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When Iran Sanctions Collided with Contingency Contracting

 

 

 
 
   
   
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(Credit: istockphoto.com/Vitoria Holdings LLC)

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On 19 December 2018, Army judge advocates (JA) huddled in video teleconference rooms spread across multiple time zones and locations throughout Kuwait, Iraq, Qatar, South Carolina, Alabama, and Washington, D.C. During the roll-call, they identified their respective commands and organizations—U.S. Army Central Command (ARCENT); Combined Joint Task Force–Operation Inherent Resolve (CJTF-OIR); U.S. Central Command (CENTCOM), Vendor Vetting Division; U.S. Army Contracting Command; Office of The Judge Advocate General (OTJAG), Procurement Fraud Division; and the 408th Contracting Support Brigade (CSB). They patiently waited for attorneys from the U.S. Department of State (DoS) and the U.S. Department of Treasury Office of Financial Asset Control (OFAC), who specialized in sanctions law, to dial in. Approximately two weeks earlier, the U.S. Embassy-Baghdad had informed the 408th CSB that the Flower of the Palace (FoP), an Iraqi military contractor, transshipped through Iran 133 non-tactical vehicles (NTVs), which were purchased in United Arab Emirates (UAE) and destined for the Iraqi Security Forces (ISF).

Determining whether this transshipment violated the recently re-imposed Iran sanctions would require judge advocates to work across multiple commands, while leveraging the inter-agency process as part of a whole-of-government approach. A major takeaway from this situation was the ability of judge advocates to enhance their respective commands’ decision-making cycles by communicating directly with one another to accelerate the sharing and processing of critical information and resources.

Background

On 14 July 2015, Iran, the five permanent members of the United Nations Security Council, Germany, and the European Union agreed to the Joint Comprehensive Plan of Action (JCPOA or Iran Nuclear Deal). As part of the JCPOA framework, Iran agreed to the elimination of its stockpile of medium-enriched uranium and a reduction in its gas centrifuges, for a period of thirteen years. In exchange, the U.S. Government agreed to relax certain economic sanctions beginning on 16 January 2016. This agreement, however, would be short-lived. On 8 May 2018, the United States announced its withdrawal from the JCPOA, resulting in the reinstatement of numerous Iran sanctions, effective 5 November 2018.

Meanwhile, by 2014, the Islamic State of Iraq and the Levant (ISIS) had spread like a contagion across the Middle East. From its capital in Raqqa, ISIS controlled a massive land area stretching from central Syria, to Mosul, Iraq, and the outskirts of Baghdad.1 After its leader, Abu Bakr al-Baghdadi, declared a global caliphate, the United States intervened, leading a military coalition drawn from sixty nations.2 As part of the U.S. military strategy to degrade, dismantle, and defeat ISIS, Congress appropriated to the U.S. Department of Defense (DoD) and CENTCOM the Counter-ISIS Train and Equip Fund (CTEF). Combined Joint Task Force – Operation Inherent Resolve used this funding source to train, equip, and sustain ISF and Vetted Syrian Opposition (VSO) forces in order to build partner capacity as part of its fight against ISIS.3

Counter-ISIS Train and Equip Fund Non-Tactical Vehicles Contract Awarded to Flower of the Palace

On 5 September 2018, the 408th CSB competitively awarded a $13 million CTEF contract to FoP for the purchase of sixty armored NTVs and 183 standard NTVs.4 As part of the contract and host nation law, FoP was required to obtain approval from the U.S. Embassy-Baghdad and the Iraq Prime Minister National Operations Center (PMNOC)5 prior to delivering the NTVs to the Taji Military Complex (Camp Taji). Under the CTEF program, after the contracting officer inspected and accepted the NTVs, CJTF-OIR would take possession, then divest them to the ISF.

