The United States continues to impose additional layers of sanctions on Iran. The rate of change and complexity of U.S. sanctions laws present challenges, particularly where these sanctions have extraterritorial effect on the activities of non-U.S. entitles. This alert highlights recent changes in U.S. sanctions on Iran. In particular:
On January 2, 2013, President Obama signed into law new legislation that will impose broad extraterritorial sanctions on any entity that engages in transactions related to the Iranian energy, shipping or shipbuilding sectors.
The Office of Foreign Assets Control (OFAC) issued regulations providing for the "winding down" of business with Iran by foreign subsidiaries of U.S. companies.
The Securities and Exchange Commission (SEC) recently issued guidance on new Iran sanctions reporting requirements for U.S. publically traded companies.
OFAC issued an Advisory that makes clear that it will target third-party foreign exchange houses and trading companies that assist Iranian entities in evading U.S. sanctions.
New Sanctions Legislation: IFCPA
The law that President Obama signed on January 2 was the National Defense Authorization Act for Fiscal Year 2013. Similar to last year’s legislation, Congress inserted specific Iran sanctions language into this large authorization bill. In particular, the Act includes a section titled the Iran Freedom and Counter-Proliferation Act of 2012 (IFCPA). The IFCPA imposes a number of onerous extraterritorial sanctions on foreign entities that engage in transactions with Iran. However, in general the IFCPA sanctions do not become effective for 180 days (e.g., on July 1, 2013). The following are some of the major provisions:
Designation of Iranian Entities. The IFCPA requires the president to designate as blocked persons Iranian entities that operate ports in Iran and entities in the energy, shipping and shipbuilding sectors of Iran. (Many entities in these sectors have already been designated in past rounds of sanctions).
Significant Transactions with Designated Entities. The IFCPA requires the president to designate as blocked persons any entity (including non-Iranian entities) that provides significant, financial, material, technological or other support for, or goods or services in support of, any activity or transaction on behalf of, or for the benefit of, entities in the Iranian port, energy, shipping or shipbuilding sectors, or to any entity designated a Specially Designated National (SDN) by OFAC.
Supply of Goods or Services to Iran. The IFCPA imposes specific sanctions set forth in the Iran Sanctions Act on any foreign person who sells or supplies "significant goods or services" to or from Iran used in connection with the energy, shipping or shipbuilding sectors.
Insurance of Certain Iran Related Activities. The IFCPA significantly expands sanctions against entities providing insurance to Iranian entities, or covering activities prohibited under U.S. sanctions. In particular, the IFCPA would require the sanctioning of any person who provides underwriting services, insurance or reinsurance for most activities barred under U.S. sanctions laws, or where such insurance benefits an Iranian entity in these sectors, regardless of whether such Iranian entity is an assured.
Supply of Metals to Iran.The IFCPA requires the president to sanction any person who provides to Iran precious metals, graphite, or raw or finished metals, including steel, aluminum and coal.
Foreign Financial Institutions.The IFCPA requires the president to sanction foreign financial institutions that facilitate transactions barred by the IFCPA, including transactions with any SDN, with limited exceptions for certain Iranian banks that are only designated as SDNs because they are owned or controlled by the government of Iran, and not under other sanctions program.
Waivers and Exceptions. In general, the new sanctions will not apply to transactions involving humanitarian items (including agricultural commodities, food, medicine and medical devices) intended for the people of Iran. Similarly, to the extent that the president has granted waivers for the sale of crude oil to certain countries, these sanctions will not generally apply to those transactions. In addition, the sanctions exclude certain joint natural gas-related projects.
Future Sanctions on Vessel Owners/Operators.The IFCPA requires the president to submit a report to Congress by July 1, 2013 identifying large/significant vessels that have entered Iranian ports "controlled" by Tidewater Middle East Company ("Tidewater") in the preceding 180-day period. To date, OFAC has not sanctioned any entities for doing business with Tidewater, an entity designated as a proliferator of weapons of mass destruction. The report implies that Congress intends to force the president to take action against foreign ship owners/operators still doing business with Tidewater. (There is a similar provision requiring identification of airports used by sanctioned Iranian airlines).
