On August 10, 2012, the President signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (the "Act"). The Act broadens the scope of U.S. economic sanctions in ways that will impact many U.S. companies and their foreign affiliates. This alert addresses the Act's two most significant provisions relating to Iran, which (i) expand the reach of U.S. sanctions against Iran and its government to foreign entities owned or controlled by "U.S. persons," and (ii) require domestic and foreign companies that issue securities traded on a U.S. exchange to disclose to the SEC certain sanctions-related business dealings of the issuer and its affiliates.
Closing the Foreign-Subsidiary Loophole
Section 218 of the Act directs the closing of a long-standing loophole in the Iranian Transactions Regulations ("ITR") under which foreign subsidiaries of U.S. companies could engage in transactions with Iran, provided they acted independently of and were not facilitated by any "U.S. person." Although U.S. companies with foreign subsidiaries have increasingly elected not to rely on this loophole, some continue to do so and this new provision will have particular impact on those companies.
The Act requires the President, by October 9, 2012, to make the existing prohibitions in the Iran sanctions apply to any foreign entity in which a U.S. person holds 50% or more of the equity interest (by vote or value) or a majority of seats on the board of directors, or where a U.S. person "otherwise control[s] the actions, policies, or personnel decisions of the [foreign] entity." If the U.S. person could not itself engage in an Iran-related transaction under the ITR, the U.S. person will be liable for such Iran-related transactions that its owned or controlled foreign entity "knowingly" undertakes. In many respects, these new provisions will make the sanctions against Iran as far-reaching as the existing sanctions against Cuba (which already reach the owned/controlled foreign subsidiaries of U.S. companies).
A U.S. company that owns or controls a foreign entity engaged in unlawful transactions with Iran will face civil penalties up to $250,000 or twice the value of the unlawful transaction; however, a U.S. company can avoid liability for those transactions by "divest[ing] or terminating its business with the entity" within 180 days of enactment (i.e., not later than February 6, 2013).
U.S. companies should quickly assess whether any foreign entities that they "own or control" engage, directly or indirectly, in Iran-related transactions that would be prohibited if undertaken by U.S. persons or from within the United States. In some instances, an existing General License or exemption under the ITR may authorize the transaction – e.g., certain travel services, certain humanitarian relief, the export at no cost to the user of certain Internet social media services and related software, and the dissemination of information or informational materials are authorized. But many U.S. companies will need to take some form of action, such as pursuing a Specific License for the transaction from the Office of Foreign Assets Control of the U.S. Department of the Treasury ("OFAC"), examining existing contracts or warranty obligations involving Iran for provisions excusing non-performance, or evaluating the logistics and impact of a prompt divestiture.
New SEC Disclosure Obligations
Section 219 of the Act amends the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78m, to require issuers of securities to disclose in their annual and quarterly reports to the SEC if the issuer or "any affiliate of the issuer" has "knowingly" engaged in certain sanctions-related activities. Transactions with the Government of Iran or its agencies or instrumentalities or with certain persons or entities subject to a blocking order (i.e., "Specially Designated Nationals") are subject to disclosure, as are certain transactions relating to the Iranian petroleum industry, transfers to Iran of weapons or certain sensitive technologies, and certain transactions by foreign financial institutions, among other activities.
The quarterly or annual report to the SEC must describe the nature and extent of the dealings with Iran, provide gross revenues and profits attributable to the activity, and indicate whether the issuer or its affiliate intends to continue the activity. The SEC will publish any disclosures on its website and transmit the annual or quarterly report containing the disclosure to the President and Congress. The President must then initiate an investigation and determine within 180 days whether to impose sanctions on the issuer or its affiliate.
A U.S.-company issuer who is in compliance with the Iran sanctions is unlikely to have any activities of its own to report under Section 219; however, it may be required to report certain activities of its affiliates (e.g., foreign entities that own or control the issuer or that are under common control with the issuer), even where such activities are not prohibited by U.S. law.
Because these new disclosure requirements take effect for any quarterly or annual report filed after February 6, 2013, companies with reporting obligations under the 1934 Act should determine whether they or their affiliates engage in activities subject to disclosure and begin evaluating the scope of those activities.
Additional Provisions
The Act also strengthens and expands the Iran and Syria sanctions in many industry- and transaction-specific ways. Several provisions target Iran's petroleum and energy industries, barring petroleum investments and joint ventures outside Iran in which the Iranian Government is a substantial investor or that contribute to resource development in Iran. Related provisions authorize sanctions against those who provide goods, services, or technology to the Iranian petroleum and petrochemical industries.
New provisions also expand the President's authority to sanction transportation-service providers and insurers who engage in activities that could "materially contribute" to Iran's development of weapons of mass destruction or support terrorism; to restrict foreign financial institutions from opening or maintaining correspondent or payable-through accounts; and to sanction those contributing to human rights abuses in Iran and Syria or who deal with the Iranian Revolutionary Guard Corps.
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