In August 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (the IRT Act). The IRT Act significantly expands U.S. sanctions against Iran by, among other things, (i) adding new activities to the list of trigger events mandating sanctions; (ii) making U.S. companies subject to significant civil penalties if their foreign subsidiaries engage in transactions with Iran; and (iii) imposing a new disclosure requirement relating to knowing engagement in sanctionable activities by domestic and foreign private issuers required to file annual and quarterly reports with the U.S. Securities and Exchange Commission (the SEC) pursuant to Section 13(a) under the Securities and Exchange Act of 1934 (the Exchange Act).1 Section 219 of the IRT Act, which provides for the additional disclosure requirements, does not require additional rulemaking by the SEC and becomes effective on February 6, 2013. Consequently, the new disclosure provisions will apply to periodic and annual reports required to be filed with the SEC on or after February 6, 2013. For reporting companies with calendar year ends, the disclosure obligations will first apply to their Annual Report on Form 10-K, 20-F or 40-F for the fiscal year ended December 31, 2012.
Implications for Canadian Issuers
Canadian and other foreign private issuers subject to the reporting requirements of the Exchange Act must also comply with the new disclosure obligations of the ITR Act in their annual Form 40-F or Form 20-F reports, as applicable.
SEC Disclosure Relating to Sanctionable Activities
The IRT Act amended Section 13 of the Exchange Act by adding subsection (r), which requires an issuer who files annual or quarterly reports with the SEC to make specific disclosures in such reports if, during the period covered by the report, the issuer or any of its affiliates2 (including the issuer's significant shareholders, and potentially including other parties that the issuer does not control) engaged in any of the following activities:
- Knowingly3 engaged in an activity covered by Section 5(a) or 5(b) of the Iran Sanctions Act of 1996, as amended (ISA).4
- Knowingly engaged in an activity or transaction described in sections 104(c)(2), 104(d)(1) or 105A(b)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, as amended (CISADA).5
- Knowingly conducted any transaction or dealing with the
following persons or entities:
- Any person or entity that has property blocked pursuant to Executive Order No. 132246. Executive Order No. 13224 relates to any person or entity that is designated on the Specially Designated National and Blocked Persons List (the SDN List) as global terrorists by the Office of Foreign Asset Control7.
- Any person or entity who has property blocked pursuant to Executive Order No. 133828 which relates to any person or entity that is designated on the SDN List as a supporter and proliferator of weapons of mass destruction.
- Any person or entity defined in Section 560.304 of the U.S. Code of Federal Regulations which covers the Government of Iran, any political subdivision, agency or instrumentality of the Government of Iran, any entity owned or controlled directly or indirectly by any of the foregoing, or any person acting or purporting to act, or for whom there is reasonable cause to believe that such person is acting or purporting to act, directly or indirectly on behalf of any of the foregoing. Under this requirement, any transactions conducted without the specific authorization of a U.S. government department or agency must be reported.
If an issuer discloses that it, or one of its affiliates, has engaged in any of these activities during the relevant reporting period, the issuer is also required to provide a detailed description of such activity. Absent further guidance from the SEC, this disclosure must be made without regard to materiality of the amount or the scope or breath of the activities involved. The disclosure must include:
- the nature and extent of the activity;
- the gross revenues and net profits, if any, attributable to the activity; and
- a statement whether or not the issuer or its affiliate intends to continue the activity.
Notification Obligations Imposed on the Issuer and Implications
The ITR Act also requires a reporting issuer to provide the same information to the SEC in a separate notice filed concurrently with the applicable annual or quarterly report.9 Upon receipt of this notice, the SEC is required to provide the relevant report to each of: (i) the President of the United States, (ii) the Committee on Foreign Affairs and the Committee on Financial Services of the House of Representatives, and (iii) the Committee on Foreign Relations and the Committee on Banking, Housing, and Urban Affairs of the Senate, and to post the notice publicly on the SEC's website. Following receipt of such notice, the ITR Act requires the President to initiate an investigation to determine whether sanctions should be imposed pursuant to a variety of laws or by Executive Order and to make that determination not later than 180 days after the commencement of the investigation.
