By Suzanne Reifman, Vinson & Elkins, 202-639-6577, firstname.lastname@example.org
Over the past two years, the United States has continued to escalate sanctions against Iran, targeting both U.S. and non-U.S. persons and particularly those persons dealing with or supporting Iran’s energy and financial sectors. On July 1, 2010, the U.S. passed the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA). CISADA amended the existing Iran Sanctions Act of 1996 (ISA) and was designed to expand restrictions on non-U.S. entities that provide goods, services, or other support meeting particular monetary thresholds to Iran’s petroleum industry. The goal of the ISA, as amended by CISADA, is essentially to force non-U.S. companies to choose between doing business with Iran and doing business with the U.S. Following the passage of CISADA, the U.S. has continued to target non-U.S. companies that provide support to Iran through a series of laws and executive orders that have broadened the scope of sanctionable conduct and isolated Iran’s financial sector.
On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA). The law contains many new prohibitions that affect a broad range of industries. In particular, the TRA addresses what many have described as a “loophole” in prior sanctions. Prior to the enactment of the TRA, in many instances foreign subsidiaries of U.S. companies could continue to legally engage in business with Iran as long as the business did not involve the provision of U.S. origin equipment or technology or require facilitation from U.S. persons. The prior sanctions were decidedly less restrictive than U.S. sanctions targeted against Cuba, under which foreign entities owned or controlled by U.S. companies are considered “U.S. persons” and fully subject to all of the sanctions’ requirements. However, under the TRA, any entity “owned or controlled by a United States person and established or maintained outside the United States” is now subject to the range of prohibitions applicable to U.S. persons or persons located in the U.S. with respect to dealings involving Iran.
It should be noted that the definition of “own or control” in TRA is broad, and means “holding more than 50 percent equity interest by vote or value in the entity;” “holding a majority of seats on the board of directors of the entity;” or “otherwise control[ling] the actions, policies, or personnel decisions of the entity.” The TRA does not identify the circumstances in which an entity can be “otherwise control[led]” and no other guidance has been issued. As such, U.S. companies that are parties to foreign joint ventures or similar entities in which they do not hold a majority equity interest or control a majority of board seats will still need to assess their level of control in order to determine whether these foreign entities could be construed as controlled by a U.S. company and, thus, subject to the Iran sanctions that apply to U.S. persons.
The TRA provided that the President would have to implement this provision within 60 days after the law’s enactment. Accordingly, Section 4 of the October 9, 2012 EO formally satisfied this statutory requirement. The EO provides that the penalties for violations of the prohibitions may be assessed against the U.S. person that owns or controls the entity that engaged in the prohibited transaction. The EO also provides that penalties shall not apply if the U.S. person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013. Therefore, given the short grace period allowed for divestment/termination, U.S. companies will need to promptly determine:
- Does the U.S. company own or control foreign entities that are engaged in conduct involving Iran that would violate U.S. sanctions against Iran? Note that in cases where U.S. companies are involved in joint ventures or other arrangements, it may be difficult to immediately identify all circumstances in which they control an entity based on the broad description set forth in the TRA.
- If the foreign entity is engaged in business involving Iran, can this business be discontinued prior to February 6, 2013? Note that there is no general license or other authorization that would enable a U.S. company to provide unauthorized facilitation during this process. For example, a U.S. company could not participate in negotiations involving a foreign subsidiary and its Iranian customer to try and mitigate any breach of contract claims that would result from the foreign subsidiary’s termination of a contract.
- If the owned or controlled foreign entity is either unable or unwilling to discontinue its business with Iran, can the U.S. company divest or terminate its interest in the foreign entity prior to February 6, 2013? Note that unlike the more general ISA sanctions, there is no “safe harbor” provision or other exception that would be granted to a foreign entity owned or controlled by a U.S. company that continues to do business with Iran (even if the entity is in the process of winding down or reducing its business).
- Does the U.S. company have any of its own licenses from OFAC to engage in transactions involving Iran? If so, the company needs to consider whether it will need to cover any of its foreign owned or controlled foreign entities under these licenses going forward.
- Can the U.S. company put the appropriate policies and procedures in place at its owned or controlled foreign entities to ensure compliance on a going-forward basis?
Given these issues, compliance with the TRA, as implemented by the October 9 EO, will present a major challenge for many U.S. companies and their owned or controlled foreign entities.