On December 26, 2012, the US Treasury Department, Office of Foreign Assets Control (OFAC) issued amendments to the Iranian Transactions and Sanctions Regulations (ITSR) implementing section 218 of the Iran Threat Reduction and Syria Human Rights Act (ITRA) and Executive Order 13622.

Background

As we have previously advised, section 218 of ITRA prohibits a non-US entity owned or controlled by a US person from engaging in any transaction with the Government of Iran (GOI), or any person "subject to the jurisdiction" of the GOI, if current US laws prohibit a US person, or a person in the United States, from engaging in such a transaction. On October 9, 2012, President Obama issued Executive Order 13628, implementing section 218 of ITRA and defining the term "subject to the jurisdiction of the Government of Iran" to mean "a person organized under the laws of Iran or any jurisdiction within Iran, ordinarily resident in Iran, or in Iran, or owned or controlled by any of the foregoing."

As we also previously advised, on July 30, 2012, President Obama issued Executive Order 13622, which imposed sanctions targeting the Iranian energy and petrochemical industries and expanded existing sanctions available under the National Defense Authorization Act for Fiscal Year 2012. The Executive Order authorized sanctions against individuals and entities providing material support to the National Iranian Oil Company (NIOC), Naftiran Intertrade Company (NICO), or the Central Bank of Iran (CBI), as well as on those engaged in the GOI's purchase or acquisition of US bank notes or precious metals.

Imposition of Sanctions on Certain Foreign Affiliates of US Persons

New section 560.215 of the ITSR implements section 218 of ITRA. It prohibits foreign entities that are "owned or controlled" by US persons from engaging in transactions with the GOI or any person subject to the GOI's jurisdiction where a US person, or person in the US, would be prohibited from engaging in such a transaction. The regulation provides that an entity is "owned or controlled" by a US person, and thus subject to section 560.215, where the US person:

  • Holds a 50 percent or greater equity interest by vote or value in the entity
  • Holds a majority of seats on the board of directors of the entity
  • Otherwise controls the actions, policies, or personnel decisions of the entity

OFAC has not provided any guidance regarding the circumstances under which it would conclude that a US person "controls" the actions, policies, or personnel decisions of a foreign entity. However, given the breadth of the language, and the use of the disjunctive "or" in this element of the definition, there could easily be situations where a US person is a minority owner or has limited representation on the governing board, but nonetheless may control policies, actions or personnel decisions at the entity. For example, a joint venture or partnership might present a situation where a US person's role or involvement, even if not as a majority owner, could trigger a "control" situation that would be covered under section 560.215. It is not clear if this provision would apply to contractual joint venture arrangements.

In accordance with sections 602 and 603 of ITRA, section 560.215 provides that its prohibitions do not apply to authorized intelligence activities of the US government or to activities relating to the Shah Deniz natural gas field or related pipeline projects.

General License for Winding Down of Iran Business

OFAC has introduced a significant general license at new ITSR section 560.555, which authorizes foreign entities to engage in "all transactions ordinarily incident and necessary to the winding-down" of Iran-related transactions covered by section 560.215, provided that the transactions do not involve US persons or occur in the United States. The general license authorizes such transactions from October 9, 2012 through March 8, 2013.

The general license does not authorize transactions that would violate section 560.205, which prohibits foreign persons from knowingly reexporting to Iran US-origin goods that are controlled under the Export Administration Regulations.

Finally, the general license does not authorize transactions involving Iranian financial institutions that have been blocked under sanctions regimes other than the ITSR, such as those targeting terrorism and proliferation of weapons of mass destruction. Section 560.555 authorizes transactions involving Iranian financial institutions only if the financial institution is blocked solely under the ITSR, which blocks the property of all Iranian financial institutions on a blanket basis at section 560.211.

