On December 26, 2012, the US Treasury Department's Office of Foreign Assets Control ("OFAC") issued a final rule amending the Iranian Transactions and Sanctions Regulations (the "ITSR"). Central to these amendments was the imposition of new extraterritorial restrictions on the foreign subsidiaries of US companies.

These restrictions, established by Section 218 of the August 10, 2012 Iran Threat Reduction and Syria Human Rights Act (the "TRA") and Section 4 of Executive Order 13628 ("EO 13628"), are designed to extend the broad prohibitions on US persons from doing business in Iran or with the Government of Iran to cover any US owned or controlled foreign entities.

The December 26, 2012 OFAC final rule adds section § 560.215 to the ITSR. This section prohibits an entity that is (i) owned or controlled by a US Person and (ii) established or maintained outside the United States from knowingly engaging in any transaction (direct or indirect) with the Government of Iran or any person that is subject to the jurisdiction of the Government of Iran, if the transaction would be prohibited under the ITSR if it were engaged in by a US Person or in the United States.

The structure of this provision is intended to force US parent companies to terminate and prohibit any sanctionable activities engaged in by foreign entities under their ownership or control. The ITSR, as amended, includes a framework of civil penalties that can be imposed upon any US person that owns or controls a foreign entity that violates, attempts to violate, conspires to violate, or causes a violation of § 560.215.

By its terms, the plain language of § 560.215 appears to be quite expansive in terms of its coverage. The definitions of the key terms of this provision cover an exceptionally broad range of foreign entities with US affiliations and a wide sweep of transactions and counterparties.

  • For example, § 560.215 outlines a wide range of scenarios and circumstances under which a foreign entity is considered to be "owned or controlled" by a US Person and, as such, subject to the expanded sanctions. Pursuant to the regulations, "ownership or control" occurs when a US Person: "holds more than 50% of the equity interest by vote or value in the entity; holds a majority of the seats of the board of directors of the entity; or otherwise controls the actions, policies, or personnel decisions of the entity." (emphasis added) This language would appear to cover a wide range of potential business affiliations, as well as provide OFAC with substantial discretion with respect to determining that a US Person "otherwise controls" a foreign entity -- a term that is not defined in the regulations.
  • As with other US sanctions programs, for conduct to be sanctionable under § 560.215, actual or constructive knowledge is required. By its terms, § 560.215 includes both actual knowledge (i.e., the party actually knew it was engaging in a prohibited transaction) or constructive knowledge (i.e., the party should have known it was engaging in a prohibited transaction). Thus, a party could be sanctioned under this provision in a situation where it did not actually know the activity was sanctionable.
  • The plain language of § 560.215 also designates a vast sweep of the Iranian economy as off-limits for US owned or controlled foreign entities. By its terms, this includes the Government of Iran, any of its political subdivisions, agencies, or instrumentalities, as well as any person controlled (directly or indirectly) by any of the foregoing, or any person that acts or purports to act (directly or indirectly) on behalf of the foregoing. Importantly, the term "Government of Iran" also includes any person determined by OFAC to be included in this category -- a list of persons which currently contains dozens of names of private sector enterprises and persons. Additionally, a person "subject to the jurisdiction of the Government of Iran" would include a wide scope of Iranian individuals and entities, as this term is defined to cover any 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."
  • § 560.215 also makes a wide range of conduct subject to US sanctions. As a general matter, because the ITSR broadly prohibits US Persons from engaging in most transactions with the Government of Iran or other Iranian entities, the scope of § 560.215, on its face, would prohibit most transactions by US owned or controlled foreign entities with the Government of Iran or any person subject to the jurisdiction of Iran.

However, there are some important limitations on the scope of § 560.215, including a safe harbor that is intended to allow for the unwinding of certain transactions that otherwise would be sanctionable under this provision.

  • Under a related provision (§ 560.556), US owned or controlled foreign entities generally can engage in a transaction otherwise prohibited by § 560.215 so long as the activity would be authorized by a general license for a US Person. The US owned or controlled foreign entity is authorized to engage in such a transaction only to the same extent that a US Person would be authorized to engage in the transaction, and subject to all the terms and conditions in the general license for the US Person. Importantly, this section does not authorize any transaction that would be prohibited by other parts of the ITSR if it were engaged in by a US Person or in the United States.
  • Consistent with ordinary US sanctions practice, US foreign owned or controlled entities can apply to OFAC for a specific license to authorize a transaction that otherwise would be prohibited by § 560.215.
  • Reflecting the US policy goals of isolating Iran from international commerce while minimizing the economic impact on US allies, § 560.555 authorizes a safe harbor provision for the winding-down of transactions prohibited by § 560.215. The safe harbor authorizes "all transactions ordinarily incident and necessary to the winding-down of transactions prohibited by § 560.215" during the period from October 9, 2012 through March 8, 2013, provided that such transactions do not involve a US Person and do not occur in the United States. Additionally, this safe harbor does not authorize any reexports of US-origin goods, services or technology to Iran or the Government of Iran. Moreover, the safe harbor only applies to transactions involving Iranian financial institutions if the property and interests in property of the Iranian financial institution are blocked solely pursuant to the ITSR (i.e., they are not also blocked under other US sanctions programs, such as those imposing sanctions on entities involved in the proliferation of weapons of mass destruction).
  • Additionally, pursuant to § 560.701, a US parent can avoid civil penalties for violations of § 560.215 if it divests or terminates its business with the foreign entity by February 6, 2013, such that the US person no longer owns or controls the foreign entity within the meaning of this provision. (February 6, 2013 is 180 days after the enactment of the TRA.)
  • Recognizing certain other geo-political factors, the regulations, consistent with the TRA, provide an exemption from § 560.215 for the authorized intelligence activities of the United States and for activity relating to the development of Azerbaijan's Shah Deniz natural gas field, and the construction and operation of a Shah Deniz pipeline to bring this gas to Europe and Turkey.

Given the expanding reach of US sanctions against Iran, US persons with overseas affiliates should closely follow the evolving sanctions policy and enforcement landscape. The establishment and implementation of extraterritorial restrictions on US owned or controlled foreign entities is merely the latest in a series of expanding restrictions on foreign/non-US parties that can result in significant legal, reputational and commercial impacts on conduct that was heretofore outside the scope of US sanctions.

Particularly as businesses begin to execute their plans for the New Year, now is a critical time to identify any potential exposure to US sanctions and to take appropriate measures to address this risk.

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.