Trade Compliance Flash: U.S. Regulators Find That a Foreign Company That Appears in U.S. Bankruptcy Court Becomes a U.S. Person for Purposes of Iran Sanctions
On February 3, 2017, the U.S. Treasury's Office of Foreign Assets Control (OFAC) announced that it had issued a Finding of Violation
against B Whale Corporation (B Whale), a Liberian company based in Taipei, Taiwan, and a member of the TMT Group of Shipping Companies. The finding was based on B Whale's Liberian flag vessel, M/V B Whale, having conducted a ship-to-ship transfer of approximately two million barrels of condensate crude oil with the vessel M/T Nainital, a vessel owned by the Iranian National Tanker Company. The M/T Nainital had been included on OFAC's list of Specially Designated Nationals (SDN List) prior to the approximately four day period between August 30, 2013 and September 2, 2013, when the oil transactions occurred.
Given that the transaction involved two foreign entities and took place outside the United States, the jurisdictional basis for OFAC's Finding of Violation was not obvious. In its announcement, OFAC explained that it had found jurisdiction because B Whale had entered into bankruptcy proceedings in the U.S. Bankruptcy Court for the Southern District of Texas on June 20, 2013, and remained a party to those proceedings at the time of the transactions. According to OFAC, these proceedings gave rise to U.S. jurisdiction under the Iran sanctions in two ways: (1) B Whale was a U.S. person at the time of the transactions because its participation in the bankruptcy proceedings meant that "it was present in the United States for the bankruptcy proceedings when the transaction occurred" and (2) the vessel M/V B Whale was under the jurisdiction of a U.S. bankruptcy court at the time of the transaction, which, according to OFAC, meant that the oil was transferred from Iran to the United States for the purpose of the Iran sanctions regulations.
After discussing jurisdiction, OFAC went on to explain the circumstances it considered to be aggravating in connection with the transaction:
- B Whale had demonstrated reckless disregard for U.S. sanctions requirements while it and its vessel were subject to U.S. jurisdiction;
- B Whale took steps to conceal the transaction by leaving ship logs blank and switching off the ship's automatic identification system during the period of the oil transfer;
- B Whale knew or should have known that the transaction involved Iranian-origin oil and an Iranian vessel on the SDN list; and
- The transaction harmed U.S. foreign policy by providing a significant benefit to Iran, allowing a designated SDN to transport Iranian-origin oil to market in a way that concealed its origin.
OFAC also found two mitigating factors: First, B Whale had no previous violations in the five years leading up to the 2013 transactions. Second, B Whale's assets "appear to have been liquidated in bankruptcy." This latter fact likely is why OFAC issued a Finding of Violation but did not issue a Civil Monetary Penalty.
Interestingly, the B Whale matter may have come to OFAC's attention through allegations of a TMT creditor: Local press from late 2013 reported that, following the consolidation of the B Whale bankruptcy proceedings into larger TMT proceedings, one of TMT's largest creditors, Cathay United Bank Co. Ltd., alleged in a brief that the M/V B Whale engaged "in a clandestine voyage whereby it appears to have trafficked in Iranian crude oil from a blacklisted tanker ... in willful disregard for the laws of the United States."
- The Finding of Violation reflects OFAC's broad view of its jurisdiction over foreign companies and foreign transactions under U.S. sanctions programs. This view is evidenced by the fact that OFAC found a foreign entity that did not otherwise meet the definition of U.S. person to be "within the United States" on the basis of the filing of a bankruptcy proceeding in U.S. courts.
- The Finding of Violation also highlights the heightened risks presented by attempts of employees or other company officials to alter documents or otherwise conceal evidence of transactions involving Iran. Many of the larger sanctions penalties over the past five years have involved attempts of alter documents or conceal transactions involving Iran and OFAC continues to take a very strict view toward such conduct.
- OFAC's expansive view of its jurisdiction is extremely important for foreign companies to consider when engaging in international trade. The 2015 Iran nuclear deal, formally known as the Joint Comprehensive Plan of Action (JCPOA), has presented additional opportunities for foreign companies to engage in lawful trade with Iran. However, enforcement actions like the one involving B Whale make clear that seemingly innocuous contacts with United States, such as engaging in unrelated proceedings before U.S. courts, can make them subject to the Iran sanctions as U.S. persons and expose them to much more significant restrictions on their ability to trade with Iran.
- This increased sweep of U.S. sanctions, even in otherwise purely foreign transactions involving foreign companies, also means that foreign companies must take care to ensure accurate records of all transactions. The failure to do so can greatly increase a foreign company's exposure when U.S. regulators choose to exercise their expansive jurisdiction over one those transactions. While B Whale escaped such serious penalties in its recent enforcement action, the failure to impose a significant sanction was likely only due to the fact that the company had already been liquidated.
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