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Digg On August 10, President Obama signed into law another expansion
of US sanctions against Iran and Syria that, most significantly,
makes US firms liable for their foreign subsidiaries'
involvement in sanctionable activity in Iran and further subjects
non-US firms and their corporate officers to possible US sanctions.
The Iran Threat Reduction and Syria Human Rights Act of 2012
("Act"), like its 2010 predecessor, the Comprehensive
Iran Sanctions, Accountability, and Divestment Act of 2010
("CISADA"), broadens the Iran Sanctions Act of 1996
("ISA") by requiring the President to take action against
non-US firms involved directly or indirectly in specified
transactions with Iran. In its broad extraterritorial application,
the Act provides strong disincentives to firms that provide
energy-related services, insurance and reinsurance services, and
shipping services to Iran. It targets not just the firms
themselves, but also their corporate officers and principals by
restricting their access to the United States and permitting the
imposition of other sanctions against them in their individual
capacities. The Act also applies sanctions to firms involved in
joint ventures with Iran related to the development of petroleum
resources and the mining, production and distribution of uranium,
establishes new reporting requirements for issuers under the
Securities Exchange Act of 1934, and expands both the
"menu" of sanctions available to the President and the
requisite number of sanctions that the President must apply to
firms engaging in sanctionable conduct.1
The Act provides exceptions for many of its restrictions and
grants the President some discretionary waiver authority. However,
these exceptions and waivers are narrow and the
Administration's recent history of enforcement demonstrates
both an increased focus on Iran and an increased willingness to
apply US law in an extraterritorial manner. Companies should
monitor ongoing implementation of the new legislation, review its
potential impact, and establish effective due diligence and
compliance programs that address their conduct in the United States
and abroad.
This legislative action targeting Iran complements increasingly
strong executive action. Last month, President Obama signed
Executive Order 13622, "Authorizing Additional Sanctions With
Respect to Iran," which made sanctionable knowingly conducting
or facilitating significant transactions with a private or public
foreign financial institution or other entity for the purchase or
acquisition of Iranian oil. It also authorized sanctions against
those who provide material support to major entities in the Iranian
energy sector or the Central Bank of Iran for the purchase or
acquisition of US bank notes or precious metals by the Government
of Iran. The Executive Order was accompanied by the Treasury
Department imposition of sanctions under CISADA against two
banks—including Bank of Kunlun in China—found
to have facilitated significant transactions or providing
significant financial services to previously designated Iranian
banks. These measures are the latest in a series of Presidential
actions this year targeting Iran's access to international
financial markets and those who engage in activities intended to
evade existing sanctions.
Application of US Sanctions Against Iran to Foreign
Subsidiaries of US Firms
Previously, US firms were not liable under US sanctions law with
respect to Iran-related transactions of their foreign
subsidiaries if neither the US firm itself nor any individual who
was a US person was involved in such transactions. The Act extends
the reach of US sanctions law by directing the President to
prohibit an entity—including a partnership, association,
trust, joint venture, and corporation—owned or controlled
by a US person and established or maintained outside the United
States from knowingly engaging in any transaction with the
Government of Iran, or any person subject to its jurisdiction, that
would be prohibited if it were engaged in by the US person or in
the United States.
Notably, the Act provides that civil penalties may be assessed
against a US person if a non-US entity that it owns or controls
attempts to violate, conspires to violate, or causes a violation as
described above.
Expanded Scope of Activities Now Subject to ISA/CISADA
Sanctions
As we discussed in an earlier
alert, CISADA amended ISA by requiring the imposition of
sanctions against non-US firms engaged in certain specified
activities, including investment in Iran's petroleum
production, transactions that could facilitate the maintenance or
expansion of Iran's refined petroleum industry, and exports of
refined petroleum products to Iran. CISADA also added three new
punitive measures to ISA's "menu" of sanctions that
could be imposed against violating firms.
