The President signed the "Iran Threat Reduction and Syria Human Rights Act of 2012" (H.R. 1905) into law on August 10, 2012. The legislation will significantly strengthen existing Iranian1 sanctions and will mandate disclosure of activities that are sanctionable in public company annual and quarterly filings pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Most notably, the statute prohibits transactions by foreign businesses that are owned or controlled by a U.S. parent company, making the Iranian sanctions more like those currently in place with respect to Cuba, where non-U.S. foreign entities are included in the definition of parties "subject to U.S. jurisdiction." An important provision in the bill requires the imposition of civil penalties of up to twice the amount of the transaction on U.S. parent companies for the activities of their owned or controlled foreign entities that, if undertaken in the U.S. or by a U.S. person, would violate U.S. sanctions law. That is, if a foreign entity owned or controlled by a U.S. parent enters into an unauthorized transaction with an Iranian party, the penalty will be assessed against the U.S. parent company, not the foreign entity.
This expansion of U.S. sanctions must be implemented within 60 days of the enactment of the bill, or October 9, 2012. Other than ensuring that owned/controlled foreign entities cease all transactions with Iran by October 9 (or obtain OFAC licenses for such activities, which could not possibly be completed in the time allotted), civil penalties can also be avoided if the U.S. parent divests itself of the foreign entity, or its interest therein, no later than 180 days after enactment of the bill.
The extra-territorial application of sanctions is likely to be particularly problematic for several reasons. For example, under existing regulations, uncontrolled, or "EAR99," medicines may be re-exported to Iran with no license required under the Export Administration Regulations, so long as they were not specifically destined for export to Iran when they left the U.S. (e.g., they are sold from inventory held outside the U.S.). After October 9, 2012, there is no indication that this regulation will change. After that date, however, non-U.S. companies owned or controlled by a U.S. parent will be largely unable to transact business with Iran at all. Therefore, a U.S. company that sells through an unrelated distributor will be in a better position to continue its status quo than a company that sells through an affiliate.
In addition, although it is unlikely that other countries will be as hostile to U.S. sanctions against Iran as they are with respect to sanctions against Cuba, many countries, e.g., Canada and countries in the European Union, are currently subject to blocking legislation that prohibits them complying with a very similar extraterritorial restriction against that country. Given that implementing regulations may take years to be drafted and published, it is difficult to predict whether or how these issues may be resolved.
Increased Public Company Disclosure Requirements
The bill also requires Exchange Act reporting companies – beginning with their first annual or quarterly periodic report filed after February 6, 2013 – to disclose information about their Iran-related activities. This required disclosure will force companies to determine whether they or any of their foreign or domestic owned/controlled entities have:
- Engaged in any sanctionable activity described in the Iran Sanctions Act of 1996 which pertains to Iranian petroleum resources and products and development of Iranian weapons of mass destruction;
- Engaged in any activities prohibited by the Comprehensive Iran Sanctions, Accountability and Devestment Act of 2010 relating to Iranian financial services transactions and transactions with the Iranian Revolutionary Guard Corps or any of its affiliates or representatives;
- Transferred any goods, technologies or services to Iranian parties to commit human rights abuses against the people of Iran; or
- Engaged in transactions with Specifically Designated Nationals, designated for involvement in terrorist activities, the proliferation of weapons of mass destruction, or being part of the Government of Iran (including owned/controlled entities), unless authorized by the Office of Foreign Asset Control of the U.S. Treasury.
In each Exchange Act periodic report filed after February 6, 2013 the required disclosure must include, for any action taken during the period covered by the report:
- The type and extent of the activity;
- The gross revenues and net profits from the activity; and
- Whether the company or any of its affiliates intends to continue the activity.
In addition to the Exchange Act periodic report disclosure, the Exchange Act reporting company must also file a separate report with the Securities and Exchange Commission, which is then required to post the report on the SEC website and send the report to the President, as well as the House Committees on Foreign Affairs and Financial Services and the Senate Committees on Foreign Relations and Banking, Housing and Urban Affairs. The President is then charged with investigating whether sanctions should be imposed on the reporting company.
1 Although Syrian sanctions are also referenced, no substantive changes to the Syrian Sanctions Regulations are required as a result of the bill.
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