How a shopping mall project in Tehran ended up costing a US construction company $660,594
Sanctions on Iran have been around, and on more than off, for many years. Thanks to geopolitical tensions in the Middle East and the memory of the 1979 hostage crisis, most Americans recognize that doing business with Iran is fraught with compliance and reputational risk. However, this is not always the case with overseas subsidiaries. Take, for instance, the recent settlement agreement between the Treasury Department Office of Foreign Assets Control (OFAC) and New Jersey-based construction firm Construction Specialties, Inc. (CS).
CS agreed to a $660,594 fine to settle three apparent violations of the Iranian Transactions Sanctions Regulations (ITSR), which arose from the activities of their United Arab Emirates subsidiary, Construction Specialties, Middle East LLC (CSME). According to the OFAC press release: "Between December 4, 2016, and August 3, 2017, CSME senior leadership oversaw the purchase and reexportation of commercial building products, valued at approximately $1,100,991, from suppliers in the United States with the knowledge that these goods were ultimately destined for a customer in Iran. OFAC determined that these apparent violations were egregious and were voluntarily self-disclosed."
The settlement states that during a CS management visit to Dubai in June 2016, CSME's non-US person General Manager proposed supporting the construction of a shopping mall in Tehran. CS consulted with counsel and took advantage of General License H, which allowed US companies' non-US subsidiaries to do business with Iran but did not authorize exports or reexports of US goods (General License H didn't last long; OFAC revoked it on June 27, 2018). CS took the opportunity to revamp its compliance procedures and changed its corporate structure to meet OFAC requirements. In a message to CSME's General Director quoted in the Settlement Agreement, the Secretary of the CS Board of Directors stated: "In a nutshell, CS [USA] may not engage in business with Iran, but CSME is allowed to do so. US citizens and US lawful permanent residents are not allowed to facilitate or support Iranian business in any way." The internal correspondence went on to say, "[Non-U.S. person] has been appointed by [CS Chief Executive Officer] as a non-U.S. citizen proxy to provide support to CSME on the project as needed ... I want you all to be aware of this so that neither you nor your teams inadvertently get involved."
But it wasn't inadvertent involvement that lined CS up for the fine. Between December 4, 2016, and August 3, 2017, senior management at CSME sourced materials for the Iranian mall from CS and another supplier in the US. They comingled the U.S.-origin goods with locally produced items, repackaging them and falsely declaring them as UAE origin before sending them to Tehran. CSME concealed its conduct by removing references to Iran as the final destination on purchase orders for U.S.-origin goods using a false project name or falsely stating the commodities were for general inventory at CSME's warehouse in Dubai. CSME made approximately $1,100,990 worth of prohibited goods shipments from the United States
Despite CSME's efforts to conceal the transactions, a US person employed there figured out the scheme. When the whistleblower confronted the CSME senior managers, they dismissed the employee. The employee then reported to CS headquarters in the US and laid out the story, where CS commenced an internal investigation that led to the voluntary disclosure. CS replaced CSME's General Manager, and the senior manager involved in the scheme and discontinued all business with Iran.
The ITSR prohibits exports and reexports to Iran of items subject to the Export Administration Regulations (EAR) without OFAC authorization. The number of items "subject to the EAR" is significantly broad in scope, capturing the "catch-all" items referred to as EAR99, where the US goods involved in this case would have likely fallen. Usually, you will need a Bureau of Industry & Security (BIS) license to export or reexport most Commerce Control List (CCL) items to Iran. There are circumstances where you may need to seek approval from both agencies: an export license from BIS is required for a technology transfer accompanying an OFAC-licensed goods shipment or if you have a transaction involving prohibited end-uses or users. In a helpful note from the BIS website, they remind us that if your transaction is subject to the EAR and not to OFAC's ITSR, you will likely need a BIS license to export or reexport that item to Iran. Remember that if you export or reexport items subject to the EAR without a required OFAC authorization, even if it would not have required a license from BIS, it is still a violation.
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