On May 26, 2017 the D.C. Circuit Court of Appeals released its opinion in Epsilon Electronics v. Office of Foreign Assets Control (“OFAC”), a rare appeal of OFAC’s decision in an economic sanctions civil penalty case. The court upheld OFAC’s determination that Epsilon had violated the Iranian Transactions and Sanctions Regulations (“ITSR”). However, the court remanded to OFAC to reconsider the treatment of five “egregious” violations and the overall penalty assessment against Epsilon, citing concerns with the procedure the agency used in making these determinations.
Although the court deferred to OFAC’s interpretation of the ITSR’s prohibitions, the court was less deferential to the agency’s civil penalties determination when it found the administrative record lacking. The Epsilon decision may lead OFAC to develop more detailed evidence in enforcement cases in which it decides to impose a civil penalty in order to withstand future court scrutiny.
Between 2008 and 2012, Epsilon sent thirty-nine shipments of electronics products to Asra, a customer in the United Arab Emirates. After learning of multiple wire transfers to Epsilon from Asra’s bank, OFAC discovered that Asra did business exclusively or near-exclusively with Iran. OFAC began an investigation and concluded the shipments violated the ITSR. OFAC further determined that five of the shipments constituted “egregious” violations of the ITSR, and ultimately levied a civil penalty of $4,073, 000. Epsilon appealed OFAC’s decision, arguing that the products it supplied to Asra were not intended for Iran, Epsilon had no reason at the time of shipment to think that the products would be sent to Iran, and there was no evidence that the products were actually shipped to Iran. Epsilon also argued that the civil penalty assessed was excessive under the Eighth Amendment, and that its due process rights had been violated.
Neither Epsilon nor the U.S. government attempted to prove whether the products shipped to Asra were in fact sent on to Iran, but Epsilon argued that OFAC should have to prove that the products were shipped to Iran in order to impose civil penalties under the ITSR. The court found that exporters such as Epsilon can be held liable for ITSR violations if they “ship goods from the United States to a third country, with reason to know that those goods are specifically intended for reexport to Iran, even if the goods never arrive in Iran” (emphasis added). Per OFAC public guidance, this “reason to know” can be established by circumstantial evidence, such as the photos and contact information from Asra’s website cited in the administrative record. On this point, the court deferred to OFAC’s interpretation of the ITSR’s broad prohibitions in Section 560.204, which it found to be reasonable.
In addition, the court found that OFAC’s determinations regarding 34 of Epsilon’s 39 shipments to Asra were thus supported by substantial evidence, but the final five—which OFAC had classified as “egregious”—were not. The court focused on OFAC’s treatment of e-mail correspondence between Epsilon and an Asra manager in Dubai, which the court says could support that Epsilon had no reason to know that the last five shipments were intended for Iran. In particular, the court noted that OFAC had not considered the emails to be credible, but OFAC did not adequately explain how this credibility finding was made. The court remanded this question to the agency, and it is possible that the “egregious” violation assessment will be reinstated based on the existing record. Because the court also found that OFAC’s calculations for both the non-egregious and these five egregious violations were “intertwined,” the entire penalty calculation was remanded to the agency.