On August 10, 2017, the Department of Treasury’s Office of Foreign Assets Control (“OFAC”) announced a settlement with IPSA International Services, Inc. (“IPSA”) to resolve apparent violations of the Iranian Transactions and Sanctions Regulations (“ITSR”). The apparent violations include importation of Iranian-origin services in violation of § 560.201 and engagement in transactions or dealings related to Iranian-origin services in violation of § 560.206 and § 560.208. IPSA is a “risk mitigation” firm that specializes in providing regulatory-related due diligence services, among other offerings. IPSA agreed to pay $259,200 to resolve the matter.
According to OFAC, the apparent violations stem from two contracts entered into by IPSA and one of its subsidiaries. IPSA (the US parent) entered into the first contract (“contract one”) with a third country, presumably a government agency or entity, regarding its “citizenship by investment program,” which may be a program similar to the EB-5 Immigrant Investor Visa Program in the US. IPSA’s Canadian subsidiary entered into the second contract (“contract two”), which involved a similar immigration-related investment program, with a government-owned financial institution based in a different third country.
Some of the applicants to both of these programs were Iranian nationals whose personal information could not be appropriately vetted by sources outside Iran. In an effort to verify information about these applicants, IPSA’s Canadian subsidiary and IPSA’s subsidiary in the UAE hired subcontractors to conduct due diligence, and those subcontractors then hired third parties to obtain and validate information within Iran.
In both instances, IPSA’s foreign subsidiaries managed and performed the contracts. However, OFAC asserted that:
- Under contract one, IPSA imported Iranian-origin services into the United States because “the foreign subsidiaries conducted the due diligence in Iran on behalf of and for the benefit of IPSA.”
- Under contract two, IPSA engaged in “transactions or dealings related to Iranian-origin services and facilitated the foreign subsidiaries’ engagement in such transactions or dealings” by reviewing, approving, and initiating the foreign subsidiaries payments to the Iranian-origin service providers.
OFAC’s allegations regarding the second contract seem clear enough – OFAC alleges that IPSA facilitated its foreign subsidiaries’ payments to the Iranian service providers. Any such facilitation would be a violation of § 560.208, and it is not surprising that OFAC would view initiating or approving payments to Iranian entities as an unlawful dealing in or related to services of Iranian origin under § 560.206.
However, OFAC’s position regarding the first contract is less clear. Regarding that contract, OFAC alleges that IPSA imported Iranian-origin services into the United States, apparently by virtue of the fact that its foreign subsidiaries conducted due diligence in Iran on IPSA’s behalf and for its benefit. IPSA was the contractually bound party to provide the due diligence report to its foreign government customer, though OFAC’s web notice does not state that the due diligence report containing the results of the Iranian-origin services was imported into the United States. Nor does OFAC allege that IPSA facilitated the activities of its subsidiaries as it does with respect to contract two.
OFAC’s position may be that IPSA indirectly imported Iranian-origin services into the United States. OFAC, however, does not clearly articulate this in its web notice. Specifically, OFAC does not allege that IPSA received any of the actual services under contract one. OFAC acknowledges that IPSA’s foreign subsidiaries managed and performed contract one, so presumably they obtained the Iran-origin information and used it in the course of performing the contract. There is no allegation in the web notice that the subsidiaries actually provided the information received from the Iranian entities to the IPSA parent entity in the United States, though it is possible that did occur.
Another possibility is that OFAC took the position that by contracting to provide services to a non-Iranian entity in a third country, where the performance of the contract involved sub-subcontractors that were based in Iran, the US parent was deemed to have imported Iranian services by virtue of being the beneficiary of the information collected (i.e., the information enabled IPSA to fulfill its contractual obligation to its customer).
Such an interpretation is akin to the “benefit” test for when services are considered exported to Iran (§ 560.410), but now applied in the context of an import transaction. Unlike § 560.410 for the export of services, there is no comparable language in the ITSR for the import of services into the United States. Therefore, this OFAC action may denote a broad interpretation of § 560.201.
It is not clear whether IPSA and its subsidiaries and subcontractors were engaged in legal compliance due diligence or more general business due diligence. However, OFAC’s footnote reference to Guidance on the Provision of Certain Services Relating to the Requirements of US Sanctions Laws suggests that even if IPSA was providing legal compliance due diligence services, it could only avail itself of the general authorization at § 560.525 if “there is no importation of services [from Iran] where the importation of services is prohibited by any part of 31 C.F.R. chapter V.”
The IPSA enforcement action appears to continue a recent trend of OFAC taking a more expansive view of imports under the ITSR. For example, in February of this year, OFAC found B Whale Corp.’s (“BWC”) transfer of non-US oil between two non-US registered, non-US owned ships, occurring entirely outside the United States, was an importation in violation of § 560.201. The rationale for such a finding was not entirely clear in the enforcement action, but appeared to be integrally linked to BWC’s presence in US bankruptcy court. See our analysis here.
US companies should be aware of OFAC’s evolving view of what constitutes an importation, and should be particularly careful in scenarios potentially involving offshore arrangements where a US company receives some benefit from non-US parties’ activities in Iran. Notably, this includes companies specializing in the due diligence consulting field.