On 2 October 2018, FoP purchased all 243 NTVs in Dubai, UAE. It transported sixty NTVs across Saudi Arabia to Jordan, where a subcontractor installed the ballistic plating and armor. On 16 October 2018, FoP placed 133 standard NTVs on a freighter and transported them across the Gulf of Hormuz to Iran. On 11 November 2018, after transiting the length of Iran, the NTVs crossed over into Iraq.6

On 6 December 2018, the U.S. Embassy-Baghdad notified the 408th CSB that it had denied FoP’s request to deliver the initial shipment of 133 standard NTVs to Camp Taji, on the grounds that FoP had violated the Iran sanctions by shipping the NTVs through the landmass of Iran. Flower of the Palace then attempted to circumvent the embassy’s decision by improperly going directly to PMNOC and “paying for” PMNOC approval. The embassy officials cautioned the 408th CSB that the contractor was attempting to deliver the 133 NTVs to Camp Taji, after obtaining PMNOC approval under dubious circumstances.

The 408th CSB immediately issued a ten-day show cause notice to FoP, which directed the contractor to provide assurances that it had not violated any Iran sanction or applicable contract clause concerning the same. Absent a satisfactory explanation, FoP’s CTEF contract would be terminated for cause based on the Federal Acquisition Regulation (FAR) 52.225-13, which was incorporated into the CTEF contract. It provides the following: “Except as authorized by OFAC, most transactions involving . . . Iran are prohibited[.]”7

In response to the show cause notice, FoP provided hundreds of pages of import/export certificates, shipping manifests, and invoices, which were in Arabic and required translation.8 The gist of FoP’s argument was two-fold. First, the CTEF contract was awarded on 5 September 2018, and prior to the snap-back of Iran sanctions, i.e. 5 November 2018. Second, the NTVs were manufactured in Japan and purchased in Dubai, UAE.

Law and Analysis

The legal framework surrounding Iran sanctions is vast and serpentine. Sanctions were initially levied in 1979, as a result of the Iran hostage crisis.9 The United States later imposed a host of sanctions over the succeeding years in response to Iran’s support of regional terror groups, involvement in the bombing of the U.S. Marines barracks in Lebanon, its designation as a state sponsor of terrorism, military arms exports, efforts to destabilize the region, and human rights violations.10 Presently, there are more than fifty U.S. statutes, regulations, and United Nations Security Resolutions related to Iran sanctions.11 Further complicating matters is that many of these sanctions only apply to U.S. persons.12

As the legal advisor to the Army Service Component Command, the ARCENT Office of the Staff Judge Advocate (OSJA) coordinated with the relevant stakeholder commands, the DoS, and, most importantly, OFAC, the U.S. governmental entity responsible for enforcing U.S. trade sanctions. Although this ad hoc inter-agency working group initially convened on 19 December 2018, its progress was frustrated by a thirty-five-day federal government shutdown from 22 December 2018 to 25 January 2019. On 24 January 2019, a furloughed OFAC attorney, working from a shuttered and empty office, provided OFAC’s legal assessment of the situation. Flower of the Palace, as a non-U.S. person, did not violate the Iran sanctions. But because the 133 NTVs were deemed of Iranian origin, CJTF-OIR and the 408th CSB could not take possession of the same without violating the Iranian Transactions and Sanctions Regulations (ITSR).13

United States persons, wherever they may be located, are prohibited from engaging in any transaction dealing with goods of Iranian origin.14 In accordance with 31 C.F.R. § 560.306(a)(2), goods of Iranian origin include items “that have entered into Iranian commerce.” The U.S. Department of Justice and OFAC have consistently held that the mere transshipment of goods through the landmass of Iran make them of Iranian origin— irrespective of their point of origin or manufacture.

