On August 10, 2012, President Barack Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (the "Act").1 While the Act contains a section imposing sanctions in response to human rights abuses committed against Syrian citizens, its primary focus is on strengthening and expanding an already extensive U.S. sanctions program against Iran. This Commentary highlights three key areas where the Act has substantially altered the landscape of U.S. sanctions related to Iran.
U.S. Parent Companies Liable for Violations of Sanctions by Foreign Subsidiaries
Arguably, the Act's most significant expansion of sanctions
against Iran is the inclusion of activities by non-U.S.
subsidiaries of U.S. parent companies within the scope of certain
sanctions that have been previously imposed against Iran by the
United States. The Iranian Transactions Regulations
("ITR"), 31 C.F.R. Part 560, promulgated under the
authority of the International Emergency Economic Powers Act
("IEEPA") and administered by the Department of the
Treasury's Office of Foreign Assets Control ("OFAC"),
have historically prohibited U.S. persons from engaging in most
transactions involving Iran. Prior to the Act, the broad
prohibitions contained in the ITR generally applied only to
"United States persons," defined in the ITR as "any
United States citizen, permanent resident alien, entity organized
under the laws of the United States (including foreign branches),
or any person in the United States." 31 C.F.R. §
560.314.2 Thus, transactions by foreign-incorporated
subsidiaries of U.S. parent companies have generally been outside
the scope of the ITR, absent any involvement of a United States
person.
The Act, however, purports to broaden the scope of the ITR by
requiring the President to prohibit activities by
foreign-incorporated subsidiaries of U.S. parent companies, as well
as other types of entities owned or controlled by the U.S. parent
company or by "United States persons" in general.
Specifically, the Act provides:
Not later than 60 days after the date of the enactment of this
Act, the President shall prohibit an entity owned or controlled by
a United States person and established or maintained outside the
United States from knowingly engaging in any transaction directly
or indirectly with the Government of Iran or any person subject to
the jurisdiction of the Government of Iran that would be prohibited
by an order or regulation issued pursuant to the International
Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) if
the transaction were engaged in by a United States person or in the
United States.
Section 218(b).3 "Entity" is defined as
"a partnership, association, trust, joint venture, corporation
or other organization." Section 218(a)(1). The phrase
"own or control" is defined as (i) holding more than 50
percent of the equity interest by vote or value in the entity; (ii)
holding a majority of seats on the board of directors of the
entity; or (iii) otherwise controlling the actions, policies, or
personnel decisions of the entity. Section 218(a)(2). Civil
penalties as set forth in Section 206(b) of IEEPA may be imposed
against a U.S. person if a non-U.S. entity that it owns or controls
violates, attempts to violate, conspires to violate, or causes a
violation of the prohibition. Section 218(c).4 The
penalties, however, do not apply where "the United States
person divests or terminates its business with the entity not later
than the date that is 180 days after the date of the enactment of
this Act." Section 218 (d).
Disclosure Requirements With the Securities and Exchange Commission ("SEC")
The Act amends the Securities Exchange Act of 1934 to require each issuer required to file annual or quarterly reports with the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "Exchange Act") to disclose if, during the period covered by the report, it or any of its affiliates had "knowingly engaged in" certain sanctionable activity under the ISA or CISADA. The Act also requires each such issuer to disclose if it or any of its affiliates had "knowingly conducted any transaction or dealing with" persons whose property had been blocked for their participation in terrorism or proliferating weapons of mass destruction, or any person identified as part of the Government of Iran "without the specific authorization of a Federal department or agency." Section 219(a) implementing a new Section 13(r) of the Exchange Act. Any such issuer must also file a notice with the SEC indicating that a disclosure has been included in a filed report. That notice is sent to certain congressional committees and to the President, who then is to initiate an investigation into the possible imposition of sanctions. In addition, the Commission is required to make the information provided in the disclosure and the notice available to the public by posting the information on the Commission web site. Section 219(a). These disclosure obligations come into effect with respect to reports required to be filed with the SEC 180 days after enactment of the Act. Section 219(b).
Expansion of Petroleum Sector Sanctions
The Iran Sanctions Act ("ISA"), which was passed in
1996, directed the President to impose sanctions on any entity,
foreign or domestic, that makes an investment of $20 million or
more that "directly and significantly contribute[s] to the
enhancement of Iran's ability to develop petroleum resources of
Iran." Because any investment that was sanctionable under the
ISA would also have been illegal if performed by a U.S.-based
company, commentators have long noted that, as a practical matter,
the ISA was primarily an attempt to regulate the overseas
transactions of foreign firms.
