By George W. Thompson
Earlier this month, both the Office of Foreign Assets Control and Bureau of Industry and Security announced the imposition of penalties against Alcon Laboratories, Inc., a United States corporation, and its Swiss affiliate, Alcon Pharmaceuticals Ltd. I’ll spare you the suspense: yes, illegal transshipments to Iran were involved. As our discussions here, here and here show, these kinds of violations are not uncommon.
Three features make these penalties worth mentioning. They illustrate that BIS treats certain violations of OFAC’s Iranian Transactions and Sanctions Regulations as violations of its own Export Administration Regulations as well. They also clarify the restrictions placed on foreign resellers of U.S.-origin goods. Third, they show the utter stupidity of ignoring the favorable license procedures that were available to authorize exports of medical supplies to Iran.
Transshipments to Iran Were Contrary to OFAC and BIS Prohibitions
Alcon Pharmaceuticals purchased medical products from the affiliated U.S. manufacturer, intending to reship them to Iran. To avoid tipping off the U.S. exporter, the orders were falsely described as destined for warehousing in various countries; in fact, they were used to fill existing orders from Iranian customers and required an OFAC license.
The facts are not entirely clear on Alcon Laboratories’ knowledge of the scheme. That company was fingered for shipping to third countries despite having been advised that the merchandise was not held in inventory but reshipped to Iran by the Swiss company. Presented with this information, Alcon Laboratories “failed to determine the end user or ultimate destination of the items.”
A similar pattern was used to transship products to Sudan in violation of OFAC regulations, and to Syria contrary to the embargo imposed by the EAR.
OFAC imposed a penalty of $1,317,150 on both companies for the Iranian and Sudan transshipments. Because the violations of OFAC’s Iranian regulations constituted concomitant violations of the EAR pursuant to 15 C.F.R. § 746.7(e), BIS further asserted that both companies had acted with knowledge they were in breach of the EAR. When combined with the unlicensed Syrian shipments, that agency imposed against them a penalty of $8,100,000. The penalty notice further provides that failure to pay either agency’s penalty could result in their loss of export privileges.
Lessons to Be Learned
The first point that U.S. and foreign companies should note is that OFAC and BIS can separately penalize violations of OFAC’s Iranian regulations. A non-U.S. company may shortsightedly believe it is beyond OFAC’s reach, without realizing that BIS’ enforcement clout may be brought against it. Given the ability to deny export privileges under the EAR, a violation of the OFAC regulations or failure to cooperate in a subsequent OFAC investigation can have dire consequences if and when BIS gets involved.
Second, the penalty decisions make it clear that foreign companies cannot obtain goods from the United States intending to send them to Iran, nor can U.S. companies ship to third countries with knowledge that Iran is the destination.
Finally, there was a perfectly legal alternative under which Alcon Pharmaceuticals could have sought authorization to send the exact same U.S.-origin surgical and pharmaceutical products to Iran. As OFAC’s penalty notice points out, such articles for medical end-use are covered by the licensing regime established under the Trade Sanctions Reform and Export Enhancement Act of 2000. Indeed, one or both of the penalized companies previously obtained such licenses, but ceased doing so for reasons unexplained. The relatively minor burden of applying for a TSRA license pales next to the cost and disruption of shipping without a license, as Alcon Laboratories and Alcon Pharmaceuticals have learned the hard way.