The indictment in United States v. Farouki, is instructive on this point.15 On 22 June 2012, the Government awarded defendants, who were U.S. persons, an eight billion-dollar contract to provide contract services, food, and supplies to the U.S. military in Afghanistan.16 Similar to the FoP CTEF contract, the Government incorporated FAR 52.225-13 into the Farouki contract.17 According to the indictment, the defendants improperly shipped their goods through Iran to reduce their transportation costs.18 The Government indicted the defendants, averring that they “knowingly engaged in, and directed others to engage in, the practice of shipping goods and materials across Iran, in violation of the OFAC regulations including the ITSR,” while concealing their scheme from the Government.19

Here, unlike the Farouki defendants, FoP was a non-U.S. person and, thus, was not subject to the ITSR,20 though it still breached its contract by violating FAR 52.225-13. More importantly, once the 133 NTVs were transshipped through Iran, they became “tainted”, i.e. considered of Iranian origin. Consequently, CJTF-OIR and the 408th CSB could not accept their delivery and possession without violating the applicable Iran sanctions.

The 408th CSB set out to minimize the operational impact and the litigation risk of terminating FoP’s contract. They conferred with the CJTF-OIR OSJA, as the legal advisor to the requiring activity and the customer, regarding how it and the ISF would like to proceed. According to the CJTF-OIR CTEF program manager, who liaised with the ISF, the Iraqi Army still badly needed the 183 standard and sixty up-armored NTVs. So, the 408th CSB decided to only partially terminate the contract for default, accepting delivery of the fifty standard and sixty up-armored NTVs that were still in the UAE and Jordan, respectively, and had not been transshipped through Iran. The contracting officer (KO) also worked with CJTF-OIR to release a new solicitation for quotes from vendors to purchase another 133 standard NTVs for the ISF. Because FoP was terminated for default, the original prior year funds remained available, even though the replacement contract would be awarded in a subsequent fiscal year.21 Finally, as part of the contract file, the 408th CSB ensured that the KO’s written determination and findings included a detailed recounting of the facts, all of the applicable translated shipping manifests, import/export certificates, and a written statement by OFAC officials that FoP was not authorized to ship the NTVs through Iran. Thus, the KO’s termination action based on a material breach of FAR 52.225-13 would be unassailable, if FoP appealed the final decision to the Armed Services Board of Contract Appeals and/or the U.S. Court of Federal Claims.

Conclusion

Since the Global War on Terror, the Army has gained considerable experience in the area of contingency contracting. Nevertheless, the interplay of contingency contracting with Iran sanctions law was an issue of first impression for the JAs at ARCENT, CENTCOM, CJTF-OIR, and the 408th CSB. Fortunately, they were able to work across multiple commands, while leveraging the inter-agency process to collaborate and craft a legal way forward that minimized any disruption to ongoing military operations against ISIS. The legal issues generated from this episode were discrete and limited to sanctions and contract and fiscal law, but the major lesson learned has universal application for JAs. Judge advocates should work together to create synergy, thereby amplifying their value to their respective commands. TAL

 


MAJ Nolan Koon is currently assigned as an administrative law attorney with the Administrative Law Division at OTJAG.



Notes

1. Jason Burke, Rise and Fall of ISIS: Its Dream of a Caliphate is Over, so What Now?, The Guardian (Oct. 21, 2017), https://www.theguardian.com/world/2017/oct/21/isis-caliphate-islamic-state-raqqa-iraq-islamist.

2. Sebastian Payne, What the 60-Plus Members of the Anti-Islamic State Coalition are Doing, The Wash. Post (Sept. 25, 2014), https://www.washingtonpost.com/news/checkpoint/wp/2014/09/25/what-the-60-members-of-the-anti-islamic-state-coalition-are-doing/.

3. U.S. Dep’t of Def., Fiscal Year (FY) 2020 President’s Budget: Justification for Security Cooperation Program and Activity Funding 3 (2019) https://comptroller.defense.gov/Portals/45/Documents/defbudget/fy2020/FY2020_Security_Cooperation_Book_FINAL.pdf.

