Southern District Of New York Denies Motion To Dismiss Indictment In High-Profile Sanctions Prosecution
On Monday, October 17, 2016, Judge Richard M. Berman of the United States District Court for the Southern District of New York denied a motion to dismiss criminal charges against a Turkish businessman, who allegedly violated U.S. sanctions against Iran by directing foreign companies to conduct U.S. dollar transactions on behalf of, and for the benefit of, Iranian entities and individuals. United States v. Zarrab, Case No. 1:15-cr-00867 (S.D.N.Y. October 17, 2016). Judicial decisions interpreting the scope of criminal violations of U.S. sanctions laws are rare, as corporate defendants have recently opted to settle allegations. This decision offers valuable insight into the application of U.S. sanctions laws to foreign actors, operating on foreign soil.
The Indictment charges a Turkish/Iranian businessman and two others with four criminal counts, including conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. §§ 1701-1706, and the Iranian Transactions and Sanctions Regulations (“ITSR”), 31 C.F.R. §§ 560.202-205. According to the Indictment, Zarrab used a network of exchanges and companies to conceal the identity of Iranian originators and beneficiaries to various financial transactions, all of which were cleared through United States banks. Zarrab’s conduct allegedly included “stripping” references to these Iranian connections in correspondence with the U.S. clearing banks, as such references would have caused the U.S. banks to block the transactions from proceeding.
Zarrab moved to dismiss all four counts of the Indictment. His principal argument regarding the sanctions-related charges related to his status as a foreign national who lived and worked abroad. As Zarrab argued – “he stands accused of violating U.S. law for agreeing with foreign persons in foreign countries to direct foreign banks to send funds transfers from foreign companies to other foreign banks for foreign companies. This is prosecutorial overreach of the first order.” Specifically, Zarrab argued that (1) there was not a sufficient nexus between his alleged conduct and the United States, and that he therefore did not export any services from the U.S. in violation of 31 C.F.R. § 560.205, and (2) U.S. sanctions laws do not apply extraterritorially. The Government, in turn, cited to Zarrab’s alleged use of the U.S. financial system to process U.S. dollar transactions that originated by, or were for the benefit of, Iranian persons or entities.
In rejecting Zarrab’s nexus argument, Judge Berman agreed that Zarrab’s availment of the U.S. financial system to clear U.S. dollar transactions constituted a prohibited export under IEEPA. See United States v. Zarrab, Case No. 1:15-cr-00867, Decision and Order, Docket No. 90 (S.D.N.Y. October 17, 2016), at 106 (“[T]he execution of money transfer on behalf of others from the United States to Iran” represents an exportation of services in violation of IEEPA and ITSR.). In its opposition brief, the Government acknowledged that its prosecution was tethered to Zarrab’s use of the U.S. financial system, rather than U.S. dollars: “if a foreign bank had its own store of U.S. dollars that it wished to send to [a foreign entity], then it could simply have done so, without involving the U.S. bank.” Judge Berman made clear, however, that this hypothetical was not at play in Zarrab’s case, given the allegations of the Indictment.
Because Judge Berman found a sufficient domestic nexus between Zarrab’s conduct and the United States, the opinion did not reach the question of whether IEEPA and ITSR apply extraterritorially. Judge Berman nevertheless stated that Zarrab’s “argument that IEEPA and ISTR [sic] do not apply extraterritorially would likely prove to be unpersuasive,” noting that “[s]everal provisions of the IEEPA and the ITSR would (expressly) support the Court’s jurisdiction and any presumption against extraterritoriality would be overcome by the United States’ interest in defending itself.” Zarrab, Case No. 1:15-cr-00867 at *18. Judge Berman cited to Second Circuit precedent, holding that the presumption against extraterritoriality generally does not apply to criminal statutes. See United States v. Vilar, 729 F.3d 62, 73 (2d Cir. 2013) (“[T]he presumption against extraterritoriality does not apply to criminal statutes, except in situations where the law at issue is aimed at protecting the right of the government to defend itself.”). In analyzing IEEPA and ITSR, Judge Berman looked to the broad authority granted to the President by IEEPA and the broad language of the prohibitions found in Section 560.204 of the ITSR, which are not limited to U.S. persons. In addition, Judge Berman noted that the transactions at issue involved clearing by U.S. banks, which satisfy the jurisdictional predicate of the statute.
Judge Berman also rejected Zarrab’s challenge to the count charging conspiracy to defraud the United States in violation of 18 U.S.C. § 371. To establish a conspiracy under Section 371, the Government must show “(1) that the defendant entered into an agreement (2) to obstruct a lawful function of the Government (3) by deceitful or dishonest means and (4) at least one overt act in furtherance of the conspiracy.” United States v. Ballistrea, 101 F.3d 827, 832 (2d Cir. 1996). Applying Second Circuit precedent, Judge Berman ruled that Zarrab’s willful use of shell companies and the stripping of payment instructions relating to Iran had the effect of obstructing OFAC’s ability to carry out its lawful functions, and therefore the allegations were sufficient to withstand Zarrab’s motion to dismiss. Judge Berman also found Zarrab’s argument that Section 371 does not apply extraterritorially to be unpersuasive.
Overall, the Zarrab decision should prove instructive in counsel’s efforts to challenge the application of sanctions laws to extraterritorial conduct. The decision confirms earlier precedent that the scope of IEEPA’s prohibitions should be broadly construed when transactions are processed by the U.S. financial system.