The new disclosure requirements are intended to compel the disclosure of activities involving Iran that could trigger sanctions against the disclosing party or its affiliates. However, the language of the statute is very broad and covers business activities that are not necessarily sanctionable under existing U.S. sanction programs. Issuers should make sure that the appropriate individuals within their organizations, including their foreign subsidiaries and affiliates, are aware of these disclosure requirements and the potential implications involved and that any failure to make the required disclosures could result in the issuer violating the U.S. securities laws. Issuers, including senior management and disclosure committees, should consider implementing some if not all of the following procedures, policies and practices to prepare for these disclosure requirements.
- Undergo a thorough internal review of whether any of the issuer's and/or affiliate's activities can trigger ITR Act disclosure requirements and promptly report any ITR Act activities to the disclosure committee.
- Implement or update protocols for the issuer and its affiliates designed to identify any new business dealings that could trigger ITR Act disclosure requirements.
- Employ a systematic internal reporting process so that the correct information is accurately reported in the quarterly and annual reports, so that the acquiror can report them if required.
- Ensure that due diligence procedures in M&A activities or other cooperative ventures identify ITR Act activities that a target or partner corporation may have engaged in.
- If an issuer is reporting that it has engaged in ITR Act activities, the issuer should consider including further disclosure in the risk factors section or elsewhere regarding the potential consequences it may face as a result of those activities.
Issuers with international business operations, especially those with operations in the Middle East, should pay additional attention to these new requirements and give further consideration to the implementation of the policies and procedures noted above. The requirement to disclose any transactions or dealings with SDNs reaches activities that may be unrelated to Iran and apply to persons located anywhere in the world. All reporting issuers should consider conducting a thorough evaluation of their worldwide business activities to confirm that they do not do business with SDNs designated as global terrorists or weapons proliferators on the SDN List and should consider implementing compliance procedures (including appropriate software) to confirm that business partners and counterparties are not on the SDN List.
A.Section 5(a) of ISA generally prohibits a person from engaging in the following activities relating to the energy sector of Iran:
- Development of petroleum resources of Iran. Knowingly makes an investment in excess of specified amounts that directly and significantly contributes to the enhancement of Iran's ability to develop petroleum resources.
- Production of refined petroleum products. Knowingly sells, leases, or provides to Iran goods, services10, technology, information, or support in excess of specified amounts that could directly and significantly facilitate the maintenance or expansion of Iran's domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries or directly associated infrastructure, including construction of port facilities, railways, and roads, the primary use of which is to support the delivery of refined petroleum products.
- Exportation of refined petroleum products to Iran. Knowingly (i) sells or provides to Iran refined petroleum products in excess of specified amounts or (2) sells, leases, or provides to Iran goods, services, technology, information, or support in excess of specified amounts that could directly and significantly contribute to the enhancement of Iran's ability to import refined petroleum products, including:
- subject to certain exceptions, underwriting or entering into a contract to provide insurance or reinsurance for the sale, lease, or provision of such goods, services, technology, information, or support;
- financing or brokering such sale, lease, or provision;
- providing ships or shipping services to deliver refined petroleum products to Iran;
- bartering or contracting by which goods are exchanged for goods, including the insurance or reinsurance of such exchanges; or
- purchasing, subscribing to, or facilitating the issuance of
sovereign debt of the Government of Iran, including governmental
bonds, issued on or after the date of the enactment of the ITR Act.
- Joint ventures with Iran relating to developing petroleum resources. Knowingly participates, on or after August 10, 2012, in a joint venture with respect to the development of petroleum resources outside of Iran if (i) the joint venture is established on or after January 1, 2002; and (ii)(I) the Government of Iran is a substantial partner or investor in the joint venture; or (II) Iran could, through a direct operational role in the joint venture or by other means, receive technological knowledge or equipment not previously available to Iran that could directly and significantly contribute to the enhancement of Iran's ability to develop petroleum resources in Iran.
