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Article: October 2016: U.S. Claims Ability to Prosecute Foreign Actors Acting Abroad for Violating U.S. Sanctions Laws

October 01, 2016
Business Litigation Reports

On March 19, 2016, FBI agents arrested Turkish citizen and resident Reza Zarrab at Miami International Airport, soon after he landed with his wife and young child to visit Disney World. The principal charge, brought by the U.S. Attorney in Manhattan, Preet Bharara, was violating the Iran Transactions and Sanctions Regulations (“ITSR”).

The case marks the first time that U.S. prosecutors have attempted to enforce a sanctions regime by putting in their cross-hairs a foreign citizen in a foreign country who directed a foreign bank to transfer funds between foreign entities. The prosecutors have justified the exercise of jurisdiction solely on the ground that the defendant ordered the funds transfers in U.S. dollars. This position, if accepted by the courts, would represent a paradigm shift in U.S. sanctions jurisdiction which puts foreign companies and individuals in peril of U.S. prosecution on the basis of the currency they use rather than U.S. citizenship, U.S. residency, or activity carried out in the territory of the United States.

Mr. Zarrab, who is represented by Quinn Emanuel, is a 34-year-old gold trader with dual Iranian and Turkish citizenship. The indictment against him charges that from 2010 to 2015, Mr. Zarrab engaged in hundreds of millions of dollars’ worth of international funds transfers that illegally sought to evade U.S. sanctions laws against trading with or for the benefit of Iran or persons in Iran. On the sanctions charge alone, Mr. Zarrab faces a statutory maximum sentence of 20 years’ imprisonment.

News stories about Mr. Zarrab’s case to date have focused on such glossy topics as his offer to post a $50 million bond and pay for a private armed guard service as a means of obtaining bail (an effort that was unsuccessful) or the central role he played in a corruption scandal that struck the government led by Turkish Prime Minister Recep Tayyip Erdogan in late 2013. The manner in which U.S. prosecutors have alleged that Mr. Zarrab transgressed U.S. sanctions law, however, is at least as worthy of note, because of the implications for foreign companies and individuals who directly or indirectly perform services for sanctioned governments or sanctioned entities and whom to date have believed themselves beyond the reach of U.S. prosecution so long as they do not conduct activity in the United States.

The indictment against Mr. Zarrab charges that he conspired to illegally export the “service” of “international financial transactions” from the United States, by requesting funds transfers from one foreign country to another (for example, from Turkey to China) and for the benefit of Iran (for example, to help an Iranian company pay for goods such as shoes or clothes purchased from a Chinese company). In recent briefing opposing Mr. Zarrab’s motion to dismiss the indictment, U.S. prosecutors clarified that they believe that this conduct is illegal solely because Mr. Zarrab requested foreign banks to make funds transfers to other foreign banks in the currency of U.S. dollars. In the prosecutors’ view, the request by a customer of a foreign bank that the transfer be effected in U.S. dollar means that Mr. Zarrab caused a dollar clearing transaction to take place in the United States. According to U.S. prosecutors, the “service” exported by Mr. Zarrab for the benefit of an Iranian person or company was the dollar clearing transaction performed by a U.S. bank, as one component of a funds transfer from one foreign country to another and requested by a non-U.S. citizen or resident, from outside the United States.

Mr. Zarrab’s motion to dismiss the indictment is pending. He has argued that the International Emergency Economic Powers Act (“IEEPA”), the statute under which the ITSR were promulgated, expressly limits jurisdiction to “any person, or with respect to any property, subject to the jurisdiction of the United States.” He has further pointed out that the phrase operative in his prosecution—“person . . . subject to the jurisdiction of the United States”—has been interpreted for decades in sanctions law, including by Congress and by the U.S. Office of Foreign Assets Control to mean, at an outer limit, (1) citizens of the United States, (2) persons actually within the United States, (3) corporations organized under U.S. law, and (4) organizations owned by any of the foregoing.

Mr. Zarrab has argued that because it is undisputed that he fits none of these four categories, he cannot be charged under IEEPA and the ITSR. Also included as part of his motion to dismiss was a catalogue of all prior reported U.S. criminal prosecutions for violating the prohibition on the export of services from the United States and for the benefit of Iran, which shows that in each those prior prosecutions, the defendants squarely fitted within the four categories of persons historically deemed to constitute the only persons “subject to the jurisdiction of the United States.”

The most recent highly publicized prosecutions involving high-volume transactions for the benefit of Iran targeted multinational banks such as Credit Suisse and BNP Paribas. Those cases, however, involved a bank that operates at least in part in the United States and clearing transactions that were undertaken either by a U.S. arm of the bank itself, or by U.S. banks with whom the defendant bank had a correspondent banking relationship. The charging of a bank customer who acted from outside the United States, and through banks not alleged to have engaged in wrongdoing, is a step that takes a far broader view of criminal jurisdiction. In the past, enforcement against foreign actors acting abroad has taken the form of “designating” such actors—a secondary sanction that results in U.S. persons being forbidden from dealing with such actors but no criminal penalty.

The skirmishing to date has exposed that the U.S. government and its high-profile target, Mr. Zarrab, disagree about a central, critical question underpinning U.S. sanctions laws: their territorial reach. Prosecutors have contended that IEEPA, which has served as the foundation for regulations imposing sanctions relating to numerous countries (including the Balkans, Myanmar, Colombia, Iraq, Libya, The Sudan, and Syria) is intended to create extraterritorial jurisdiction—jurisdiction founded on “effects” in the United States, including those caused by actions taken by foreign persons acting outside the United States. Mr. Zarrab has argued that this viewpoint misapprehends the very nature of sanctions laws, which prohibit U.S. persons and persons in the United States from trading with a designated enemy but cannot, absent complementary sanctions imposed by other countries or treaty bodies, regulate the conduct of foreign persons acting outside the United States.

The stakes of the resolution of Mr. Zarrab’s motion are high for foreign individual companies or individuals who while outside the United States engage in funds transfers directly or indirectly for the benefit of sanctioned countries or sanctioned entities. The courts will either hold a jurisdictional line that has been observed since the beginning of the 20th century—that U.S. sanctions laws regulate the conduct of U.S. persons or person in the U.S. only—or green-light extraterritorial jurisdiction based on effects in the U.S. as slender as the execution of a dollar clearing transaction by a U.S. correspondent bank.