These sanctions essentially seek to shut down Iran’s source of revenue from the energy sector and cripple Iran’s economy by sanctioning key trading sectors. Companies have until July 1, 2013, to examine their commitments in Iran to determine whether they will have to terminate such commitments. (There are no contract sanctity provisions in this legislation).
New OFAC Regulations Regarding Foreign Subsidiaries of U.S. Companies
On October 9, 2012, Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITA) came into effect, prohibiting any foreign entity owned or controlled by a U.S. individual or U.S. company from knowingly engaging in, directly or indirectly, most transactions with Iran, the Iranian government or Iranian entities to the same extent as such prohibitions apply to U.S. persons. This provision has caused significant concern among many U.S. companies because it makes the U.S. parent company liable for the actions of its foreign subsidiaries. The only "safe harbor" for the U.S. parent company is a provision that permits the parent to divest its interest in its foreign subsidiary that did business with Iran not later than February 6, 2013.
On December 26, 2012, OFAC amended the Iran Transaction and Sanctions Regulations (ITSR) to implement ITA Section 218 and certain Executive Orders. In particular, these amendments include the following:
provide some clarification regarding humanitarian exports to Iran by foreign entities owned or controlled by U.S. persons
allow for a general license for such foreign entities owned or controlled by U.S. persons to "wind down" their relationships with Iranian entities, provided such winding down is complete by March 8, 2013; this does not "cure" past violations by the U.S. parent or its foreign subsidiary, but the amendments appear to provide a path for U.S. companies and their foreign subsidiaries to come into compliance with the new law, without necessarily requiring the U.S. parent to divest its foreign subsidiary
SEC Guidance on Reporting of Iran Related Transactions
Under the ITA, U.S. publicly traded companies will be subject to enhanced disclosure requirements related to Iran in their annual and quarterly reports filed with the SEC. The new disclosure requirements will apply to reports filed after Feb. 6, 2013, and will cover specified Iran-related activities that occurred during the periods covered by such reports. In particular, under ITA §219, if the issuer, or any affiliate of the issuer during the relevant reporting period, knowingly engages in certain Iran-related transactions, including transactions with the government of Iran or any entity owned or controlled by the government of Iran, it must file a report detailing: (1) the nature and extent of the activity; (2) the gross revenues and net profits attributable to the activity; and (3) whether the issuer or its affiliates intends to continue the activity. The reports will be published on the SEC website.
In December 2012, the SEC issued Compliance and Disclosure Interpretations (C&DI) regarding these reporting requirements, which should be carefully reviewed by trade sanctions and securities counsel. In particular, these interpretations clarify that reports are required even if the activities are authorized under a general or specific license.
OFAC Targeting Foreign Exchange Houses and Trading Companies
On January 10, 2013, OFAC issued an Advisory regarding the activities of certain foreign companies that assist Iranian entities in disguising the nature or parties in a transaction to circumvent U.S. and international sanctions in the financial sector. OFAC defines foreign exchange houses as financial institutions in third countries that are licensed to deal in foreign exchange. Trading companies are not licensed to transit funds, but use their company bank accounts to transmit funds on behalf of third parties, acting as middlemen. The U.S. government has been heavily penalizing foreign banks for engaging in wire stripping and similar practices. Most recently, in December 2012, the U.S. Department of Justice announced a $1.2 billion settlement with HSBC Bank for facilitating payments involving U.S. sanctioned countries/entities. We expect that OFAC is shifting focus to now target these foreign exchange houses and trading companies that facilitate trade with Iran. Further, many U.S. banks are already cautious in doing business with entities engaged in these types of business or with a history of past violations. The Advisory puts such U.S. banks on notice that they should be undertaking additional diligence in transactions involving such entities.
U.S. sanctions on Iran are complex. This alert merely highlights aspects of these sanctions, and therefore should not be construed as comprehensive or as specific legal advice.