On Feb. 3, 2017, the US Treasury Department’s Office of Foreign Assets Control issued a finding of violation against Taiwan-based B Whale Corp. (BWC), a member of Taiwan-based shipping company TMT Group, for activity occurring entirely outside the United States, based on the jurisdictional finding that “BWC was a US person ... because it was present in the United States for the bankruptcy proceedings when the transaction occurred.” This case has led to quite a bit of speculation about whether OFAC has asserted a broad new theory of jurisdiction that may now impact non-US companies conducting business entirely outside the United States. Below is an overview of some of the key facts in this case, along with observations on OFAC’s assertion of jurisdiction in the context of the particular facts and US court proceeding.
BWC was accused of violating the Iranian Transactions and Sanctions Regulations (ITSR) when its vessel allegedly conducted a ship-to-ship transfer of condensate crude oil from a vessel owned by the National Iranian Tanker Co. (NITC), which, at the time of the transaction, in August/September 2013, was named on OFAC’s list of specially designated nationals and blocked persons (SDNs). BWC and TMT had filed voluntary petitions under the US Bankruptcy Code for commencement of a case in the US Bankruptcy Court for the Southern District of Texas just a few weeks earlier, in June 2013, in order to secure protection from their creditors and reorganization pursuant to the Bankruptcy Code’s Chapter 11.
OFAC’s case against BWC appears to have arisen from a motion in TMT’s consolidated cases to remove TMTs management and appoint a trustee to manage the companies under Bankruptcy Code §1104. Under the code, a debtor’s management may be removed for “fraud or dishonesty.”
One of TMT’s creditors told the court that, during a review of documents produced by TMT, they noticed inconsistencies in the documents and facts suggesting that BWC’s vessel conducted a ship-to-ship transfer with the NITC vessel, just off the coast of Iran. When presented with this evidence, TMT admitted that BWC’s vessel had conducted a ship-to-ship transfer with an Iranian vessel, and accepted that there were indications that it may have been the NITC vessel on the SDN list, but claimed that the transaction was with the United Arab Emirates and did not involve Iranian oil. In fact, TMT presented documents purporting to show that the oil originated in the UAE and that their dealings with the Iranian vessel were conducted indirectly through a charterer and a subcharterer that were contractually prohibited from transacting with SDNs, in accordance with standard industry practice. But the creditors asserted that BWC’s vessel had engaged in deceptive practices, such as turning off its identification system and pursuing out-of-the-way routes that suggested an effort to conceal the Iranian origin of the oil. The bankruptcy issues centered on whether the debtor’s management was guilty of dishonesty, not whether the debtor had violated the OFAC regulations per se. The court documents show that a representative from the US attorney’s office was present in court when these facts were being heard.
While it seems fairly clear that BWC was dealing with an SDN, perhaps indirectly, and possibly also Iranian-origin oil, what is less clear is OFAC’s basis for jurisdiction in this matter. At first blush, it may appear that OFAC asserted jurisdiction over this non-US company (whose vessel court documents show was flagged and registered outside the United States and appears to have been located outside the United States at all relevant times) solely on the grounds that it sought to assert its legal rights in US court. BWC was accused of violating the ITSR, which in general apply to “US persons,” which includes “any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States.” The ITSR define the “United States” to mean “the United States, its territories and possessions, and all areas under the jurisdiction or authority thereof.” TMT Group, its subsidiary BWC, and BWC’s vessel would ordinarily not be considered “US persons” under these regulatory definitions. Nonetheless, OFAC found that BWC “was present in the United States for the bankruptcy proceedings” and that BWC’s vessel “was property under the jurisdiction of a US bankruptcy court.”
Those broad statements might cause one to conclude that OFAC found that the mere presence of a non-US person in US court is enough on its own to create civil or criminal enforcement jurisdiction. Given the potential implications of this case, we decided to examine the filings for anything unique about BWC’s bankruptcy matter, or bankruptcy proceedings in general, that may establish a more limited jurisdictional theory. The docket is sprawling, but a quick review of some of the filings reveals some potentially relevant facts.
First, BWC and TMT filed voluntarily for bankruptcy protection in US court. Second, the Iran dealings uncovered by the creditors were relevant to the court case to which BWC had subjected itself voluntarily — the creditors were claiming that management’s Iran dealings evidenced a disregard for the rule of law and, therefore, keeping incumbent management in control would have put the company’s assets and operations at risk, jeopardizing the creditors’ claims and interests. Furthermore, the Iran-related transaction took place during the course of the bankruptcy proceedings. OFAC specifically pointed out in its web notice that the transaction “occurred after BWC entered into bankruptcy proceedings in the US Bankruptcy Court for the Southern District of Texas on June 20, 2013.” That could indicate that Iran-related conduct predating the initial court filing, or post-dating the resolution of the matter in US court, may not be within OFAC’s jurisdiction, although OFAC did not specifically address that point. In any case, for non-US companies with long-term contracts or investments in Iran or other sanctioned countries, such a temporal limitation may not be of much relevance in assessing jurisdiction.
However, while the factors above may be one measure of the limits that can be drawn around the jurisdictional precedent set by the BWC case, we believe that the most instructive aspect of OFAC’s jurisdictional theory may lie in the fact that this was a bankruptcy case. Bankruptcy proceedings, as opposed to other types of disputes in US district court, have particular elements that appear to have been potentially relevant to OFAC’s finding of jurisdiction here. Under 11 U.S.C. § 541(a), the commencement of a bankruptcy case creates an estate of all of the property of the debtor, as of the petition date, “wherever located and by whomever held,” with only limited exceptions. So, BWC’s vessel would have been part of the bankruptcy estate. Furthermore, under 11 U.S.C. § 363, a debtor’s management cannot engage in any transaction out of the “ordinary course of business” without prior bankruptcy court approval.