4. Based at Shaw Air Force Base, South Carolina and Camp Arifjan, Kuwait, the 408th Contracting Support Brigade (CSB) provides operational and theater contract support to United States Army Central (USARCENT), and serves as the lead contracting agency for all Title 10 Army forces operating in the Central Command (CENTCOM) Area of Responsibility in support of Operations Inherent Resolve, Freedom Sentinel, and Spartan Shield. Like all Outside Continental United States (OCONUS) CSBs, the 408th is assigned to U.S. Army Contracting Command (ACC) at Redstone Arsenal, Alabama, but regionally aligned to an Army Service Component Command (ASCC) — here, USARCENT — in a direct support relationship.

5. Iraqi Prime Minister National Operations Center (PMNOC) is analogous to the U.S. Department of Transportation and Internal Revenue Service. Iraqi vendors are required to get PMNOC approval for the ground movement of cargo. As part of the approval process, PMNOC assesses a tax.

6. Flower of the Palace (FoP) provided no explanation regarding why it took twenty-six days to transport the non-tactical vehicles (NTV) through Iran. According to the shipping manifests and import/export certificates, the distance traveled in Iran was approximately 900 miles.

7. Federal Acquisition Regulation (FAR), 48 C.F.R. § § 52.225-13 (2008). The FAR clause required the contractor to incorporate this prohibition into any subcontracts.

8. The 408th CSB did not have any translation or geospatial capabilities. However, the Combined Joint Task Force – Operation Inherent Resolve (CJTF-OIR) Office of the Staff Judge Advocate (OSJA) provided critical support to the 408th CSB, translating the vast mountain of Arabic documents and mapping the probable route of the 133 NTVs from the UAE to Iraq via Iran.

9. Ashish Kumar Sen, A Brief History of Sanctions on Iran, Atlantic Council (May 8, 2018), https://atlanticcouncil.org/blogs/new-atlanticist/a-brief-history-of-sanctions-on-iran/.

10. Erin Blakemore, U.S.-Iran Tensions: From Political Coup to Hostage Crisis to Drone Strikes, History (Jan. 8, 2020), https://www.history.com/news/iran-nuclear-deal-sanctions-facts-hostage-crisis.

11. See e.g., Resource Center: OFAC FAQs: Iran Sanctions, U.S. Dep’t of the Treasury, https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx (last visited Nov. 4, 2019). This is the FAQ section about Iran Sanctions from the U.S. Department of the Treasury.

12. See, e.g., U Resource Center: OFAC FAQs: Iran Sanctions, U.S. Department of the Treasury https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_iran.aspx#diplomatic (last visited Nov. 4, 2019). This section of the FAQs discusses the provision of routine goods and services by non-U.S. persons to diplomatic missions of the Government of Iran.

13. See 31 C.F.R. §§ 560.204-206, 560.208, and 560.403 (2011). Iran sanctions “apply to export, re-export or supply transactions which require a transshipment or transit of goods or technology through Iran to third countries.” 31 C.F.R. § 560.403 (2011) (emphasis added).

14. 31 C.F.R. § 560.206(a) (1) (2011).

15. Indictment, at 10, United States v. Farouki (No. 1:18-cr-00346) (D.C. Dist. Ct. 2018).

16. Press Release, Off. of Pub. Aff., Three Senior Executives at Defense Contracting Firms Charged with Scheme to Defraud the U.S. Military in Connection with $8 Billion Troop Supply Contract and with Violating the Iran Sanctions Regime (Nov. 29, 2018), https://www.justice.gov/opa/pr/three-senior-executives-defense-contracting-firms-charged-scheme-defraud-us-military.

17. Id.

18. Id.

19. Faarouki, supra note 15.

20. The 408th CSB examined FoP’s corporate disclosures to confirm that none of its principles or officers were U.S. persons.

21. Funding of Replacement Contracts, B-198074, 1981 CPD ¶ 33 (Comp. Gen. Dec. Jul. 15, 1981); Bureau of Prisons-Disposition of Funds Paid in Settlement of Breach of Contract Action, B-210160, 1983 CPD ¶ 91 (Comp. Gen. Dec. Sept. 28, 1983).