A criminal indictment recently unsealed in the United States District Court for the District of Columbia against an Iranian businessman who allegedly conspired to violate the U.S. embargo of Iran by funneling U.S.-origin goods to Iran through front companies in Turkey, highlights one of the biggest risks faced by U.S. exporters: You never know where your goods or technology will end up.
The Jafari Case – Why Exporters Need to Be Wary of the “Middle Man” Conspiracy
In United States v. Jafari, Case No. 10-CR-00195 (D.D.C.), the government alleged that between 2004 and 2007 Iranian businessman Milad Jafari and his co-conspirators, through businesses based in Istanbul, Turkey, purchased goods from businesses in the U.S. on behalf of third parties in Iran whose involvement in the transactions was intentionally not disclosed. The indictment alleges that Jafari purchased specialized metals and electrical equipment, some of which had aerospace and military applications, from at least seven unnamed companies throughout the U.S. Once the goods were in Turkey, Jafari would re-export them to his customers in Iran, some of whom were subject to sanctions by the U.S. and the United Nations for involvement in Iran’s nuclear and ballistic missile activity. The indictment further alleges that Jafari – knowing that the companies in the U.S. could not sell directly to the Iranian companies or even know of their involvement – filed false documents with customs authorities and made false representations to the U.S. sellers regarding the end-users and final destination of the goods.
The Jafari case is just one of many recent enforcement actions or criminal prosecutions that reflect the U.S. government’s emphasis on investigating cases in which dual-use goods (goods that have civilian and military applications or could be converted to use for a military purpose) were diverted to countries subject to the strictest export controls, including Iran, Syria, China, North Korea and Cuba. In most instances, the conspiracies follow the classic “middle man” structure allegedly used by Mr. Jafari whereby U.S. exporters are led to believe they are dealing with a legitimate counterparty and that their goods are destined for a country to which there are no regulations prohibiting the shipment. Other examples include the following:
- In May 2010, a subsidiary of Balli Group PLC, a U.K.-based conglomerate, pled guilty and agreed to pay a $15 million civil penalty in connection with its role in a conspiracy whereby U.K. and French entities associated with Balli purchased three Boeing 747s from U.S. financial institutions with the intent of re-exporting the aircraft to Iran. The U.K. and French purchasers did not disclose that the financing for the transactions came from entities in Iran and that the aircraft were intended to be re-exported for use by Iran Air.
- In February 2010, a Taiwanese businessman was indicted for his role in purchasing turbine engines and related parts from U.S. businesses and re-exporting the goods to Iran. The U.S. sellers shipped the goods to freight forwarders in Asia and were falsely led to believe that the ultimate destinations of the goods were Hong Kong and Taiwan. Once the goods were in Hong Kong or Taiwan, the freight-forwarder would ship the goods to Iran.
- In April 2010, Aqua-Loop Cooling Towers Co., a California-based company, had its export privileges revoked by the Commerce Department in connection with the Commerce Department’s finding that Aqua-Loop had purchased cooling tower parts from another unnamed U.S. company on behalf of a customer in Iran. Despite having some knowledge of the involvement of an Iranian company in the transaction, the unnamed U.S. seller sold parts to Aqua-Loop, who shipped the parts to Dubai. After arriving in Dubai, the parts were forwarded to Iran.
What Is The Exposure of U.S. Exporters Who Sell to “Middle Men”?
While it is well known that the U.S. has had an embargo in place against Iran for decades, the breadth of the export laws and regulations that implement the embargo is less well-known. The main set of regulations are the Iranian Transaction Regulations (“ITR”), which are enforced by the Treasury Department’s Office of Foreign Assets Control (“OFAC”) and the Commerce Department’s Bureau of Industry Security (“BIS”). With very few exceptions, the ITR provide that, unless a license is granted by OFAC or BIS, no goods, technology or services of U.S. origin can be exported or re-exported to Iran and all financial transactions with Iran or Iranian entities are prohibited. Additionally, the ITR prohibits any person or entity from participating in an export or financial transaction if that person or entity knows or has reason to know that U.S.-origin goods, technology or funds are destined for Iran. This regulatory scheme has the effect of criminalizing the conduct of “middle men” around the world, as well as anyone who participates in an export transaction while having a reason to believe that the “middle men” they are dealing with intend to violate the embargo or are likely to attempt to violate the embargo.
The implication for U.S. companies is that they need to be cognizant of potential “red flags” surrounding their transactions – no matter what they sell or where their customers are located. For example, in the government’s investigation of the U.S. companies that did business with Mr. Jafari, the investigators undoubtedly wanted to know what due diligence the U.S. companies did on Mr. Jafari, who was apparently known to be a “smuggler” with a criminal history in Turkey. Also, in the Aqua-Loop case discussed above, information in the public record reflects that an employee of the U.S. seller that did business with Aqua-Loop was aware of the involvement of an Iranian company in the transaction. In that case, the investigators certainly pursued what level of knowledge the employee had and whether he or she turned a blind-eye.
While in most instances the targets of the Treasury and Commerce Departments will be the “middle men” who are at the heart of covert conspiracies and while investigators certainly understand there is no way for exporters to completely guarantee that their goods or technology won’t change hands and end up in the hands of a prohibited end-user or in a prohibited country, when the government investigators show up – usually with subpoenas and a lot of questions – exporters need to be prepared to demonstrate two main things:
- First, exporters will need to show that they had an export compliance policy in place and attempted to comply with their export law obligations by, among other things, obtaining any necessary export licenses and ensuring that there were no prohibitions against selling their export to the end-user or to the country of destination.
- Second, exporters will need to demonstrate that they had “clean hands” and that they saw no “red flags” that would have alerted them to likely export law violations.
If exporters can’t satisfactorily demonstrate the above and satisfy the government that sufficient steps were taken to comply with the export regulations, then they may very well find themselves a target of the government’s investigation.
The Jafari case and the other enforcement actions summarized above reflect that the Treasury and Commerce Departments are aggressively pursuing and continually uncovering conspiracies involving “middle men” who create the appearance of a legitimate transaction with U.S. businesses and then re-export the goods or technology to Iran or other countries subject to strict export controls. Though the government’s primary focus is regulating goods and technology that can be used for military purposes, recent enforcement actions reflect the Treasury and Commerce Departments investigating the re-export of everything from Boeing 747s to car wax. Since the ITR prohibits virtually all export and financial transactions with Iran, all exporters need to be cognizant of the fact that, should the government find that a U.S. company was even tangentially connected to a business transaction involving Iran, it is highly likely that investigators will show up with a document subpoena and start asking: who knew what when?
While no company can guarantee that its goods or technology will not fall into the wrong hands, in order to limit legal exposure it is imperative for U.S. exporters to have a thorough export law compliance program that educates employees regarding the company’s legal obligations, implements adequate know-your-customer protocols, and implements processes for dealing with “red flags.” Having such a program in place will not only ensure compliance with U.S. export regulations, but it will go along way if and when government investigators show up with a subpoena and want to discover whether a company was fooled or whether it turned a blind eye.