On May 26, 2017, the D.C. Circuit issued its final decision regarding Epsilon Electronics’ challenge to a July 2014 penalty imposed by the U.S. Department of the Treasury’s Office of Foreign Assets Control. The court upheld much of the penalty, but found OFAC failed to provide sufficient explanation for five of the 39 alleged violations, and remanded the entire penalty to the agency for further consideration.
In 2014, OFAC imposed a $4 million penalty against Epsilon for 39 transactions it allegedly intended specifically for the supply, transshipment, or re-exportation, directly or indirectly, to Iran. OFAC noted Epsilon exported its products to a company it knew or had reason to know distributed most, if not all, its sales to Iran. Epsilon also had a photo gallery of its products labeled “Iran” on its website.
In its challenge, the company raised issues with the substance of the violations and the calculation used to determine the penalty amount. With respect to the substance, Epsilon argued OFAC introduced no evidence the goods it shipped to its distributor actually arrived in Iran and therefore it could not be held liable for violating a provision of the Iranian Transactions and Sanctions Regulations (ITSR) that prohibited the export of goods to a person in a third country “undertaken with knowledge or reason to know that [s]uch goods … are intended specifically for … re-exportation, directly or indirectly, to Iran.” The D.C. Circuit disagreed, holding that the prohibition does not require that the goods actually arrive in Iran. The court also rejected Epsilon’s due process argument that it lacked adequate notice of the basis for the agency’s action because the agency did not disclose certain documents it relied on, finding that the basis for the agency’s decision was adequately described in its pre-penalty notice.
Epsilon had more success, however, arguing that OFAC failed to adequately explain some of its findings. In a review to determine if the agency’s decision was “arbitrary and capricious,” under the Administrative Procedure Act, the D.C. Circuit found that there was “substantial evidence” to support OFAC’s findings with respect to the first 34 transactions. However, for the last five transactions, the court found that the agency “failed to explain adequately why it discounted” evidence Epsilon submitted to show why it believed the products were to be used in Dubai. OFAC’s determination for those transactions was therefore arbitrary and capricious, and the D.C. Circuit remanded the determination to the agency for “further consideration.” Additionally, because the penalty determination for the 34 transactions the D.C. Circuit upheld was inherently intertwined with alleged aggravating factors for the five transactions it remanded, the D.C. Circuit remanded the entire penalty for further consideration.
Judge Silberman issued a dissent which would have found OFAC’s determination with respect to all 39 transactions to be arbitrary and capricious, arguing that “OFAC has exacted a penalty based on a confusing, indeed mystifying, decision.” The dissent argued OFAC’s interpretation of whether it must prove the goods had arrived in Iran was ambiguous and the court must remand to the agency.
The D.C. Circuit’s decision stands as one of the few circuit-level reviews of an OFAC penalty determination and it contains a number of useful elements for practitioners, from a clarification that the ITSR does not require evidence of the goods arriving in Iran, to a summary of the penalty matrix, a suggestion of how exclusionary clauses can be overcome by a seller’s knowledge of potential violations, and even a brief overview of the “inventory rule.”
Going forward, the decision may hold even more value for the regulated community if it leads OFAC to provide more detail in its public penalty determinations to ensure they can withstand judicial scrutiny against a “substantial evidence” standard.