Archive for the ‘Reexport’ Category

Epsilon vs. OFAC: Third Party Risks & “Reason to Know”


By: Danielle Hatch

Before I get to the nitty gritty of this case its important to remember that companies can be held liable for sanctions violations when they export a product to a third-party in another country and know or have reason to know that the third party intends to reexport their product to Iran. Companies must do their due diligence to make sure that that third party who is receiving their products isn’t planning on sending them to Iran. Now that that’s out of the way, let’s get started.

Note: This case was between the Office of Foreign Assets Control (OFAC) and Epsilon Electronics but Power Acoustik Electronics who is a subsidiary of Epsilon who engaged in the transactions in question.

Epsilon Electronics, also doing business as Power Acoustik Electronics, Sound Stream, Kole Audio, and precision Audio has agreed to pay $1.5 million to OFAC to settle the enforcement case related to alleged violations of the Iranian Transactions and Sanctions Regulations (ITSR). OFAC’s Penalty Notice alleged that Epilson violated the ITSR when it issued 39 invoices for sales to Asra Internationals LLC from 2008 to 2012 because Epsilon knew or had reason to know that Asra was distributing its products to Iran.

In 2008 OFAC found out that Power Acoustik exported items to an address in Iran. OFAC issued a subpoena and eventually sent the company a cautionary letter in 2012. During a separate investigation, OFAC uncovered wire transfers from Asra International (company located in Dubai) to Power Acoustik totaling more than $1.1 million between 2010 and 2011. OFAC believed that these wires may have been for products that were destined to Iran and they issued another subpoena to Power Acoustik. The company explained that they had 41 sales of audio and video equipment to Asra between 2008 and 2012 which explained the wire transfers. During a further investigation, OFAC did not directly find any proof that any of the equipment was reexported to Iran by Asra but they did find a website for Asra that specified that the company provided car audio and video products to Iran. The Iran affiliate’s address on Asra’s website was the same address as the 2008 address that OFAC initially sent a subpoena to Power Acoustik for, related to the illegal shipment.

OFAC then issued a Penalty Notice to Epsilon for $4 million based on 34 non-egregious violations (those that occurred before the 2012 cautionary letter) and 5 egregious violations (occurred after the cautionary letter). Epsilon challenged OFAC’s Penalty Notice in the US District Court for the District of Columbia and lost. The company than appealed the order to the US Court of Appeals for the District of Columbia which affirmed the 34 non-egregious violations but reversed the 5 egregious violations to be non-egregious changing the penalty from $4 million to $1.5 million. The Court of Appeals found that an exporter may be found liable if it exports goods from the US to a third country, with reason to know that those goods are specifically intended for reexport to Iran, even if they never make it to Iran. The “reason to know” requirement for OFAC can be established “through a variety of circumstantial evidence” including “course of dealing, general knowledge of the industry or customer preferences, working relationships between parties, or other criteria far too numerous to enumerate.”

Up until 2011, Asra distributed to Iran exclusively, making the evidence on their website evidence for OFAC that Power Acoustik could have reasonably inferred that Asra only distributed its products to Iran. The Court of Appeals found that the final five exports didn’t fit the “reason to know” standard because OFAC did not address several emails between Acoustik’s sales team and an Asra manager between 2011-2012 which explained that their products were going to be sold from Asra’s new retail store in Dubai…causing the 5 violations to be changed.

OFAC saw the following as aggravating factors:

  1. The alleged violations constituted or resulted in a systematic pattern of conduct
  2. Epsilon exported goods valued at $2,823,000 or more
  3. Epsilon had no compliance program at the time of the alleged violations

OFAC considered the following to be mitigating factors:

  1. Epsilon has not received a Penalty Notice or a Finding of Violation in five years preceding the transactions that gave rise to the alleged violations
  2. Epsilon is a small business
  3. Epsilon provided some cooperation to OFAC, including entering into an agreement to toll the statute of limitations for one year

The important take away from this case is that, as most people already know, there is a very far-reaching interpretation of what constitutes “reason to know” when dealing with third parties and Iran (and Cuba).

