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What the Decision on Epsilon’s Sanctions Violations Means for Companies

Michael Volkov discusses Epsilon’s sanctions violations, the resulting “reason to know” requirement and the potential impact to companies going forward.

The Department of Treasury’s Office of Foreign Asset Control (OFAC) recently announced the settlement of the Epsilon enforcement action (here).  This case requires a theme song and there is none better than Truckin (here) from Grateful Dead’s second compilation album, What a Long Strange Trip its Been.

This case involved two separate OFAC investigations for violations of the Iran Sanctions Program, an appeal to the U.S. District Court for the District of Columbia (here), and an appeal at the U.S. District Court of Appeals for the District of Columbia Circuit (here). The case is important because it confirms a broad reading of third-party risks for companies when dealing with the Iran Sanctions Program (and the Cuba Sanctions Program).

As we all know, companies can be held liable for a sanctions violation when they ship a product to a third party in another country and know or have reason to know that the third party intends to reship the product to Iran. Consequently, companies have to conduct due diligence and document appropriate assurances that the third party is not intending to ship the goods to Iran.

The legal question here boils down to what does OFAC have to prove – that the products actually ended up in Iran or that the company had “reason to know” that the third party intended to ship the goods to Iran. There is a big difference here between the two levels of proof.

The Facts

Let’s review the facts – OFAC learned in 2008 that Power Acoustik (a subsidiary of Epsilon) sent a shipment to an address in Iran and OFAC issued a subpoena. OFAC eventually closed the investigation with a cautionary letter dated January 26, 2012.

In a separate investigation, OFAC learned that between September 2010 and October 2011, Power Acoustik received wire transfers totaling more than $1.1 million from a commercial bank in Dubai on behalf of Asra International and that these payments may have been for products destined to Iran. OFAC issued another subpoena.

Power Acoustik confirmed that they had 41 sales of audio and video equipment to Asra International between August 2008 and May 2012. OFAC found that five of these transactions post-dated its initial cautionary letter, dated January 26, 2012.

OFAC did not identify any direct evidence that Power Acoustik’s shipments were transported to Iran, but they located a website for Asra International which indicated that Asra, through an affiliated entity, distributed car audio and video products in Iran. The Iran affiliate’s address was the same as the address in the original 2008 illegal shipment to Iran. OFAC also noticed that photos from the Asra International website revealed that Asra International distributed Acoustik Power’s products (from a related party) were being distributed in Iran.

OFAC issued a pre-penalty notice concluding that Power Acoustik should pay $4,073,000, based on 34 non-egregious violations (which occurred before the January 26, 2012 cautionary letter) and five egregious violations (which occurred after the cautionary letter). After hearing Power Acoustik’s objections, OFAC affirmed its penalty notice.

Power Acoustik’s Appeals

The district court affirmed the OFAC determination. The U.S. Court of Appeals, however, reversed in part and affirmed OFAC’s decision with remand instructions. The Court of Appeals affirmed OFAC’s enforcement action with respect to the 34 non-egregious cases but reversed on the five transactions that occurred after the January 26, 2012 cautionary letter.

The Court of Appeals affirmed that an exporter may be found liable if it ships goods from the United States to a third country, with reason to know that those goods are specifically intended for reexport to Iran, even if the goods never arrive in Iran. OFAC affirmed this finding as to the total 39 transactions.

The “reason to know” requirement can be established “through a variety of circumstantial evidence,” including “course of dealing, general knowledge of the industry or customer preferences, working relationships between the parties or other criteria far too numerous to enumerate.”

Up until December 2011, Asra International in Dubai distributed to Iran exclusively. The evidence concerning Asra International’s website and marketing document confirmed its exclusive distribution arrangement involving an Iran  affiliate. For this time period, Power Acoustik could reasonably infer that Asra in Dubai only distributed its products to Iran.

For the final five shipments, however, the Court of Appeals found that the evidence did not satisfy the “reason to know” standard.  Specifically, the Court of Appeals noted that OFAC failed to address several email conversations between Acoustik’s sales team and the Asra Dubai manager during the period of September 2011 to July 2012, which indicated that the products were going to be sold from Asra International’s new retail store in Dubai.

Based on this review, the Court of Appeals re-calculated OFAC’s penalty by excluding the five egregious transactions. The Court of Appeals remanded the case back to OFAC for recalculation of the penalty based on the change in the five transactions.

The End of the Road.

OFAC and Epsilon agreed to pay $1,500,000 to settle the enforcement matter.

This article was republished with permission from Michael Volkov’s blog, Corruption, Crime & Compliance.


Michael Volkov

Michael Volkov

Michael-Volkov-leclairryanMichael Volkov is the CEO of The Volkov Law Group LLC, where he provides compliance, internal investigation and white collar defense services.  He can be reached at [email protected].  His practice focuses on white collar defense, corporate compliance, internal investigations, and regulatory enforcement matters. He is a former federal prosecutor with almost 30 years of experience in a variety of government positions and private practice.

Michael maintains a well-known blog: Corruption Crime & Compliance which is frequently cited by anti-corruption professionals and professionals in the compliance industry.Michael has extensive experience representing clients on matters involving the Foreign Corrupt Practices Act, the UK Bribery Act, money laundering, Office of Foreign Asset Control (OFAC), export controls, sanctions and International Traffic in Arms, False Claims Act, Congressional investigations, online gambling and regulatory enforcement issues.

Michael has assisted clients with design and implementation of compliance programs to reduce risk and respond to global and US enforcement programs.

Michael has built a strong reputation for his practical and comprehensive compliance strategies.Michael served for more than 17 years as a federal prosecutor in the U.S. Attorney’s Office in the District of Columbia; for 5 years as the Chief Crime and Terrorism Counsel for the Senate Judiciary Committee, and Chief Crime, Terrorism and Homeland Security Counsel for the Senate and House Judiciary Committees; and as a Trial Attorney in the Antitrust Division of the U.S. Department of Justice.

Michael also has extensive trial experience and has been lead attorney in more than 75 jury trials, including some lasting more than six months. His clients have included corporations, officers, directors and professionals in, internal investigations and criminal and civil trials. He has handled a number of high-profile criminal cases involving a wide‐range of issues, including the FCPA and compliance matters, environmental crimes, and antitrust cartel investigations in countries all around the world.

Representative Engagements

  • Successfully represented three officers of a multinational company in two separate criminal antitrust investigations involving a criminal antitrust investigation in the District of Columbia and the Southern District of New York.
  • Defended pharmaceutical company before the Food and Drug Administration and Senate Finance Committee relating to application for approval of generic drug.
  • Conducted internal investigation which exonerated company against allegations of false statements in submissions to the FDA and against improper conduct alleged by Senate Finance Committee.
  • Represented company before the US State Department on alleged violations of ITAR which lead to voluntary disclosure and imposition of no civil or criminal penalties.
  • Advised several multinational companies on compliance with anti‐corruption laws, and design and implementation of anti‐corruption and anti‐money laundering compliance programs.
  • Advised hospitals, pharmaceutical companies and medical device companies on compliance issues relating to Stark law and Anti‐Kickback law and regulations.
  • Conducted due diligence investigations for large multinational companies for anti‐corruption compliance of: potential third party agents, joint venture partners and acquisition targets in Europe, Africa, Asia and Latin America.
  • Represented individual in white collar fraud case in Alexandria, Virginia and secured dismissal of criminal charges and expungement of criminal record.
  • Represented company before Congress and Executive Branch in effort to modify Justice Department regulations concerning use of federal funds.
  • Advised and assisted World Bank in review of global corruption policies, enforcement programs and corruption investigations and prosecutions.

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