Civil Penalties/Divestment

The amendments add section 560.701(a)(3) to the existing penalties available under ITSR sections 560.701(a)(1) & (2). The new penalty provision provides that a US person is subject to civil penalties under the International Emergency Economic Powers Act (IEEPA) where its owned/controlled foreign affiliate has violated, attempted to violate, conspired to violate, or caused a violation of the prohibitions set forth in section 560.215. This penalty provision makes clear that the US government intends to hold US companies responsible for the Iran-related activities of their owned/controlled affiliates. A US person, however, will not be subject to such penalties if it "divests or terminates its business with the entity," such that it does not "own or control" the entity under the definition above, by February 6, 2013. Note that the general license discussed above seems to provide additional time for such divestment to occur. While the language in the ITRA appeared to require divestment of the owned/controlled foreign entity that was engaged in business activity with Iran, the new ITSR general license allows winding down of the Iran-related activities of the foreign entity. Presumably, if one can achieve the winding down of the Iran-related business, OFAC would not proceed to impose penalties on the US parent even though it has not divested its ownership interest.

Although the ITSR do not impose penalties on foreign-owned/controlled entities that violate section 560.215, foreign persons themselves are subject to penalties for violation of certain other provisions of the ITSR (e.g., sections 560.204 or 560.205) or of IEEPA's prohibition on "causing" a violation of the statute or any order or regulation issued thereunder. Section 560.701(a)(3) therefore appears not to define the entire universe of civil penalties that may result from a foreign person's conduct involving Iran, but imposes vicarious civil (not criminal) liability on a US parent company for the actions of its foreign owned/controlled entity. Of course, a US parent can be held liable directly if it participates in conduct by a foreign affiliate that involves Iran.

Extension of US Parents' General Licenses to Foreign Subsidiaries

New section 560.556 provides that a foreign affiliate of a US person may engage in a transaction prohibited by section 560.215 where the transaction would be authorized by a general license if engaged in by a US person. The foreign entity is authorized to engage in the transaction only to the same extent that a US person is authorized, and must adhere to the conditions and requirements set forth in the applicable general license.

Section 560.556 further provides that it does not authorize any transaction that would be prohibited to a US person under a sanctions regime other than the ITSR. Accordingly, OFAC has amended and harmonized several existing general licenses to provide that a foreign entity may not avail itself of a general license where a US person would be prohibited from engaging in the transaction at issue under a sanctions regime other than the ITSR. These amended general licenses include those relating to:

  • Telecommunications and mail transactions (section 560.508)
  • Patent, trademark, and copyright-related transactions (section 560.509)
  • Transactions related to the resolution of disputes between the United States and the GOI (section 560.510)
  • Allowable payments for flights over Iranian airspace (section 560.522)
  • Provision of certain legal services (section 560.525);
  • Sales of agricultural commodities, medicine, and medical devices, and payment for or financing thereof (sections 560.530, 560.532)
  • Official activities of certain international organizations (section 560.539)
  • Payments from funds originating outside the United States (section 560.553)

Sanctions Targeting NIOC, NICO, CBI, and Purchase of Precious Metals by GOI

In order to implement Executive Order 13622, OFAC has amended ITSR section 560.211 to provide for the blocking of all persons providing material support to NIOC, NICO, or CBI, as well as of those engaged in the GOI's purchase or acquisition of US bank notes or precious metals. The section does not apply to transactions relating to the Shah Deniz natural gas field or related pipeline projects.

Conclusion

Through this set of amendments to the ITSR, OFAC has implemented section 218 of ITRA and Executive Order 13622, and has issued or amended various general licenses. Particularly significant is the general license authorizing foreign entities to engage in transactions incident to the winding down of Iran-related transactions, as this provides such entities with leeway to withdraw voluntarily from prohibited Iran-related business—which provides companies an option that likely will be viewed as preferable to the compelled divestiture required for US companies to avoid penalties under section 560.701(a)(3). Furthermore, OFAC has issued a general license authorizing foreign entities to engage in a transaction to the extent that a US person would be authorized to engage in the transaction under a general license.

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