On July 27, 2017, the United States Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement agreement with CSE Global Limited and CSE TransTel Pte. Ltd., two non-U.S. companies located in Singapore, for 104 apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”), 31 C.F.R. Part 560, and the International Emergency Economic Powers Act (“IEEPA”). The settlement agreement reflects OFAC’s increasingly broad interpretation of IEEPA’s jurisdictional scope and evidences OFAC’s apparent willingness to penalize non-U.S. companies for violations of U.S. sanctions regulations.
OFAC alleges that, between June 2012 and March 2013, TransTel “appears to have violated § 1705(a) of IEEPA and § 560.203 of the ITSR by causing at least six separate financial institutions to engage in the unauthorized exportation or re-exportation of financial services from the United States to Iran, a prohibition of § 560.204 of the ITSR.” TransTel, which had entered into contracts with “multiple Iranian companies to deliver and install telecommunications equipment for several energy projects in Iran,” had signed a statement with its non-U.S. bank in Singapore, promising “not to route any transactions related to Iran through [the Bank], whether in Singapore or elsewhere.” Nonetheless, TransTel and CSE Global – according to OFAC – originated U.S. dollar funds transfers from its U.S. dollar-denominated account with its bank related to its Iran business “no later than June 2012 – less than two months [after signing the statement].”
In other words, TransTel – despite promising its bank to refrain from doing so – originated funds transfers from its U.S. dollar-denominated account at a non-U.S. bank and routed such funds transfers through the United States for eventual destination in Iran. In doing so, OFAC alleges that TransTel engaged in an apparent violation of § 560.203, which – at the time of the conduct – prohibited “any transaction…that causes a violation of…the prohibitions set forth in [the ITSR].” TransTel, according to OFAC, caused U.S. banks to engage in the export or re-export of financial services to Iran in violation of § 560.204. Moreover, the underlying statutory authority – IEEPA – prohibits “a person [from]…caus[ing] a violation of any license, order, regulation, or prohibition issued under [its authority].” Accordingly, in acting in apparent violation of § 560.203, TransTel likewise acted contrary to § 1705(a) of IEEPA. For this reason, OFAC undertook enforcement action against the two non-U.S. companies for violations of the Iran trade embargo.
OFAC’s action is par for the course. We have seen OFAC and other U.S. federal authorities continue to make use of the language in § 560.203 (as well as the causation provisions in other U.S. sanctions programs) to target non-U.S. persons for “causing” a U.S. person to violate the prohibitions contained in the ITSR. Yet, there is an open question as to whether OFAC (and other U.S. federal agencies) have the legal authority to take such action under the terms of the underlying statute. Does IEEPA, for instance, provide for jurisdiction over non-U.S. persons who cause a violation of a prohibition issued under its authority?
Many sanctions practitioners have assumed yes. However, there appears to be good reason to believe otherwise. The textual foundation for OFAC’s view appears to the language of § 1705(a), which prohibits a “person” from violating, attempting to violate, conspiring to violate, or causing a violation of any license, order, regulation, or prohibition issued under the authority of IEEPA. Use of the word “person” – as opposed to the more specific terminology of “U.S. person” – would suggest that the drafters of the IEEPA Enhancement Act – which is where the current language of § 1705(a) originates – intended to extend its prohibitions to U.S. and non-U.S. persons alike. (Traditionally, as evident in § 1702(a), IEEPA grants the President authority to regulate the activities of any person, or with respect to any property, subject to the jurisdiction of the United States. Non-U.S. person who are located outside the U.S. would appear to be beyond the scope of U.S. jurisdiction and thus not subject to the President’s regulatory authority as provided under IEEPA. There is an additional question as to whether a penalty provision (i.e., § 1705) can broaden the scope of jurisdiction provided elsewhere in the statute.)
Yet, in reviewing the legislative history, there is a complete lack of evidence suggesting that the drafters of the IEEPA Enhancement Act had any intention of extending its prohibitions in such manner. Nowhere do the Act’s sponsors indicate that the legislation was intended to make unlawful acts both by U.S. and non-U.S. persons alike. Moreover, use of the word “person” does not necessarily make evident an intention to extend IEEPA’s prohibitions to non-U.S. persons located outside the United States. Indeed, there is a long-standing canon of statutory construction – what is commonly known as the “presumption against extraterritoriality” – that limits application of a given law to U.S. persons in the absence of clear textual evidence that the law was intended to apply extraterritorially. In the case of § 1705(a), there appears to be a good case that this presumption should prevent OFAC (and others) from applying its language to those outside the United States absent clear indication from Congress to do so.
That has not stopped OFAC from doing so, and few, if any, have been willing to test this argument in U.S. federal court (as opposed to entering into a settlement agreement with OFAC to limit liabilities) – not unexpected considering the potential costs of litigation and the uncertainty of a favorable result. Yet there remains an open question – one that will not be resolved by settlement agreements like the one found here – as to whether OFAC does have the authority to regulate the activities of, and penalize, non-U.S. persons for “causing” U.S. persons to violate the prohibitions of a given sanctions program issued under the authority of IEEPA. So long as OFAC continues to aggressively interpret its own authorities in this manner, non-U.S. persons should exercise caution with respect to transactions that could render them liable for causing U.S. person violations.