United States: No More Safe Harbors: New Statute Expands Iran Sanctions Liability For U.S. Parent Companies

In a development that should be heeded by any U.S. company with overseas operations, on October 9, 2012, the Obama Administration implemented key provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”), Pub. L. No. 112-158 (August 10, 2012). Of particular note is Section 218, which for the first time imposes sanctions liability on a U.S. company for any act by its foreign subsidiary that contravenes prohibitions against “U.S. person” dealings with Iran, regardless of whether any U.S. person actually participated in the conduct or even whether the U.S. parent had knowledge of it. The law thus greatly expands the extraterritorial reach of the Iran sanctions, while imposing what appears to be strict liability on the U.S. parent for the conduct of its subsidiary.

Other provisions of the ITRA impose increased investigation and reporting burdens on U.S. companies, while expanding and codifying sanctions on foreign company activity.

Expanded Liability for U.S. Parent Companies

Section 218 of the ITRA expands existing U.S. Iran sanctions by applying their terms to the conduct of any entity owned or controlled by a U.S. person and established or maintained outside the United States. An entity is “owned or controlled by a U.S. person” when a U.S. person holds 50 percent or more of the equity interest by vote or value, holds a majority of seats on the board of directors “or otherwise controls the actions, policies or personnel decisions of” the foreign entity. ITRA, § 218(2)(a).

Section 218 prohibits a foreign subsidiary from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran, that would contravene existing U.S. sanctions against Iran if engaged in by a United States person or in the United States. Under the Iran sanctions programs, the term “United States person” means any U.S. citizen, permanent resident alien, entity organized under the laws of the United States (including foreign branches) or any person in the United States. Should a foreign subsidiary engage in such a transaction, the U.S. parent company will be subject to civil penalties to the same extent that they would apply to a U.S. person for the same conduct.

Notably, the statute does not require that the U.S. parent know that its subsidiary has engaged in a prohibited transaction. Thus, U.S. parent companies that own independently operating foreign entities could be liable for actions abroad that occur without their knowledge. This fact alone should motive U.S. companies to thoroughly review the activities of their foreign subsidiaries and should initiate action to ensure compliance going forward especially if, as is often the case, the foreign operations (operating in jurisdictions that do not ban dealings with Iran) do not maintain the rigorous compliance practices that are commonplace in the U.S. corporate culture.

Applicable Prohibitions Listed in Executive Order

In its Executive Order implementing this provision, and in guidance issued by the U.S. Department of the Treasury’s Office of Foreign Assets Controls (“OFAC”), both released on October 9, 2012, the Administration stated that the prohibited transactions are those specified in OFAC’s Iranian Transactions Regulations (incorporating the prohibitions of earlier executive orders), Executive Order 13599, Section 5 of Executive Order 13622 or Section 12 of the October 9 Order. These prohibitions are summarized below.

• The Iranian Transaction Regulations, 31 CFR Part 560, prohibit a wide range of Iran-related activity, including trading in Iranian-origin goods, selling goods or services to Iran or the Government of Iran, investing in Iran and entering into contracts related to the development of petroleum resources in Iran.
• Executive Order 13599 blocks the property and interests in property of any Iranian financial institutions, including the Central Bank of Iran.
• Section 5 of Executive Order 13622 blocks the property of any person that has materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services in support of, the National Iranian Oil Company (“NIOC”), Naftiran Intertrade Company (“NICO”), or the Central Bank of Iran or the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran.
• Section 12 of the October 9 Order prohibits evasion and attempts to evade certain Iran-related prohibitions.

Previous Rule Only Prohibited Facilitation

Before implementation of the ITRA, U.S. parent companies were generally not liable for conduct by their subsidiaries, absent direct involvement in the conduct by the U.S. parent or its U.S. personnel. U.S. persons (including parent companies) were, however, further prohibited from “facilitating” Iran transactions. Although practically it has always been difficult for U.S. parent companies to segregate corporate activities in order to ensure that no “U.S. person” facilitation of overseas transactions occurred, foreign subsidiaries of U.S. companies were permitted to engage in Iran transactions provided a strict segregation from U.S. involvement were maintained. The ITRA shuts this door. U.S. companies now must either eliminate their connection with foreign subsidiaries that engage in Iran-related transactions or ensure that the foreign subsidiaries immediately cease their Iran-related business.

Safe Harbor Provision

The statute does contain a temporary safe harbor provision. U.S. parent companies may avoid civil penalties by divesting their ownership and control in the foreign subsidiary within 180 days of enactment of the statute. U.S. parent companies who are unable to immediately shut down Iran-related operations of their subsidiaries abroad may want to consider this option.

Blocking Statutes

The extraterritorial scope of Section 218, reminiscent of other U.S. embargo programs (e.g., Cuba) may trigger blocking statutes of other jurisdictions, barring compliance with the new law. For example, in the EU, Council Regulation EC No. 2271/96 restricts EU Member companies from complying with certain extraterritorial provisions of the U.S. Iran Sanctions Act of 1996, as amended. If Section 218 of the ITRA is added to the list of statutes blocked by this provision, the EU-based foreign subsidiary of a U.S. company might find itself pulled in conflicting directions when it comes to maintaining or discontinuing Iran transactions.