The Act signed on Friday further expands the scope of
ISA/CISADA by requiring the imposition of sanctions against parties
engaged in the following activities:
- Joint ventures relating to the development of petroleum resources: Any person who knowingly participates in a joint venture established after January 1, 2002 with respect to the development of petroleum resources outside of Iran, if the Government of Iran is a "substantial partner or investor" or could (e.g., through a direct operational role in the JV) receive technological knowledge or equipment that could directly and significantly contribute to its ability to develop petroleum resources in Iran;
- Transportation of crude oil from Iran: Any person who is a controlling beneficial owner of, or otherwise owns, operates, controls, or insures, a vessel that is used to transport crude oil from Iran to another country. Sanctions apply to controlling beneficial owners who have "actual knowledge" of the use of the vessel and to those who own, operate, control, or insure the vessel if they "knew or should have known" of the use. The sanction is applicable only if the President has made a sufficiency finding under the National Defense Authorization Act of 2012 ("NDAA") with regard to the global availability of non-Iranian crude, and it includes an exception with respect to the transportation of crude oil from Iran to countries that have been granted an exception under the NDAA for reducing their imports of Iranian crude;
- Concealing Iranian origin of crude oil and refined petroleum products: Any person who is a controlling beneficial owner of, or otherwise owns, operates, controls, or insures, a vessel that is used in a manner that conceals the Iranian origin of crude or refined petroleum products transported on that vessel (e.g., by obscuring or concealing the ownership, operation, or control of the vessel by the Government of Iran, the National Iranian Tanker Company ("NITC"), or the Islamic Republic of Iran Shipping Lines). Sanctions apply to controlling beneficial owners who have "actual knowledge" of the use of the vessel and to those who own, operate, control, or insure the vessel if they "knew or should have known" of the use;
- Joint ventures relating to the mining, production or transportation of uranium: Any person who knowingly participates in a joint venture involving any activity related to the mining, production, or transportation of uranium, if the joint venture is established on or before February 2, 2012 with the Government of Iran, an entity acting at its direction or that it owns or controls, or an entity incorporated in Iran or subject to the Government of Iran's jurisdiction. Sanctions would also apply to joint ventures established prior to February 2, 2012 if uranium is transferred directly or indirectly to Iran through such joint ventures, if the Government of Iran receives significant revenue from them, or if it could receive previously unavailable technological knowledge or equipment that could contribute materially to Iran's ability to develop nuclear weapons or related technologies;
- Provision of underwriting services or insurance or reinsurance: Any person who knowingly provides underwriting services or insurance or reinsurance for the National Iranian Oil Company ("NIOC"), the NITC, or a successor company. The Act gives the President the discretion not to impose sanctions if he finds that the person has exercised due diligence in establishing and enforcing compliance procedures, and it disallows sanctions for the provision of insurance or reinsurance for activities relating to the provision of food, medicine, medical devices or humanitarian assistance; and
- Purchase, subscription to, or facilitation of the issuance of debt: Any person who knowingly purchases, subscribes to, or facilitates the issuance of sovereign debt of the Government of Iran or any entity that it owns or controls, including government bonds.
Several of the new prohibitions are designed to encourage firms
that are currently engaged in sanctionable conduct to terminate
their participation in those activities. For example, the Act does
not allow the imposition of sanctions on persons who terminate
their participation in a sanctionable joint venture within 180 days
of the date of enactment of the Act, and it gives the President the
discretion not to sanction underwriters, insurers or reinsurers who
provide reasonable assurances that they will cease providing their
services to the NITC or the NIOC not later than 120 days after
enactment of the Act.
In addition to these new expansions of ISA/CISADA, the Act
codifies Executive Order 13590, which imposed ISA/CISADA-type
sanctions against firms involved in transactions with Iran that
could directly and significantly contribute to the maintenance or
enhancement of Iran's ability to develop petroleum resources
located in Iran, or to the maintenance or expansion of Iran's
domestic production of petrochemical products. It also amends the
ISA/CISADA sanctions with respect to the export, transfer, or
provision to Iran of goods, services, technology, and other items
that would materially contribute to Iran's ability to acquire
or develop chemical, biological or nuclear weapons, or
destabilizing numbers and types of advanced conventional weapons.
As amended, this section of ISA/CISADA now applies to transactions
with any party (i.e., not just Iran) where the firm knew that the
transaction would likely result in another person exporting,
transferring, transshipping, or otherwise providing the item to
Iran and that the transaction would contribute to weapons
proliferation. Finally, the Act expands the scope of key
definitions under ISA/CISADA to target those associated with
infrastructure improvements that are provided for the maintenance
or expansion of Iran's domestic refined petroleum production,
e.g., port facilities, railways and roads.
Expansion of Sanctions Available to the President Under
ISA
ISA/CISADA included nine sanctions that the President could impose
on parties engaged in prohibited transactions: 1) prohibition on
receiving Export-Import Bank credits; 2) prohibition on receiving
licenses under various export control regimes; 3) prohibition on
receipt of large loans from US financial institutions; 4) for
financial institutions, restrictions on their ability to deal in US
government bonds and serve as a repository for government funds; 5)
prohibition on government procurement from the violating entity; 6)
prohibition on "transactions in foreign exchange that are
subject to the jurisdiction of the United States and in which the
sanctioned person has any interest"; 7) prohibition on
transfers of credit or payments that involve "any interest of
the sanctioned person" through US financial institutions; 8)
prohibition on any person from participating in any property
transaction "with respect to which the sanctioned person has
any interest"; and 9) additional sanctions to restrict imports
from that party, in accordance with the International Emergency
Economic Powers Act.
The new legislation provides for three additional sanctions, and
the President must now impose five or more of the sanctions
authorized under the Act. One unique feature of the new sanctions
is that two of the measures target the individuals involved in the
decision-making at sanctioned firms, as opposed to the firms
themselves. The additional sanctions are:
- Prohibition on US persons investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person;
- Prohibition on the provision of visas to, and the entry into the United States of, corporate officers or principals of, or shareholders with a controlling interest in, a sanctioned entity; and
- Imposition of ISA/CISADA sanctions on the principal executive officers of any sanctioned person, or on persons performing similar functions and with similar authority.