- Support for the development of petroleum resources and refined petroleum products in Iran. Knowingly, on or after August 10, 2012, sells, leases, or provides to Iran goods, services, technology, or support in excess of specified amounts that could directly and significantly contribute to the maintenance or enhancement of Iran's (i) ability to develop petroleum resources located in Iran; or (ii) domestic production of refined petroleum products, including any direct and significant assistance with respect to the construction, modernization, or repair of petroleum refineries or directly associated infrastructure, including construction of port facilities, railways, and roads, the primary use of which is to support the delivery of refined petroleum products.
- Development and purchase of petrochemical products from Iran. Knowingly, on or after August 10, 2012, sells, leases, or provides to Iran goods, services, technology, or support in excess of specified amounts that could directly and significantly contribute to the maintenance or expansion of Iran's domestic production of petrochemical products.
- Transportation of crude oil from Iran. Subject to certain exceptions, knowingly owns, operates, controls, or insures, a vessel that on or after November 8, 2012, was used to transport crude oil from Iran to another country.
- Concealing Iranian origin of crude oil and refined petroleum products. Knowingly owns, operates, or controls, a vessel that on or after November 8, 2012 is used in a manner that conceals the Iranian origin of crude oil or refined petroleum products transported on the vessel, including by (i) permitting the operator of the vessel to suspend the operation of the vessel's satellite tracking device; or (ii) obscuring or concealing the ownership, operation, or control of the vessel by (I) the Government of Iran; (II) the National Iranian Tanker Company or the Islamic Republic of Iran Shipping Lines; or any other entity determined by the President to be owned or controlled by the Government of Iran or an entity specified in subclause (ii).
B.Section 5(b) of ISA generally prohibits a person from engaging in the following activities with respect to development by Iran of weapons of mass destruction or other military capabilities, including providing support for Iran's acquisition or development of chemical, biological, or nuclear weapons or advanced conventional weapons:
- Exports, transfers, and transshipments. Exporting or transferring, or permitting or otherwise facilitating the transshipment of, any goods, services, technology, or other items with knowledge or reason to know that (i) such actions would likely result in another person exporting, transferring, transshipping, or otherwise providing the goods, services, technology, or other items to Iran, and (ii) the export, transfer, transshipment, or other provision of the goods, services, technology, or other items to Iran would contribute materially to the ability of Iran to (I) acquire or develop chemical, biological, or nuclear weapons or related technologies; or (II) acquire or develop destabilizing numbers and types of advanced conventional weapons.
- Joint ventures relating to the mining, production, or transportation of uranium.
- Knowingly participated, on or after August 10, 2012, in a joint venture established on or after February 2, 2012 that involves any activity relating to the mining, production, or transportation of uranium with (i) the Government of Iran; (ii) an entity incorporated in Iran or subject to the jurisdiction of the Government of Iran; or (iii) a person acting on behalf of or at the direction of, or owned or controlled by, the Government of Iran or an entity described in clause (ii).
- Knowingly participated, on or after August 10, 2012, in a joint venture established before February 2, 2012 with any person described in the immediately preceding bullet through which (i) uranium is transferred directly to Iran or indirectly to Iran through a third country; (ii) the Government of Iran receives significant revenue; or (iii) Iran could, through a direct operational role or by other means, receive technological knowledge or equipment not previously available to Iran that could contribute materially to the ability of Iran to develop nuclear weapons or related technologies.
A. Section 104(c)(2) of CISADA generally prohibits a foreign financial institution from knowingly engaging in the following activities that facilitate the transactions or activities of Iran's Revolutionary Guard Corps, of U.S.-sanctioned persons in Iran, or of any blocked person in Iran in connection with weapons of mass destruction or terrorism:
- Facilitates the efforts of the Government of Iran (including efforts of Iran's Revolutionary Guard Corps or any of its agents or affiliates) (i) to acquire or develop weapons of mass destruction or delivery systems form weapons of mass destruction; or (ii) to provide support for organizations designated as foreign terrorist organizations under section 219(a) of the Immigration and Nationality Act or support acts of international terrorism (as defined in the ISA).
- Facilitates the activities of (i) a person subject to financial sanctions pursuant to certain United Nations Security Council Resolutions, or any other resolution that is agreed to by the Security Council and imposes sanctions with respect to Iran; or (ii) a person acting on behalf of at the direction of or owned or controlled by, a person described in clause (i).
- Engages in money laundering to carry out an activity described in the previous two bullets.
