On May 26, 2017, the D.C. Circuit upheld a fine imposed by the U.S. Department of the Treasury Office of Foreign Assets Control (“OFAC”) for violation of the Iran Transaction and Sanctions Regulations (“ITSR”) because the company had “reason to know” the thirdcountry recipient intended to reexport goods to Iran.
In Epsilon Electronics, Inc. v. United States Department of the Treasury, Office of Foreign Assets Control, 857 F.3d 913 (D.C. Cir. 2017), Epsilon filed a challenge seeking declaratory and injunctive relief against the enforcement of OFAC’s penalty. Epsilon was fined USD 4,073,000 in 2014 based on evidence it had reason to know shipments of its products to its Dubai-based distributor were intended for reexport to Iran in violation of the ITSR.
Epsilon argued that the U.S. was required to demonstrate that the goods ended up in Iran. The district court granted summary judgment in favor of OFAC, relying in part on the distributor’s website that indicated the distributor sold goods exclusively to Iran. The appellate court affirmed and also held that OFAC did not need to prove whether the goods actually ended up in Iran. The appellate court noted that the Administrative Procedure Act requires a “highly deferential” review and the court can only set aside OFAC’s action “if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
The appellate court did, however, find that OFAC did not adequately justify its determination for some of the shipments as evidence showed those goods actually ended up in Dubai. The appellate court remanded the matter to recalculate the penalty.
“Reason to know” can be established through course of dealing, general knowledge of the industry or customer preferences, working relationships between parties, or other criteria. In this case, the distributor’s website clearly noted that it was an affiliate of an Iranian company, had locations only in Dubai and Iran, the distributor had been shipping their products to Iran for at least ten years, and the distributor implied that it only served Iran as no other countries were mentioned on its page. In addition to the page being public, there was evidence Epsilon had actual knowledge of the website because Epsilon used images found on the website on an internal gallery labeled “Iran.” There was also evidence of knowledge because a freight manifest showed a shipment from Epsilon’s address directly to the distributor’s address in Tehran, Iran.
The takeaway from this matter is that a company has “reason to know” if their goods will end up in a sanctioned country if there is information (such as a public website) that illustrate as much.