OFAC also issued a new FAQ clarifying OFAC policy on the types of remote learning services and software that are authorized pursuant to other Iran general licenses. In the FAQ, OFAC indicates that General License G authorizes U.S. academic institutions to export services and related software that allow Iranian students to sign up for, and participate in, online undergraduate courses. OFAC also indicates that Section 560.540 of the Iranian Transactions and Sanctions Regulations and General License D-1 generally authorize exports of video conferencing software and educational technology software that allow students to view course materials, complete assignments, receive grades, participate in discussions and other remote learning activities, because those services are “incidental to the personal exchange of communications over the internet.” OFAC will prioritize the review of specific license requests for online learning services involving Iranian students that fall outside the scope of these general licenses.

Universities and technology companies using these licenses will need to pay close attention to the specific terms of each license in order to ensure compliance. For example, General License M does not authorize the export of software that is listed on the Export Administration Regulations Commerce Control List. General License M currently expires on September 1, 2021.

Treasury Issues New Guidance Regarding June 21, 2019 Amendment to the Reporting, Procedures, and Penalties Regulations (“RPPR”)

OFAC clarifies that as of June 21, 2019, when the changes to the RPPR took effect, they expected all U.S. persons and persons otherwise subject to U.S. jurisdiction, including entities that are not U.S. financial institutions, to comply fully with all requirements of the RPPR, including the requirement to report rejected transactions within 10 business days of the rejected transaction. (Note: Prior to June 21, 2019, only U.S. financial institutions were required to submit reports to OFAC for rejected funds transfers). Rejection reports must be submitted to OFAC using their Report of Rejected Transaction Form.

The June 21, 2019 changes incorporated new requirements for parties filing reports on blocked property, unblocked property, or rejected transactions. The rule requires more information in blocked property reports in order to prevent multiple requests from OFAC for additional information. Additionally, rejection and blocked transaction reports can be submitted electronically pursuant to the regulations as well as by email, U.S. mail, or other official reporting options. The rule includes information on OFAC’s electronic license application procedures and provides additional instructions regarding applications for the release of blocked funds.

The new guidance does not clarify, however, when a sales inquiry qualifies as a “rejected” transaction that requires reporting. This leaves open the question of whether a company that simply remains silent after receiving a purchase inquiry from a reportable entity has rejected the transaction or not. The agency did state that it does not expect companies to seek further information solely to complete the report to the agency. Instead, OFAC expects the reporting company to provide all information required by the RPPR​ that is in the reporter’s possession.

OFAC states that they continue to review the comments related to this rule change and they welcome further feedback via Compliance Division by email at: [email protected] as to whether any clarification or modification to the rule is needed.

First, the new E.O. authorizes the Office of Foreign Assets Control (OFAC) to designate as an Specially Designated National (SDN) any person that operates in the construction, mining, manufacturing, or textiles sectors of the Iranian economy. The E.O. also authorizes OFAC to sanction any person – including those outside of Iran – that that engages in a transaction for the sale, supply, or transfer of significant goods or services to or from Iran used in connection with the Iranian construction, mining, manufacturing, or textile industries. In other words, non-U.S. companies that engage in significant transactions related to these sectors of the Iranian economy are at risk of being sanctioned by the United States. U.S. persons, including other companies and U.S. banks, cannot do business with SDN’s. Moreover, many global banks will not do business with SDN’s, even if U.S. sanctions jurisdiction does not apply to the particular transaction. When a person or entity is designated as an SDN, bank accounts and other assets in the U.S. are blocked – essentially frozen.

Section 2 of the E.O. authorizes correspondent account and payable-through account restrictions on non-U.S. financial institutions that process or facilitate significant transactions related to these sectors. The E.O. also allows OFAC to expand the list of industries subject to sanctions under the E.O.

Second, OFAC designated the 13 largest steel and iron manufactures in Iran and the largest copper and aluminum manufacturers in Iran as SDNs today, a major step in imposing sanctions on the metals sector in Iran. Under E.O. 13871, non-U.S. companies that conduct significant transactions with any of these new SDNs could be subject to sanctions from OFAC.

