Introduction:
On October 24, 2011, a three-judge panel of the U.S. Court of Appeals for the Second Circuit released an opinion in United States v. Banki, No. 10-3381 (2d Cir. Oct. 24, 2011) that reversed convictions of Defendant Mahmoud Reza Banki on charges of conspiring to violate the Iranian Transaction Regulations ("ITR") and aiding and abetting violations of the ITR.1 In doing so, the Court contradicted the position of the U.S. Government in a manner that may have important consequences for how the Government pursues sanctions enforcement matters going forward.
Background.
With limited exceptions, the ITR prohibit most economic
transfers between the United States and Iran, including exports of
U.S. origin goods, technology, or services from the United States
or U.S. persons to Iran. See 31 C.F.R. § 560.204. The
ITR portion of the Iran sanctions have been in place since 1995,
though the United States has periodically ratcheted up sanctions on
Iran since that time, most recently in November 2011, as explained
in this month's blog article
"Aiming for a Moving Target: Bad and Good News on Changing
Iran Sanctions."
According to the opinion, Banki is an Iranian-born, naturalized
U.S. citizen with family in Iran. Starting in May 2006, family
members in Iran transferred $3.4 million to Banki for personal use
in the United States through the "hawala" system, a
network of money brokers that is widely used to make international
funds transfers in Middle Eastern and South Asian countries. As
described by the Court, hawala brokers act as international
economic go-betweens without ever making direct financial
transactions across country boundaries. Banki, No.
10-3381, at 4-5. For example, for a transfer from Iran to the
United States, a hawala broker in Iran would receive payment from
an individual in Iran, then contact a broker in the United States
who would pay the U.S. recipient.
To carry out these types of transactions, Banki's hawala broker
based in Iran would search across a wide network of his U.S.
contacts, none of whom Banki knew, for a matching amount of money
moving from the United States to Iran at the same time the transfer
from Banki's family was made to Banki. As a result, Banki
received several deposits in his U.S. bank account as a result of
monetary transfers involving a wide range of individuals and
companies. Banki typically e-mailed a family member to confirm
receipt of funds in his Iranian account; some of which, according
to the Court, indicated that Banki knew money was moving from the
United States to Iran related to his hawala transactions. Based on
these facts, Banki was convicted of violating the prohibition in
the ITR against exporting services to Iran, 31 C.F.R. §
560.204, and was sentenced to 30 months in prison. Banki,
No. 10-3381, at 10, 12.
The Opinion.
After first dismissing Banki's argument that money transfers
to Iran qualified as "services" under the ITR only if
undertaken for a fee, the Court overturned his convictions related
to the ITR on his second argument, that the district court erred by
failing to instruct the jury that non-commercial remittances to
Iran are exempt from the ban on export of services under 31 C.F.R.
§ 560.204.
In so ruling, the Court relied on 31 C.F.R. § 560.516, which
provides that "U.S. depository institutions are authorized to
process transfers of funds to or from Iran" in certain
circumstances, including where "[t]he transfer arises from an
underlying transaction that is not prohibited by this part, such as
a non-commercial remittance to or from Iran." Banki argued
that this provision specifically permitted a non-commercial
remittance to or from Iran, including a "family
remittance." The government, by contrast, argued that such
remittances would be allowed only if processed through a U.S.
depository institution. While the Court demurred as to the precise
meaning of the regulation, it held that "at a minimum, the
regulation is ambiguous in this respect." Banki, No.
10-3381, at 20. Citing the U.S. Supreme Court decision U.S. v.
Santos, 553 U.S. 507 (2008), the Court held that it was
required to interpret the ambiguous regulation in favor of Banki as
a criminal defendant. Id. at 20-21.
Analysis.
We think the key takeaway from Banki is how the Court
dealt with what it perceived (and many exporters would agree) as
the ambiguity of the ITR. The Court makes much of this ambiguity,
and, at base, the holding suggests that the U.S. Department of
Treasury, Office of Foreign Assets Control ("OFAC") may
have a high hurdle to demonstrate that its view of the regulations
comports with the plain text of the regulations where criminal
convictions are sought. The Court's analysis of the ITR is
quite literal, as one might expect given that U.S. federal courts
are rarely called upon to interpret OFAC's regulations. That
view of the regulations could significantly affect U.S. sanctions
enforcement precisely because many of the U.S. sanctions are
relatively ambiguous on their face, even where OFAC may have an
established view of their meaning to the point that outside counsel
and industry have accepted that view.
A few provisions might be particularly limited by a literal
reading. First, criminal prosecutions of the
"facilitation" provisions of the ITR, 31 C.F.R.
§§ 560.208; 560.417, prohibiting U.S. persons from
approving, financing, facilitating, or guaranteeing a transaction
by a foreign person that would be prohibited if performed by a U.S.
person, could be significantly constrained by this interpretive
limitation. Secondly, criminal applications of the "evading or
avoiding" provisions found in many U.S. sanctions could
potentially be significantly constrained if only allowed in
circumstances where their application is not ambiguous. See,
e.g., 31. C.F.R. § 560.203.
Of course, the impact of this aspect of Banki is limited
somewhat by its application in the criminal context. For most OFAC
enforcement activity, which occurs in a non-criminal context, the
rule of lenity enumerated in Banki may not be particularly
helpful to a defendant making its case against, for example, a
civil fine. Even in those circumstances, however, the fact that the
Court found specific provisions of the ITR to be ambiguous where
the Government argued for a fixed meaning may embolden parties
facing civil fines to press their own interpretation of the
regulations.
Conclusion.
Although Banki involved a relatively sophisticated fact
pattern and a relatively narrow focus on the question of family
remittances, its holding dismissing criminal charges based on the
ambiguity of the criminal regulations has potentially wide-ranging
effects. While the ambiguity of U.S. sanctions regulations may at
times seem to broaden their scope and application to persons
seeking to comply with the laws, in this instance the Court
inverted that presumption by forcing the burden of clarity onto the
Government.
It seems somewhat unlikely that OFAC will seek to clarify otherwise
ambiguous provisions of the regulations based on one holding, but
the opinion does provide at least qualified comfort to persons
dealing with relatively ambiguous regulations. We will be
interested to see any broader impact of the holding on future or
existing enforcement measures.
Footnotes
1. Banki was also convicted on charges of making materially false representations in response to a government subpoena, which were affirmed by the Second Circuit, and on charges of conspiring to operate an unlicensed money-transmitting business and aiding and abetting in an unlicensed money-transmitting business, which were vacated and remanded by the Second Circuit.
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