Whether a transaction is in the “ordinary course” is often a nebulous question, and creditors may challenge transactions after the fact under §§549 and 550 of the code. Thus, as a practical matter, the bankruptcy court has the power to supervise all significant transactions by the debtor. That could include even otherwise normal business transactions, such as loading and unloading certain freight for a one-vessel company like BWC, but it would almost certainly include any activity that might be considered unlawful, such as dealings with SDNs or Iranian-origin oil. Under these provisions of the Bankruptcy Code, it is likely that the bankruptcy court either would have, or else should have, reviewed and approved the ship-to-ship transfer with the NITC vessel, with the court essentially acting as the highest executive officer with the final word over the company’s senior management for the purpose of such out of ordinary course transactions.
With that context in mind, OFAC may have found that “BWC was a US person ... because it was present in the United States for the bankruptcy proceedings when the transaction occurred,” not simply because it was a party in a US court proceeding, or even one in which Iran-related dealings were germane to the dispute. Rather, OFAC’s finding of jurisdiction in this case may have been much narrower and more unique to the bankruptcy context — i.e., that the Iran-related transaction was subject to the approval of the bankruptcy court in Houston. In other words, this could be viewed as analogous to a case in which the company’s CEO is sitting in Houston, the CEO being the bankruptcy judge. If that were OFAC’s theory, it would be far less broad, though still quite novel and subject to question.
There are also indications in the court documents that TMT had incorporated a US entity in Houston that was a party to the bankruptcy proceedings, and had a lease in the United States. TMT’s creditors reportedly claimed that the company had “manufactured” a US jurisdictional nexus for the purpose of the bankruptcy proceedings by creating a US affiliate in Houston 13 days before filing for Chapter 11 protection. If it is true that BWC or an affiliate had an office or entity in the United States, that could make it easier for OFAC to assert jurisdiction under the ITSR, particularly if that office or entity had some involvement in the Iran-related activity. But, there is no indication in OFAC’s web notice suggesting that this fact played a role in its decision. Nor have we seen any indication that this US-based entity did in fact have a role in the Iran-related conduct. Therefore, it is difficult to assess whether this factor was relevant.
Moving beyond OFAC’s jurisdictional finding that BWC was a US person, the agency also found that, “because [BWC’s vessel] was property under the jurisdiction of a US bankruptcy court ... the oil transferred to the vessel was an importation from Iran to the United States as defined in the ITSR.” An ITSR “importation” charge in this context raises questions of its own. It appears that the vessel never entered US waters during the relevant period, and that the ship-to-ship transfer took place in the Persian Gulf, whether in Iran or the UAE, but in any case not in the United States. Yet OFAC still found that BWC conducted an importation into the United States.
Perhaps OFAC found that, since the vessel was subject to US jurisdiction, it somehow became part of “the United States,” and therefore loading it with Iranian-origin oil constituted an importation into the United States. That would appear to rely on the premise that property subject to US jurisdiction is part of “the United States.” Such a concept would be dubious as a matter of law. Moreover, this theory of jurisdiction could be unworkably broad. For example, following that logic, does a Chinese company that loads Iranian cargo onto a US-origin jet flying from Dubai to Istanbul thereby import that cargo into the United States? The jet would be subject to US export control jurisdiction, just as BWC’s vessel was subject to the jurisdiction of the US bankruptcy court. But that would be a remarkable and highly questionable position to adopt. Another possibility is that OFAC found that the vessel became equivalent to a US-flagged vessel when it became part of the bankruptcy estate, and therefore the vessel became part of “the United States.” Again, though, such a theory would be dubious.
An alternative view of the importation charge could be based in the fact that BWC presumably took a carrier’s lien in the oil to secure payment of its transportation charges. That lien would have then become part of the bankruptcy estate and within the court’s powers. In other words, an “interest in property” of the government of Iran was brought into US jurisdiction. Such a transaction would be prohibited under § 560.211 of the ITSR (dealing in property of the government of Iran), but it is hard to see how this would have constituted a violation of § 560.201, which prohibits “the importation into the United States of any goods or services of Iranian origin or owned or controlled by the Government of Iran ....” It seems reasonably clear that no goods were imported into the United States in this case — an interest in property such as a lien is not a “good” — which raises the question of whether OFAC may have viewed this case as involving the importation of services.
It is notable that OFAC did not say that the oil itself was imported into the United States, but rather that the transfer of the oil “was an importation.” That leaves open the possibility that OFAC may have viewed this as an importation of a service. OFAC may have found BWC to have unlawfully imported a service from Iran into the United States by conducting the ship-to-ship transfer with the NITC vessel, a transaction that would have benefited BWC’s creditors, some of which presumably had some presence in the United States, or benefited BWC itself, which OFAC had found to be a US person.
Finally, BWC’s creditors alleged that BWC had engaged in deceptive practices to prevent the creditors from discovering the Iran-related transactions. As we have seen in other OFAC enforcement cases, this type of conduct — misrepresentation or omission of facts by a non-US person that causes a US person to violate economic sanctions regulations — can trigger jurisdiction over the foreign person. While OFAC did not express such a theory in its web notice, it is conceivable that it may have played a role here as well.
Suffice it to say that unless OFAC is able to clarify how it arrived at this decision, it is hard to evaluate precisely what its implications may be for US sanctions law. The decision may cause non-US companies to consider the implications of an appearance in US court — and especially in a US bankruptcy court — from the perspective of OFAC jurisdiction.
This article was first published on Law360.