New U.S. Sanctions Target Automotive Companies Doing Business in Iran

On June 3, 2013, President Obama signed a new executive order expanding U.S. extraterritorial sanctions on Iran to multinational corporations that engage in significant financial or commercial transactions with the Iranian automotive sector. The move strengthens the new sector-based sanctions regime imposed under the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCA”), which targets business and industries that generate significant revenues for the Iranian Government. Sectors already subject to these extraterritorial sanctions include financial services, shipbuilding, and energy, among others.

Effective July 1, 2013, multinational corporations that knowingly sell, supply, or transfer significant goods and services to the Iranian automotive sector may face significant restrictions on their ability to do business in the United States. These restrictions include new prohibitions on using the U.S. financial systems to make or receive payments, obtain financing, engage in foreign exchange, or import goods into the United States. Violators also may face additional penalties, including the denial of U.S. government licenses and procurement contracts, as well as the loss of financing and insurance from the U.S. Export-Import Bank.

As with other extraterritorial sanctions imposed under the IFCA and various provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“TRA”), the new Executive Order is designed to force multinational automotive companies to choose between doing business with their Iranian counterparts and their ability to conduct business in the United States. With that goal in mind, the Executive Order also targets senior corporate officers, who may now face a travel ban and significant restrictions on banking with U.S. financial institutions.

The new executive order covers any commercial activity in Iran involving the manufacturing or assembly of passenger cars, trucks, buses, minibuses, pick-up trucks, and motorcycles. It also encompasses any sale, supply or transfers that implicate Original Equipment Manufacturing (“OEM”) and manufacturing after-market parts for vehicles. The prohibitions extend to joint ventures with Iranian entities, as well as to the Iranian branches and subsidiaries of non-U.S. corporations. U.S. companies doing business with the Iranian automotive sector also face additional penalties under the Iran Transactions and Sanctions Regulations (“ITSR”).

Multinational corporations that are currently engaged in these activities have less than four weeks to wind down their business with the Iranian automotive sector or risk exposure to these extraterritorial sanctions. Companies that may not be able to conclude their Iran-related automotive business before the July 1st deadline should consider applying to the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) for a specific license to continue that process after the Executive Order takes effect.

Finally the new Executive Order imposes a several additional restrictions that may also implicate multinational automotive companies. These include a ban on engaging in significant financial transactions denominated in the Iranian rial, as well as enhanced penalties for providing material support to the Iranian Government. With Iranian businesses increasingly unable to convert their currency, and with the Iranian Government playing a growing role in the shrinking Iranian economy, these restrictions could pose significant challenges for many non-U.S. businesses that continue to operate in the Iranian market.

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