important reminder that even what may be perceived as supposedly incidental use of the U.S. financial system to conduct business with sanctioned entities may result in sanctions liability.

Analysis & Conclusion

On the face of it, the case against Zarrab might appear to be an overreach. After all, a foreign national conducting business in a foreign country would not normally expect to be subject to U.S. criminal laws, even when conducting transactions in U.S. dollars. From the government’s perspective, however, Zarrab is exactly the type of actor that IEEPA and the ITSR were designed to capture. The government’s allegations make clear its view that without Zarrab and his network of exchange houses and front companies secretly conducting sanctions-evading international financial transfers, sanctioned Iranian entities would have been excluded from access to the U.S. financial system and the ability to engage in U.S. dollar transactions through U.S. correspondent banks. In this way, Zarrab’s charged conduct goes to the heart of what U.S. sanctions laws are intended to prohibit.

The Zarrab prosecution likely illustrates how the United States will continue to enforce economic sanctions measures. When the United States reached the nuclear deal with Iran and agreed to ease certain nuclear-related secondary sanctions pertaining to non-U.S. persons, officials pledged to continue to aggressively enforce historic violations of U.S. economic sanctions against Iran. The United States also has sanctions in place against other countries around the world. At a minimum, foreign nationals involved in transactions in U.S. dollars, even among foreign entities using foreign bank accounts, must beware that their conduct could be subject to U.S. sanctions.

As is well known, many major financial institutions have been penalized by U.S. federal and state enforcement authorities, including by OFAC, the U.S. Department of Justice, the New York Department of Financial Services, and others, for their participation in alleged sanctioned country transactions. Our prior coverage of such enforcement may be accessed here. While many of those enforcements involved knowing/willful participation, there is potential civil liability even where the participation is not knowing. In this context, financial institutions are taking a conservative approach to their potential sanctions risk exposure. And while the U.S. government has publicly attempted to provide comfort to U.S. financial institutions, enforcement officials likely are content with the abundance of caution being displayed by the banks, even if it chills permissible commerce.