The recent indictments of Chinese technology giant Huawei and the requested extradition of its chief financial officer, Meng Wanzhou, have put discussions of U.S.-China relations at center stage. Huawei’s indictment in the Western District of Washington for alleged trade secret theft came on the heels of the Department of Justice’s November announcement of a China Initiative focused on Chinese economic espionage. Meanwhile, in the Eastern District of New York, Huawei, Meng and others face charges surrounding another sensitive area of U.S. policy: its relationship with Iran. Grounded in part in the Iranian Transactions and Sanctions Regulations (ITSR), the 13-count EDNY indictment alleges bank fraud, wire fraud, a conspiracy to defraud the United States, and violations of the International Emergency Economic Powers Act (IEEPA). Although the EDNY action is still in its infancy, the Second Circuit has been called to consider potential limitations on several of these charges in another pending case.
The IEEPA and ITSR
Enacted under authority from the IEEPA, which also provides the authority to prosecute its violations, the ITSR prohibits, inter alia, “the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, technology, or services to Iran or the Government of Iran,” including financial services. 31 C.F.R. §§560.204, 560.427. The prohibition on providing services to Iran has been interpreted broadly. For example, the Second Circuit has held that “execution of money transfers from the United States to Iran on behalf of another, whether or not performed for a fee, constitutes the exportation of a service,” United States v. Banki, 685 F.3d 99, 107 (2d Cir. 2012), and a SDNY district court has held that even intermediary clearing services performed by U.S. banks (i.e., where both the originator and recipient are foreign banks) are prohibited, United States v. Zarrab, No. 15-CR-867, 2016 WL 6820737, at *6-7 (S.D.N.Y. Oct. 17, 2016). The prohibitions of the ITSR are supplemented by a “secondary sanctions” regime, whereby the Office of Foreign Assets Control (OFAC) can impose penalties on foreign individuals and entities who deal with Iran, including restricted access to U.S. financial institutions.
The EDNY indictment, which was partially unsealed in January, alleges that Huawei Technology Co. Ltd., Skycom Tech. Co. Ltd., Meng and others concealed from both U.S. financial institutions and the government details about Huawei’s relationship with Skycom, a company alleged to be indirectly owned by Huawei that did business in Iran. The indictment alleges that the defendants concealed Huawei’s true relationship with Skycom in order to maintain relationships with U.S. financial institutions that cleared millions of dollars in transactions for them.
Huawei—and other companies seeking to protect their access to U.S. financial services—will see a preview of the Second Circuit’s take on such questions in United States v. Atilla, No. 18-1589 (2d. Cir.).
Convicted with the cooperation of Turkish banker Reza Zarrab, Atilla was a deputy general manager of Türkiye Halk Bankaşi A.S. (Halkbank), who had been charged, inter alia, with conspiring defraud the United States by obstructing the Treasury Department’s enforcement of economic sanctions and conspiring to violate the IEEPA. According to evidence at trial, Zarrab used Halkbank to transfer oil and gas sales proceeds owned by a national Iranian oil company to Dubai. Atilla helped structure those transfers—from Halkbank to Dubai—so that they looked like permissible transactions, such as gold transactions with nongovernmental Iranian individuals or sanctions-exempt food sales. From Dubai, Zarrab could transfer the funds anywhere in the world, resulting in certain downstream transfers that occurred in U.S. dollars and were cleared by U.S financial institutions.
At trial, the government advanced two theories for Atilla’s liability under the conspiracy to violate the IEEPA count. First, that Atilla conspired to directly violate an existing sanctions prohibition by permitting sanctioned entities to conduct U.S.-dollar transactions through U.S.-based correspondent bank accounts. Second, that Atilla conspired to design transactions to avoid the imposition on Halkbank of “secondary sanctions,” such as being prohibited by from accessing the U.S. financial system, based on the bank’s facilitation of sanctionable transactions.
On appeal, Atilla argues that the evidence showing he directly violated the ITSR was insufficient because he had no idea that U.S. banks would provide dollar-clearing services after the proceeds (which Halkbank transferred in Turkish liras and euros, never dollars) reached Dubai. On the secondary sanctions theory, Atilla contends that the government’s position is legally erroneous, and the jury was thus improperly charged, for several reasons. First, the text of the IEEPA does not prohibit avoiding conduct that “could provide a basis for secondary sanctions, but is not yet the subject of such sanctions.” Appeal Br. at 32. Atilla further argues that the government itself acknowledged that OFAC “has historically taken the position that the prohibitions contemplated by the secondary sanctions—including implementing enforcement actions, levying fines, or taking other punitive measures for violating the prohibitions—attach only after a foreign financial institution has been sanctioned by the Secretary of the Treasury.” Id. at 34 (citing government letter). Atilla further contends that the government’s novel theory raises due process questions of notice and vagueness and represents an overreach to foreign financial institutions not contemplated by the statute and contrary to the presumption against extraterritoriality. Id. at 36-39.
Moreover, Atilla challenges his §371 conviction, which was based on the government’s theory that he “ma[de] it more difficult for the Treasury Department to enforce U.S. sanctions against Iran, by allegedly lying to Treasury so that they would not be able to investigate the sanctions evasion that they were concerned about.” Id. at 55 (quotations and citations omitted). Assuming this meant that “Atilla’s allegedly deceptive conduct impeded the Treasury Department’s ability to designate Halkbank for the imposition of secondary sanctions,” Atilla argues that because attempts to avoid the imposition of secondary sanctions are not prohibited, §371 should not be used to prosecute what the IEEPA does not itself proscribe. Id. at 56-57. He further argues that there is no justification for a vague, expansive interpretation of §371 “to protect the Executive from conduct the Executive has refrained from using its broad regulatory authority under the IEEPA to proscribe.”
The government responds that “the relevant regulations and executive orders unambiguously ban transactions designed to ‘avoid’ prohibitions, the ordinary meaning of which is to prevent the imposition of prohibitions,” and that the novel factual circumstances here reduce the weight to be given to OFAC’s historical position. In any case, it contends that the IEEPA conspiracy conviction was properly made on the alternate theory. Gov’t Br. at 35, 44. It further maintains that the presumption against extraterritoriality does not apply both because the sanctions are part of a national security effort and because Atilla “reached into the United States to commit his crime,” executing transactions for Iran through unwitting U.S. banks and lying to U.S. government officials about those transactions. Id. at 43-44.
As to the adequacy of the §371 conviction, the government maintains that impeding the operation of the Treasury Department is a crime under the plain text of the statute. To Atilla’s argument that prosecution under §371 usurps the judgment of the Executive branch when it enacted the IEEPA, the government counters that the DOJ is part of the Executive branch, and the court should decline Attila’s invitation to “hobble one executive department (Justice) in the name of protecting another executive department (Treasury).” Id. at 55.
Whether prosecutors adopt a “secondary sanctions” theory in the Huawei indictment and the success of Atilla’s appeal will help to clarify the reach of the Iranian sanctions regime and whether §371 may be used to prosecute conduct that the ITSR itself does not directly reach. Whatever their outcome, these cases should remain on defense counsel’s radar when advising foreign clients whose business dealings overlap with Iran.
Vera M. Kachnowski is of counsel and Peter J. Sluka is an associate at Schlam Stone & Dolan, where they specialize in white-collar defense and complex civil litigation.