Other Iran-Related Requirements and Prohibitions in the ITRA

The ITRA, which clocks in at a whopping 56 pages, contains a number of other requirements and prohibitions directed to Iran transactions. Noteworthy new provisions are outlined below.

SEC Disclosure

Section 219 of the ITRA creates a new disclosure requirement for issuers that are required to file reports under Section 13 of the Securities Exchange Act of 1934. The issuer must disclose whether the issuer or any of its affiliates knowingly engaged in an activity described in Section 5(a) or 5(b) of the Iran Sanctions Act (“ISA”)¹ or Section 104(c)(2)² or (d)(1)³ or 105A(b)(2)⁴ of the Comprehensive Iran Sanctions, Accountability, and Divestment Act (“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 engages in any of these activities, the issuer 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 SEC, which the SEC must make publicly available. The SEC also must provide the notice to the President and to Congress, and upon receipt of the notice, the President must initiate an investigation into the possible imposition of sanctions under the Iran sanctions program. This disclosure provision is slated to go into effect in February 2013.

Expansion of Energy Sector Sanctions

Section 201 of the ITRA expands sanctions against Iran’s energy sector. Particularly, it authorizes sanctions on any person who:

• provides assistance with respect to the construction of Iran’s transportation infrastructure when the primary use is to support the delivery of refined petroleum products;
• participates in joint ventures related to the development of petroleum resources outside Iran that are established on or after January 1, 2002 in which the Government of Iran is a substantial partner or investor or could, through a direct operational role in the joint venture or by other means, receive technological knowledge or equipment that could directly and significantly contribute to its ability to develop petroleum resources; or
• engages in transactions exceeding certain thresholds that could support the maintenance or expansion of Iran’s production of refined petroleum products, its ability to develop petroleum resources or its domestic production of petrochemical products.

Sanctions Relating to Transport of Crude Oil

Section 202 of the ITRA imposes sanctions on 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.

This section only applies 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. Several countries, including Japan, India and South Korea, have been granted an exception under the NDAA.

Prohibition on Uranium Joint Ventures

Under Section 203, a person who knowingly participates in a joint venture related to the mining, production or transportation of uranium can be subject to sanctions. The provision applies to joint ventures established on or after February 2, 2012, if the joint venture is 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 the Government of Iran could receive previously unavailable technological knowledge or equipment that could contribute materially to Iran’s ability to develop nuclear weapons or related technologies.

Dealings with NIOC and NITC

Section 212 authorizes sanctions against any person who knowingly provides underwriting services or insurance or reinsurance for the NIOC, the National Iranian Tanker Company (“NITC”), or a successor company. The statute 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.

Section 312 conveys the sense of Congress that the NIOC and NITC are not only owned and controlled by the Government of Iran, but that those companies provide significant support to IRGC and its affiliates. It requires, within 45 days of enactment of the statute, for the Secretary of the Treasury to determine whether the NIOC or NITC is an agent or affiliate of the IRGC.

On September 24, 2012, the NIOC was re-designated on the Specially Designated Nationals (“SDN”) list as an IRGC agent or affiliate. Being designated as an IRGC affiliate has particular ramifications. Foreign financial institutions determined to knowingly facilitate significant transactions or provide significant financial services for IRGC affiliates such as the NIOC may be exposed to CISADA sanctions. In addition, under Section 302 of the ITRA, foreign persons that knowingly engage in significant transactions with IRGC affiliates such as NIOC could be exposed to sanctions. Notably, however, significant transactions, financial services, or material support involving the NIOC for the purchase of Iranian petroleum or petroleum products by a foreign financial institution or entity based in a country that has received a significant reduction exception from the Secretary of State do not carry potential sanctions consequences.

NITC is an SDN but the Treasury Department has stated that, based on the information currently available, it is not able to determine at this time whether NITC is an agent or affiliate of the IRGC.

Sanctions Relating to Transfer of Goods or Technologies for Human Rights Abuses

Section 402 of the ITRA provides sanctions for any person that transfers or facilitates the transfer of goods or technologies to Iran, or provides services such as support services with respect to goods or technologies transferred to Iran, when those goods or technologies are likely to be used to commit human rights abuses against the people of Iran. Section 403 provides sanctions for any person that engages in censorship with respect to Iran. These sections were implemented in Section 2 and 3 of the October 9 Order.

Conclusion

The ITRA is a major expansion of the U.S. Iran sanctions program and marks a shift in the government’s policy with regard to the liability of U.S. companies for Iran-related actions of foreign subsidiaries. With the implementation of Section 218, U.S. companies with overseas operations should be aware of this shift and should immediately act to ensure compliance with these new limits by reviewing the activities of the foreign entities they own or control. Foreign companies should examine any Iran-related dealings they have to ensure that no projects run afoul of the new extraterritorial prohibitions outlined in the ITRA.

Footnotes

1 Section 5 of the ISA imposes sanctions on entities engaged in transactions relating to the development of petroleum resources of Iran, production of refined petroleum products in Iran, exportation of refined petroleum products to Iran or development of weapons of mass destruction or other military capabilities.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.