Over the last year, the U.S. government has accelerated its long-standing approach of tightening the economic sanctions it maintains against Iran. At this point, there is no question that the economic sanctions against Iran are the broadest and toughest U.S. sanctions currently in place, rivaling those previously maintained against countries engaged in active warfare against the United States.
Most recently, the U.S. government has acted to broaden the reach of U.S. sanctions by targeting persons operating outside of what has been viewed as the United States’ traditional jurisdictional reach. The most telling examples of this trend are new rules that change the long-standing approach of U.S. sanctions law with regard to separately incorporated subsidiaries of U.S. companies. Previously, the rule was that the activities of these companies were outside direct U.S. jurisdiction (except in the case of the Cuba sanctions, which were promulgated under a broader statute). This approach allowed separately incorporated foreign subsidiaries to trade with sanctioned countries like Iran, provided that they did so independently from the U.S. parent, with no involvement of U.S. persons, no oversight from U.S. personnel, no use of the U.S. financial system, and so forth. Although some viewed this approach as creating a loophole that allowed certain U.S. companies to continue to sell to Iran, the Office of Foreign Assets Control (OFAC) used this approach for decades.
This rule has now ended. On February 7, 2013, the United States ended a temporary moratorium on new sanctions targeting foreign corporations that conduct business with Iran. Effective immediately, foreign subsidiaries of U.S. corporations are prohibited from knowingly engaging in transactions involving Iran or the Iranian government. U.S. parent corporations, in turn, are now liable for Iran-related sanctions violations committed by their foreign subsidiaries—including subsidiaries registered as separate legal entities outside U.S. jurisdiction.
The U.S. government has taken some steps to help U.S. companies engaged in what could be extensive wind-down operations finish the withdrawal process. The U.S. government has given companies until March 8, 2013 to engage in “all transactions ordinarily incident and necessary to the winding-down” of transactions between U.S.-owned (or controlled) foreign entities, including subsidiaries, provided that the wind-down transactions do not involve:
The license also operates retroactively until October 9, 2012 to cover situations where the wind-down transactions might not have been otherwise explicitly authorized by other provisions in the Iranian Transactions and Sanctions Regulations.
The restrictions on foreign subsidiary activities accompany the full implementation of the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA). Enacted on August 20, 2012, the TRA closes the so-called “subsidiary loophole” that permitted foreign subsidiaries to engage in and conduct business with Iran, so long as their U.S. parent corporations were not involved. The White House subsequently gave U.S. corporations four months to unwind their subsidiaries’ Iranian business or divest these entities. With that moratorium now over, sanctions violations committed by foreign subsidiaries are now subject to retroactive enforcement starting from October 6, 2012.
Although the deadline is clear, much of the details about the operation of the law are still murky. As written, it is not apparent, for example, whether U.S. companies with subsidiaries need to divest the entire subsidiary, or can comply by ceasing all ongoing Iranian business conducted by that subsidiary. Also unclear is whether the sale or transfer of the ongoing business is compatible with the requirements (which would allow the Iranian counterparties to continue the existing contractual arrangements in a new guise). Further, for companies that find it difficult to wind-down their Iranian activities within the given period, it also is unknown how lenient OFAC will be in granting specific wind-down licenses to allow activities needed to end transactions appropriately.
In addition to closing the foreign subsidiary “loophole,” the TRA also imposes new extraterritorial sanctions under the Iran Sanction Act of 1996 (ISA). Previously amended under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, the updated ISA now prohibits foreign companies from:
Foreign companies engaging in these prohibited activities now face enhanced sanctions under the ISA, including new prohibitions against U.S. underwriting and investment. These sanctions also extend to corporate officers and directors, who may be subject to asset seizures, a travel ban, and exclusion from the U.S. banking system. The result is a substantial tightening of the sanctions aimed at deterring foreign companies from doing business with Iran, and punishing those that do.
SEC Disclosure Requirements
In addition to targeting foreign companies that deal with Iran, the TRA also imposes new disclosure requirements on corporations that issue securities in the United States. Under these rules, companies that file annual or quarterly reports with the SEC must disclose whether they have knowingly engaged in business with the Iranian government or other entities subject to terrorism and non-proliferation sanctions. The SEC, in turn, must post these disclosures to its public Web site and forward them to the White House and U.S. Congress for additional action.
Like the sanctions themselves, these new disclosure requirements are designed to deter U.S. and foreign securities issuers from doing business with Iran. By publishing this information and mandating White House and congressional notification, the TRA increases the likelihood of government enforcement proceedings and shareholder actions. Making false or misleading disclosures regarding Iranian activities, in turn, risks implicating the SEC’s enforcement authorities and could expose corporate officers and directors to civil, and potentially criminal, liability. Faced with these possibilities, corporations that issue securities in the United States (including companies that trade on the basis of American Depositary Receipts) now face heightened incentives to comply with U.S. sanctions.
