In our August 13, 2012 alert, "
Iran Threat Reduction and Syria Human Rights Act of 2012,"
we highlighted a crucial provision of the latest Iran sanctions:
Previously US firms were not liable with respect to Iran-related
transactions of their foreign subsidiaries if no US person was
involved in the transaction. But Section 218 of the new law
provides that US persons (including US firms) will face penalties
if foreign entities that they own or control knowingly engage in
any transaction with the Government of Iran, or persons subject to
its jurisdiction, that would be prohibited if engaged in by a US
person or in the United States.
On October 9, President Obama signed an Executive Order that
implements various provisions of the new law, including Section
218, and delegates authority for the implementation of Section 218
to the Department of the Treasury's Office of Foreign Assets
Control (OFAC). Concurrent with the President's action, OFAC
issued a set of FAQs that provides additional guidance on its
implementation of Section 218 and the Executive Order.
Section 218 and this Executive Order represent a response to
longstanding Congressional critiques of the "loopholes"
in US sanctions against Iran. This significant, extraterritorial
expansion of the sanctions extends their reach as broadly as those
sanctions imposed against Cuba.
For US firms owning or controlling foreign entities (partnerships,
associations, trusts, joint ventures, corporations, or other
organizations), it is important to note the following:
OFAC will assess penalties for violations against the US person
that owns or controls the foreign entity that engaged in the
Under Section 218, a US person "owns or controls" a
foreign entity if it holds more than 50 percent of the equity
interest in the entity (by vote or value), holds a majority of
seats on the entity's board of directors, or otherwise controls
the entity's actions, policies, or personnel
Penalties apply if the foreign entity "knowingly"
engaged in the prohibited activity; there is no requirement that
the US person itself be involved in or know about the activity.
Under the Executive Order, "knowingly" means that a
person has "actual knowledge, or should have known, of the
conduct, the circumstance, or the result".
Section 218 and the Executive Order contain a wind-down/safe
harbor provision that precludes the imposition of civil penalties
on a US person that divests or terminates its business with the
foreign entity by February 6, 2013.
If a transaction is exempt from the general prohibitions
against dealings with Iran, or is authorized by a general license
from OFAC with respect to US persons, then there is no prohibition
on a foreign entity engaging in the transaction, provided that it
satisfies all the conditions and requirements of the exemption or
While a foreign entity or its US parent may apply for a
specific license to engage in generally prohibited activities with
respect to Iran, OFAC's FAQs caution that the applicability of
a US parent's specific license to transactions by the foreign
entity will depend on the precise terms of the license and the
scope of activities that it authorizes. Accordingly, we advise that
firms applying for OFAC licenses be as specific as possible with
respect to the potential activities of any foreign entities
involved in the prospective transaction and ensure that the
activities fall within the scope of the authorization.
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.
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