- Facilitates efforts by the Central Bank of Iran or any other Iranian financial institution to carry out a activity described in the first two bullets above.
- Facilitates a significant transaction or transactions or provides significant financial services for (i) Iran's Revolutionary Guard Corps or any of its agents or affiliates whose property or interests in property are blocked pursuant to the International Emergency Economic Powers Act ("IEEPA"); or (ii) a person whose property or interests in property are blocked pursuant to the IEEPA in connection with (i) Iran's proliferation of weapons of mass destruction or delivery systems for weapons of mass destruction; or (ii) Iran's support for international terrorism.
B. Section 104(d)(1) of CISADA generally prohibits any person owned or controlled by a domestic financial institution from knowingly engaging in a transaction or transactions with or benefitting Iran's Revolutionary Guard Corps or any of its agents or affiliates whose property or interests in property are blocked pursuant to the IEEPA.
C. Section 105A(b)(2) of CISADA generally prohibits a person from knowingly engaging in the following activities on or after August 10, 2012 that support Iran's acquisition or use of such goods or technologies 11 that are likely to be used to commit human rights abuses or to restrict, disrupt or monitor the free flow of information by (i) transferring, or facilitating the transfer of, such to Iran, any entity organized under the laws of Iran or otherwise subject to the jurisdiction of the Government of Iran, or any national of Iran, for use in or with respect to Iran and (ii) providing services (including services relating to hardware, software, and specialized information, and professional consulting, engineering, and support services) with respect to such goods or technologies after such goods or technologies are transferred to Iran.
1 Like the conflict minerals and resource extraction government payments disclosure requirements required by the Dodd-Frank Act, these new disclosure requirements reflect the latest Congressional effort to promote foreign policy goals by imposing disclosure requirements on SEC reporting companies.
2 While the SEC has not provided any guidance on the meaning of the term "affiliate" specifically for purposes of Section 219 of the IRT Act, Exchange Act Rule 12b-2 defines the term to mean a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with the company.
3 A person or entity "knowingly" engages in an activity if it knows (i.e.: has actual knowledge) or a "should have known" that it engaged in the activity.
4 See Annex A for a general description of the activities covered by Sections 5(a) and 5(b) of ISA.
5 See Annex B for a general description of the activities and transactions covered by Sections 104(c)(2), 104(d)(1) and 105A(b)(2) of CISADA.
6 Executive Order 13224 was signed by President George W. Bush on September 23, 2001 as a response to the September 11, 2001 terrorist attacks. The order authorizes the U.S. government to designate and block the assets of foreign individuals and entities that support or commit terrorist activities. The order also allows the U.S. President to bar humanitarian donation transactions if the donations seriously impair his or her ability to deal with a national emergency.
7 For complete SDN lists, including those individuals and entities listed by the Department of Treasury, visit OFAC's website .
8 Executive Order 13382, signed by President George W. Bush on June 29, 2005, aims to freeze the assets of weapons of mass destruction proliferators and their supporters. By isolating and cutting off their financial support, the order is meant to reduce the ability of weapons proliferators to attack the United States. All transactions between the listed designees and any U.S. persons under U.S. jurisdiction are prohibited.
9 The SEC has not yet announced to whom within the SEC such information is to be provided or the form thereof.
10 As defined under ISA, services include software, hardware, financial, professional, professional, consulting, engineering and specialized energy information services, energy-related technical assistance and maintenance and repairs.
11 Goods or technologies are defined as those that the President determines are likely to be used by the Government of Iran or any of its agencies or instrumentalities (or by any other person on behalf of the Government of Iran or any of such agencies or instrumentalities) to commit serious human rights abuses against the people of Iran, including (i) firearms or ammunition (as those terms are defined in section 921 of title 18 of the United States Code), rubber bullets, police batons, pepper or chemical sprays, stun grenades, electroshock weapons, tear gas, water cannons, or surveillance technology; or (ii) sensitive technology, defined as hardware, software, telecommunications equipment or any other technology that the President determines is to be used specifically to restrict the free flow of unbiased information in Iran or to disrupt monitor, or otherwise restrict speech of the people in Iran.
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.