The Act also allows the President to prohibit a vessel owned,
operated or controlled by a sanctioned person from landing at a US
port for not more than two years if the person used the vessel in a
manner that concealed the Iranian origin of the crude or refined
petroleum products that it transported.
Expansion of CISADA Section 104
Section 104(c) of CISADA requires the Secretary of the Treasury to
prohibit or impose strict conditions on the opening or maintaining
of correspondent and payable-through accounts in the United States
by foreign financial institutions found to have knowingly engaged
in certain proscribed activities, including the facilitation of
efforts by the Government of Iran to acquire or develop weapons of
mass destruction or provide support for international terrorism and
the facilitation of a significant transaction or provision of
significant financial services for Iran's Revolutionary Guard
Corps ("IRGC") or other persons and entities whose
property is blocked by the Treasury Department in connection with
those activities. The Treasury Department regulations effectuating
these provisions are included in the Iranian Financial Sanctions
Regulations, 31 C.F.R. § 561.
The Act amends Section 104 to expand its scope:
- Section 104 previously applied to foreign financial institutions that facilitated the activities of persons subject to United Nations Security Council resolutions imposing sanctions on Iran. The Act expands that provision to include foreign financial institutions that facilitate the activity of anyone acting on behalf of, at the direction of, or under the ownership or control of, such persons;
- The Act expands the application of Section 104 to foreign financial institutions that facilitate the activity of any person, not just any financial institution, whose property or interests in property are blocked by the Treasury Department for activities related to the proliferation of weapons of mass destruction; and
- The Act expands the application of Section 104 to foreign financial institutions found to knowingly facilitate or participate or assist in certain proscribed activities, including by acting on behalf of, at the direction of, or as an intermediary for, another person with respect to the activity; attempting or conspiring to facilitate or participate in the activity; or being owned or controlled by a foreign financial institution found to be knowingly engaged in the activity.
New SEC Reporting Requirement
The Act creates a new disclosure requirement for issuers required
to file reports under Section 13 of the Securities Exchange Act of
1934. The required disclosure includes whether the issuer or any of
its affiliates knowingly engaged in an activity described in
Section 5(a) or 5(b) of ISA or Section 104(c)(2) or 105A(b)(2) of
CISADA, or knowingly conducted any transaction or dealing with a
person whose property and interests in property are blocked
pursuant to various Executive Orders and Treasury Department
sanctions related to Iran.
If an issuer (or its affiliate) does engage in any of these
activities, it must provide a detailed description of the activity
in its disclosure, including the gross revenues and net profits
gained thereby, and provide a separate notice to the Commission,
which the Commission must transmit to the President and the
Congress and make publicly available on the Internet. Upon receipt
of the notice, the President must initiate an investigation into
the possible imposition of sanctions under ISA/CISADA.
Additional Sanctions
In addition to the sanctions described above, the Act directs the
President to block the property and interests in property of
parties that sell, lease, or provide vessels, insurance,
reinsurance, or another shipping service for transportation of
goods to or from Iran that could materially contribute to the
Government of Iran's proliferation of weapons of mass
destruction or its support for international terrorism. It also
extends the block—depending on the level of
knowledge—to any successor entity to the party, to any
entity that owns or controls the party, and to any entity owned or
controlled by, or under common ownership with, the party.
The Act also requires the Secretary of the Treasury to submit a
report to Congress on persons identified as providing specialized
financial messaging services to, or enabling or facilitating direct
or indirect access to such services for, the Central Bank of Iran
or other Iranian financial institutions described in Section 104 of
CISADA. The Act authorizes the President to impose sanctions on
such persons unless the person has terminated its provision of the
services in response to the sanctions regime of its governing
foreign law. Earlier this year, the European Council established
prohibitions targeting SWIFT, which is headquartered in
Belgium.
Other Key Measures
- The Act denies visa privileges and access to the United States for senior officials in the Government of Iran involved in proliferation activities, international terrorism, and human rights abuses;
- The Act imposes further sanctions with respect to Iran's Revolutionary Guard Corps, including an expansion of ISA's procurement prohibition to foreign persons that engage in certain restricted activities with the IRGC and an expansion of ISA/CISADA and other sanctions on individuals and foreign government agencies acting in cooperation with the IRGC;
- The Act provides for the imposition of specific sanctions, including the blocking of property and interests in property, against a person involved in the transfer of goods or technologies or provision of services to Iran or Syria that the Iranian or Syrian government is likely to use to commit serious human rights abuses against its people, including firearms or ammunition and "sensitive technology" (i.e., hardware, software, telecommunications equipment and other items that are to be used to restrict the free flow of unbiased information in Iran or Syria or disrupt, monitor, or otherwise restrict speech);
- The Act subjects blocked assets that are the subject of proceedings in Peterson et al. v. Islamic Republic of Iran et al., the case brought by victims of the 1983 attack on the US Marine barracks in Beirut, to execution or attachment to satisfy compensatory damage awards against Iran.
Footnotes
1 The text of the law as enacted can be found here.
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.
Specific Questions relating to this article should be addressed directly to the author.
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