Today OFAC also sanctioned two Chinese entities for engaging in significant transactions related to the Iranian metals industry, including the purchase of substantial quantities of steel from Iran, the sale of carbon blocks, cathode blocks, and graphite electrodes to Iran for use in metals production, and the facilitation of sales of Iranian-origin copper to a customer in China. The designation of the Chinese entities is an example of OFAC’s authority to sanction non-U.S. firms that conduct significant business involving Iran.

Please contact us with any questions on these developments.

It is not yet clear what effect this initiative will have on EU companies. The current language in the blocking statute allows each EU member state to “determine the sanctions to be imposed in the event of breach of any relevant provisions” as long as such sanctions are “effective, proportional and dissuasive.” This could mean dealing with multiple different approaches in Europe.

In addition to the EU blocking action, on May 14, 2018, the Russian Parliament introduced new legislation in retaliation for U.S. sanctions against Russia. The proposed law would function like a blocking statute, imposing criminal liability for compliance with U.S. and other foreign sanctions against Russian parties. So far, the Duma (the lower house of Russia's parliament) approved the first of three readings of the proposed law. It will also need to be endorsed by the Federation Council (the upper house of parliament) and signed by the Russian president before publication.

While the Office of Foreign Assets Control (OFAC) sometimes works with companies when blocking statutes are in place, the agency has also enforced U.S. sanctions irrespective of another country’s blocking statute. In 2013, for example, OFAC fined American Express over $5 million for apparent violations of the U.S. embargo on Cuba because its foreign branch offices and subsidiaries issued thousands of tickets for travel between Cuba and countries other than the United States. OFAC noted in its decision that many of the tickets were issued to countries in the EU, which had adopted “antidote” measures (i.e., blocking statutes) prohibiting compliance with the U.S. embargo on Cuba.

According to a press release from the EC, the current aim is for the blocking statute to come into force before August 6, 2018 – the date on which the first set of U.S. secondary sanctions on Iran are scheduled to be re-imposed. If the EC implements legislation on this timeline, EU companies will face a difficult choice between complying with local law and risking significant penalties from OFAC. Given the significant uncertainty regarding the snapback of U.S. sanctions and the potential legislation in the EU and Russia, companies with a significant presence in Europe or Russia should monitor developments carefully and develop a plan to deal with potential conflicts.

Please contact our export and sanctions team with any questions about the new law and its implications.

Even in remanding a portion of OFAC’s determination to the agency, the Court upheld OFAC’s broad interpretation of the ITSR. OFAC’s final Penalty Notice imposed liability for 39 exports of car audio/visual equipment to the UAE that Epsilon knew, or should have known, were intended for reexport to Iran. OFAC relied on evidence from the UAE company’s site advertising extensive relationships with Iran, among other factors, to draw its conclusion. Epsilon argued that OFAC did not prove that any of the 39 shipments actually arrived in Iran. The Court agreed with the government that actual arrival in Iran is not necessary to find a violation – that exporting with reason to know the items were intended for Iran is sufficient to sustain a finding of violation.

With respect to five shipments, the Court held that OFAC did not appropriately articulate its reason for determining that evidence demonstrating Epsilon had reason to believe the items were for the Dubai market were unreliable. These five shipments occurred during a time that Epsilon had extensive e-mail communications with its UAE partner discussing specifically the Dubai market and the opening of a store to serve that market. The Court held that none of the pre-penalty notice, final notice, and internal OFAC record sufficiently articulated a basis for OFAC’s finding that these items were intended for Iran. However, the Court was careful to note that it did not hold that the record could not support OFAC’s finding – only that OFAC did not sufficiently articulate its reasoning. For that reason, it appears likely that Epsilon’s victory in this case will be short-lived.

The most important aspect of this case is that it reaffirmed that OFAC has broad discretion to make determinations under its regulations, and that “knowledge or reason to know” that a transaction will violate sanctions is sufficient to find a violation. However, this case does demonstrate that exporters can successfully challenge OFAC’s determinations under certain circumstances, and should encourage OFAC to more clearly articulate its rationale when imposing penalties.