Financial and Energy Sector Sanctions
The United States has also imposed new extraterritorial sanctions under the National Defense Authorization Act of 2012 (NDAA), which targets foreign financial institutions that conduct business with the Iranian Central Bank and other Iranian banks linked to Iran’s nuclear program. Implemented under a February 5, 2012 Executive Order, the NDAA blocks all property held by the Iranian government and any Iranian financial institutions. It also prohibits giving or receiving any funds, goods, or services from these targets without prior authorization from OFAC.
These sanctions cover all U.S. persons, corporations, and banks, regardless of their location. They also prohibit foreign branches of U.S. financial institutions from processing any covered transactions, including transactions involving non-U.S. third-party clients. As a result, all U.S. banks and bank branches are now required to block, rather than simply reject, transactions involving the Iranian government and Iranian banks.
The NDAA also sanctions foreign banks (including central banks and other state-owned banks) that process or facilitate transactions involving the export of Iranian petroleum products. Effective June 28, 2012, foreign financial institutions that participate in prohibited petroleum transactions risk severe restrictions on their correspondence and payable-through account in the United States. Although the U.S. State Department has issued waivers under the NDAA covering countries that have significantly reduced their imports of Iranian oil, financial institutions in the rest of the world must now choose between abandoning petroleum-related business with Iran or likely exclusion from the U.S. financial system.
Because the U.S. government has proven quite willing to impose substantial fines on foreign financial institutions that engage in sanctionable activities, it is expected that these sanctions, along with expanding European Union (EU) sanctions on Iranian energy-related financial transactions, will sharply curb the Iranians’ ability to sell energy products worldwide.
In addition to the measures described above, Congress also has imposed sanctions targeting the Iranian government’s capacity to develop and proliferate nuclear technology. Passed as an amendment to the National Defense Authorization Act for Fiscal Year 2013, the Iran Freedom and Counter-Proliferation Act of 2012 (IFCPA) blocks all property held by Iranian port operators, shipbuilders, and shipping companies, as well as additional entities in the Iranian financial and energy sectors. It also prohibits the sale, supply, or transfer of certain materials to Iran, be it precious metals such as gold, or industrial products relevant to Iranian shipbuilding, nuclear, or ballistic missile activities. Most notably, the IFCPA also imposes sanctions on insuring or reinsuring any activities undertaken by sanctioned Iranian entities.
Like the TRA and NDAA, these measures extend U.S. sanctions to foreign companies and persons on an extraterritorial basis. Entities that violate these new requirements now face an expanded set of mandatory penalties under the Iran Sanctions Act of 1996, including bans on imports, restrictions on loans or credits from U.S. financial institutions, as well as prohibitions on dealing in U.S. government debt instruments and serving as a repository for U.S. government funds. Combined with the new TRA’s new penalties for officers and directors, and the risk of exclusion from the U.S. financial sector, conducting business with Iran now poses considerable risks for companies that wish to maintain commercial ties to the United States.
Foreign Sanctions Evaders
Capping all of these measures is a new Executive Order imposing sanctions on foreign sanctions evaders. This category includes foreign companies that have engaged in transactions with Iran and Syria persons despite the numerous prohibitions described above. The Executive Order is designed to reach foreign entities that would not otherwise be subject to U.S. jurisdiction, including those that do not typically engage in commercial or financial transactions with the United States. As with the TRA and NDAA, sanctions imposed under this new program may include barring foreign sanctions evaders from future dealings with the U.S. financial sector.
When taken together, these measures reflect a concerted effort to further isolate the Iranian regime. By imposing new sanctions and expanding the extraterritorial scope of sanctions, the U.S. government seeks to deter foreign companies—including foreign subsidiaries of U.S. companies—from dealing with Iran. And by ramping up public disclosure requirements and sanctions enforcement proceedings, the government shows a clear determination to punish those that do.
Faced with these new realities, companies in the United States and abroad should carefully examine their current business practices, compliance policies, and internal controls. Fresh risk assessments are also prudent, especially in light of the new sanctions’ extraterritorial effect. This is particularly important given new U.S. rules targeting foreign sanctions evaders and aggressive use of existing rules prohibiting facilitation. Against this backdrop, companies that were previously deemed to be outside U.S. jurisdiction should carefully evaluate any continuing operations with U.S.-sanctioned countries.
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Christopher M. Swift