The ISA was amended with the passage of the Comprehensive Iran
Sanctions, Accountability, and Divestment Act of 2010
("CISADA"), such that persons engaged in the energy
sector became subject to sanctions in general from, inter
alia, selling, leasing, or providing goods or services that
might directly and significantly facilitate the maintenance or
expansion of Iran's domestic production of refined petroleum
products; selling or providing Iran with refined petroleum
products; and providing goods and services that could directly and
significantly contribute to enhancing Iran's ability to import
refined petroleum products. CISADA also imposed mandatory sanctions
on foreign financial institutions that knowingly facilitate
transactions related to: (i) Iran's weapons of mass destruction
programs; (ii) Iranian support for terrorism; (iii) persons subject
to United Nations sanctions; (iv) the Iranian Revolutionary Guard
Corps and its affiliates; and (v) designated Iranian banks.
In addition, the National Defense Authorization Act for Fiscal
Year 2012 ("NDAA"), signed into law on December 31, 2011,
added significant additional prohibitions and restrictions on
Iran's financial sector as part of the increasing effort to
isolate Iran from the global economy, including prohibiting or
imposing strict conditions on foreign financial institutions
attempting to open or maintain a correspondent or a payable-through
account where those institutions knowingly conduct significant
transactions with the Central Bank of Iran or designated Iranian
financial institutions.
The Act expands these laws in a variety of ways. For example, the
Act purports to expand the scope of the ISA by subjecting to
sanctions any person who knowingly sells, leases, or provides to
Iran goods, services, technology, or support above threshold levels
that could directly and significantly contribute to the maintenance
or enhancement of Iran's ability to develop petroleum resources
located in Iran or its domestic production of refined petroleum
products. This includes any direct or significant assistance with
respect to the construction, modernization, or repair of petroleum
refineries or related infrastructure, such as the construction of
roads, railways, and ports used to support the delivery of refined
petroleum products. Section 201.
The Act also, for example, targets persons who own, operate,
control, or insure vessels used to transport crude oil from Iran
(Section 202); adds three sanctions to the available sanctions
under the ISA (bringing the total to 12 available sanctions)
(Section 204); and now requires the President to impose at least
five of the available sanctions upon any person determined to have
engaged in activities as set forth in Section 5 of the ISA.
Sections 201-203.
In addition, the Act amends the NDAA by eliminating an exemption
from sanctions for state-owned banks that did not engage in
transactions involving the sale or purchase of petroleum or
petroleum products to or from Iran. Section 504. There was also an
exemption to the NDAA's sanctions if the President determined
that the country with primary jurisdiction over the foreign
financial institution had significantly reduced its purchases of
Iranian crude oil. The Act amends the NDAA such that any country
that has received an exemption for reducing its purchases of
Iranian crude oil must reduce its purchases from Iran to zero for
its financial institutions to continue to receive the exemption.
Section 504.
Conclusion
U.S. companies that have had foreign subsidiaries doing business
in Iran are now under a tight deadline to put a stop to those
activities or risk sanctions under this latest Act. The Act also
significantly enhances the disclosure obligations of U.S. issuers
for activities related to Iran, both increasing the likelihood that
any activities that are covered by the ISA will be investigated,
and where the activities do not relate to the ISA, increasing the
potential reputational harm for engaging in activities that are
legal under U.S. law. The Act also strengthens the sanctions
program targeting Iran's oil and gas industry, increasing the
scope of activities potentially sanctionable. In addition to these
significant changes, the Act also makes numerous incremental
additions to the Iranian sanctions regime, all of which serve to
increase the risk of exposure to sanctions.
U.S. companies that own or control entities engaging in dealings
with Iran, issuers in U.S. markets with Iranian operations, and
non-U.S. companies in the oil and gas sector should all take a
close look at the latest sanctions and ensure that their compliance
programs are updated and adequate to the task.
Footnotes
1. Pub. L. No 112-158, 126 Stat. 1214 (2012). The enacted
version is not yet available.
2. Section 2 of the Act adopts the definition of "United
States person" provided in Section 101 of the Comprehensive
Iran Sanctions, Accountability, and Divestment Act of 2010
("CISADA") (22 U.S.C. § 8511), but that
definition in relevant part parallels the ITR.
3. The phrase "any person subject to the jurisdiction of the
Government of Iran" has not been defined by the U.S.
government, and its scope is unclear.
4. The legislative history of the Act further suggests that a U.S.
parent company would be subject to penalties "if its foreign
subsidiary has knowledge or should have had knowledge that the
subsidiary was doing prohibited business with Iran, even if the
U.S. parent company has no knowledge of these transactions."
158 Cong. Rec. S5862 (Aug. 1, 2012) (statement of Sen.
Johnson).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.