Enforcement Details:

France: Weaning Off of US Weapons Systems Parts


By: Danielle Hatch

French Defence minister Florence Parly recently explained that it will start to cut its dependence on US components in many of its weapons systems. Everyone knows that US export controls often limit European weapons sales even if they only contain a tiny US component. Just this year, the US blocked the sale of French-made SCALP cruise missiles to Egypt because they contained a US part that was subject to the US export regulations. Regarding the blocked sale, Parly said: “We are at the mercy of the Americans.” Without providing specific examples, Parly said France needed to “gradually wean ourselves off our reliance on a certain number of American parts.”

France and Germany are currently working on the Future Combat Air System (SCAF) project, a next generation combat jet and they are trying to minimize the dependence on US parts within the project. France’s Dassault Aviation and Airbus have signed a deal to work together on the jet which will have the ability to be at the center of a broader weapons system that can control a squadron of drones. Currently, France’s air force uses Reaper drones which are built by General Atomics, a US firm. France had to obtain US congressional approval to arm the drones since they are used in its counter-terrorism operations against Islamist militants. “Is that satisfactory? No. But we don’t have any choice,” Parly explained.

Quotes from French Defence minister Florence Parly during a joint news conference in Helsinki, Finland on August 23, 2018.

More details:

DDTC Requires Foreign Applicants to Submit New Certification


By: John Black

On October 1, 2014, DDTC noted on its website a new requirement for applications submitted by foreign parties for reexports or retransfer of USML items.  Foreign applications must include a certification statement that is similar to the long-standing ITAR 126.13 certification that U.S. applicants must provide with each application. To the relief of these foreign parties, the added requirement is minimal—just an extra piece of paperwork to remember.

The foreign party certification letter must comply with these requirements:

1. The letter must state if the applicant or any senior officer of the company has been charged with ITAR violations or is otherwise ineligible to receive a license to temporarily import or export USML items.

2. The letter must also state if any party involved in the transaction has been charged with ITAR violations or is otherwise ineligible for the proposed licensure.

3. The letter must be signed by a responsible official empowered by the applicant.

While the ITAR requires that the party signing the certification by U.S. parties must be an “empowered official,” as defined in the ITAR, DDTC did not provide a similar definition for “responsible official empowered by the applicant.”  Lacking specific guidance of a definition, it would be reasonable to have the certification signed by someone similar to a U.S. “empowered official.”

For more details on this new requirement, go to the website guidance here.


DDTC Requires ITAR § 126.13 Style Certification from Foreign Persons Requesting Reexport/Retransfer Authorization


By: Brooke Driver

From now on, foreign persons requesting reexport/retransfer authorization of defense articles pursuant to §123.9(c) must provide a certification similar to what US persons must provide when they apply for ITAR licenses or agreements.  The letter from foreign persons must address the following:

– Whether the applicant or the chief executive officer, president, vice-presidents, secretary, partner, member, other senior officers or officials (e.g., comptroller, treasurer, general counsel) or any member of the board of directors is the subject of an indictment or has been otherwise charged, convicted of, violating any of the U.S. criminal statutes enumerated in §120.27 of ITAR; or is ineligible to contract with, or to receive a license or other approval to temporarily import or export defense articles or defense services from any agency of the U.S. Government;

– Whether, to the best of the applicant’s knowledge, any party to the export as defined in §126.7(e) has been convicted of violating any of the U.S. criminal statutes enumerated in §120.27 of this subchapter, or is ineligible to contract with, or to receive a license or other approval to temporarily import or export defense articles or defense services from any agency of the U.S. government.

DDTC’s guidance, which it posted on, also requires that the foreign party signing the statement must be a responsible official empowered by the applicant.  Typically, an ITAR empowered official is a US person in a US entity.  This new guidance indicates that DDTC wants foreign applicants to have something like a foreign version of a US empowered official to sign certifications and applications to DDTC.