On May 26, 2017, issuing its judgment in Epsilon Electronics, Inc. v. US Dep’t of Treasury Office of Foreign Assets Control, the United States Court of Appeals for the District of Columbia held that, in imposing civil penalties on US persons who export goods to a third party with reason to know that the third party intends to re-export the goods to Iran, OFAC is not required to make a showing that the goods actually ended up in Iran. The case presented a unique opportunity to test broadly-accepted readings of certain prohibitions of the Iranian Transactions and Sanctions Regulations (“ITSR”), 31 C.F.R. Part 560, before a US federal court.
31 C.F.R. § 560.204
Most fundamentally, the case revolved around the scope and meaning of the ITSR prohibition at 31 C.F.R. § 560.204. That regulatory provision reads as follows:
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:
(a) Such goods, technology, or services are intended specifically for supply, transshipment, or reexportation, directly or indirectly, to Iran or the Government of Iran…
Epsilon Electronics, Inc., a U.S. company, engaged in more than three dozen shipments of consumer goods to a Dubai-based company, Asra International, between 2008-2012. In 2011, OFAC began to investigate Epsilon after learning of a 2008 shipment from Epsilon to an address in Tehran, Iran. (This investigation was later resolved via a cautionary letter.) Soon thereafter, OFAC also began to take a closer look at shipments made to Asra International, finding that Asra’s own website contained information touting its success in the Iranian market and identifying a directory of its associated dealers physically located in Iran. Upon these latter findings, OFAC initiated a second investigation into Epsilon’s activities.
In May 2014, OFAC concluded that more than three dozen shipments to Asra violated § 560.204 because the shipments were made with knowledge or reason to know that Asra intended to re-export the consumer goods to Iran. OFAC sent Epsilon a Prepenalty Notice and soon afterwards a final Penalty Notice, imposing a $4,073,000 civil penalty on Epsilon. In December 2014, Epsilon initiated a lawsuit against OFAC in the U.S. District Court for the District of Columbia, seeking declaratory and injunctive relief against enforcement of the civil penalty and advancing several arguments in its favor. In March 2016, the district court granted summary judgment to OFAC, and it is that decision from which Epsilon appealed to the D.C. Circuit Court.
Interpreting the Meaning and Scope of § 560.204
Central to the appeal was the issue as to whether, prior to imposing civil penalties for a violation of § 560.204, OFAC was required to make a showing that the subject goods actually reached Iran. Epsilon argued that § 560.204 demands such a finding, while OFAC advanced the position that the plain text of § 560.204 evidences the lack of any such requirement. Alternatively, OFAC also argued that if the Court were to find the language of § 560.204 ambiguous, then the Court should defer to the agency’s interpretation.
The Court, however, did not reach OFAC’s latter argument, finding that “the reading of [§] 560.204 that OFAC has adopted is the same reading that we would have adopted in the absence of any agency interpretation.” In the Court’s holding, “OFAC’s current interpretation is the most natural and the most consistent with the plain text [of § 560.204].” To reach this conclusion, the Court engaged in a series of interpretive exercises — each of which resulted in the finding that § 560.204 does not impose a requirement on OFAC to show that the goods were actually delivered to Iran prior to finding a violation.
Two of those interpretive exercises provide insight into the scope and meaning of the prohibition of § 560.204. First, Epsilon argued that the “word ‘including’ [in § 560.204] makes clear there is no separate prohibition on exports to third countries independent from re-exportation to Iran.” In other words, “goods have not been exported ‘to Iran’ until they actually reach Iranian territory,” as the words following “including” illustrate one type of transaction prohibited by the broader prohibition on exports or re-exports to Iran. In contrast, OFAC argued that “the phrase ‘to Iran’ refers to the sender’s intent, not the ultimate arrival of the goods,” so that “goods have been ‘export[ed]…to Iran’ when the exporter puts them in transit, with Iran as the intended final destination.” The Court agreed with OFAC’s reading of the prohibition, deciding that it “more closely aligns with ordinary English usage” and finds support in how other U.S. export regulations use the term “export”. As such, the Court held that the phrase “export to Iran” does not impose a requirement that the shipped goods actually make it to Iran before a finding a violation can be made, but instead is wholly concerned with the sender’s intent and deed. It is enough, in other words, for a U.S. person to intend to ship goods to Iran and to engage in the actual shipment of such goods for OFAC to find a § 560.204 violation. Whether those goods reach Iran is beside the point for purposes of § 560.204.
Second, the Court takes issue with Epsilon’s reading of the word “including” in § 560.204. In the Court’s view, “[w]hatever follows the word ‘including’ is a subset of whatever comes before; any conduct that comes within the ‘including’ clause comes, by definition, within the preceding clause as well.” This present a problem for Appellant, according to the Court, to the extent that its reading of § 560.204 would involve certain conduct being covered by the including clause, but not by the more general prohibitory clause. For instance, as the Court points out, the export of goods by a U.S. person to parties in a third country would be prohibited if undertaken with knowledge or reason to know that the parties in a third country specifically intended to re-export the goods to Iran (even if the goods were never delivered to Iran) under the including clause, but would not be prohibited under the general prohibitory clause if the goods did not reach Iran (at least under what the Court takes to be Epsilon’s reading). This result would be anathema to generally accepted modes of statutory interpretation, insofar as the including clause would prohibit activities not otherwise prohibited by the general prohibitory clause.
What Does It All Mean?
The Court settled an unresolved issue as to the meaning and scope of § 560.204, holding that a U.S. person can be subject to civil penalties if it ships goods from the United States (or otherwise) to a third country, with knowledge or reason to know that those goods are specifically intended for re-export to Iran, even if the goods never arrive in Iran. In other words, OFAC is under no obligation to make a showing that the exported items actually reached Iran prior to finding a § 560.204 violation. It is enough that an exporter ships goods to Iran (i.e., puts the items in transit to Iran) with the intent of delivering them to Iran (or, in the case of an indirect export, shipped goods to a third person with knowledge or reason to know that such goods were specifically intended for re-export to Iran).
The Court’s decision does not resolve all questions regarding the scope of § 560.204, however. For instance, to the extent that the including phrase of § 560.204 is merely illustrative of transactions that are prohibited under the general prohibitory clause, we lack clarity as to the full scope of the prohibition at § 560.204. Could OFAC, for instance, penalize U.S. persons for exporting items to a third country, items which are later re-exported to Iran, even if they lack knowledge or reason to know that the third parties specifically intend to re-export the items to Iran…? In other words, is there necessarily a knowledge requirement for shipments to third parties? In the alternative, has the Court imposed an intent requirement for exports to Iran, as evidenced through its language that placing goods in transit with the intent for those goods to be delivered to Iran is enough for OFAC to find a prohibited “export to Iran”…? These are all unsettled questions of law and will require due caution on the part of US exporters .