The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury enforces comprehensive sanctions that regulate, and largely forbid, most forms of trade and financial transactions by U.S. persons with Iran. Recent enactments have extended the reach of the Iran trade sanctions to foreign subsidiaries of U.S. companies, which previously were not explicitly covered by these restrictions, and also have put into effect new SEC reporting requirements for public companies listed on U.S. exchanges when they or their affiliates engage in certain activities involving Iran.
Iran Trade Sanctions are Now Explicitly Applicable to U.S. Companies’ Foreign Subsidiaries
The Iran Threat Reduction and Syrian Human Rights Act of 2012 (the “Threat Reduction Act”) expands the types of transactions and other activities with Iran that are subject to U.S. trade sanctions and, most importantly, makes U.S. entities directly liable for any such transactions and activities that are undertaken by their foreign subsidiaries.
Specifically, the Act prohibits “an entity [including partnerships, trusts, joint ventures, associations, corporations and other organizations] owned or controlled by a United States person and established or maintained outside the United States” from knowingly engaging, directly or indirectly, in any transaction with the Government of Iran or any person subject to its jurisdiction if the transaction would be illegal if carried out in the United States or by a U.S. person. A U.S. person is deemed to “own or control” an entity if it (a) holds more than 50 percent of the equity of the entity, (b) holds a majority of seats of the entity’s board of directors, or (c) otherwise controls the actions, policies or personnel decisions of the entity. Implementing regulations adopted by OFAC contain a safe-harbor provision that allows a U.S.-owned or controlled foreign subsidiary to complete transactions necessary to winding down of business with Iran by March 8, 2013, provided that the transactions may not occur in the United States or involve a U.S. person.
Sanctionable Activities Must be Disclosed in Quarterly and Annual SEC Reports
The Threat Reduction Act also requires that, effective Feb. 6, 2013, public companies (including U.S. or foreign companies listed on U.S. exchanges) disclose in their periodic reports to the Securities and Exchange Commission (SEC) if they or their affiliates1 knowingly2 engaged in certain Iran-related activities during the period covered by the report. The SEC has clarified that an “actual knowledge” requirement does not qualify the duty of a public company to report upon its own activities, but that reporting obligations regarding the activities of affiliates will be judged based upon a reasonable knowledge/facts and circumstances standard. This reporting requirement is now codified as the new Section 13(r) of the Securities Exchange Act.
Disclosure is required if a public company or its affiliate has knowingly conducted or engaged in:
Various activities and investments relating to Iran’s energy sector, including development of petroleum resources and refined petroleum products, development and purchase of petrochemical products, and transport of crude oil.
Various activities relating to Iran’s military capabilities and development of weapons of mass destruction, such as the mining, production or transport of uranium and the export, transfer or transshipment of goods, services or technology that would contribute to Iran’s ability to obtain weapons.
Various financial transactions, including money laundering, facilitating transactions or providing financial services, if carried out by foreign financial institutions and entities owned or controlled by U.S. persons, that would facilitate the Government of Iran in acquiring or developing weapons of mass destruction or provide support to organizations designated as foreign terrorist organizations.
Various activities, including transfer or provision of goods, services or technology, that would assist the Government of Iran in suppressing human rights (e.g., surveillance technology or equipment, crowd-control materials, or technology or equipment that could be used to restrict free speech or the free flow of unbiased information to the people of Iran).
Transactions with (a) a person or entity on OFAC’s Specially Designated Nationals or Blocked Persons List, (b) a person or entity designated as a proliferator of weapons of mass destruction, or (c) the Government of Iran or any person or entity directly or indirectly controlled by the Government of Iran, if the transaction or activity is conducted without specific authorization from a U.S. department or agency.
Guidance issued by the SEC clarifies that companies are required to disclose activities that occurred during the period covered by the report (e.g., for an annual report, during the fiscal year), even if the activities occurred prior to the Feb. 6, 2013 effective date of Act. Disclosures must include detailed descriptions of each reportable activity, including the nature and extent of the activity, the gross revenues and net profits attributable to the activity, and whether the issuer or affiliate intends to continue the activity. There is no de minimis standard or materiality threshold for the reporting requirement. If an issuer did not engage in any reportable activities during a reporting period, it need not state so in the report pertaining to that period.
Although the notice requirement applies only to public companies’ annual and quarterly reports, and not to registration statements or other SEC filings, companies will need to consider whether they nevertheless should include disclosures in such other reports if the activities, or failure to report the activities, would be considered “material”.
Companies also are required to concurrently file a notice with the SEC that indicates that the company’s periodic report contains the disclosed activities. Notices contained in companies’ reports will trigger (a) delivery of the report to certain designated U.S. government officials, (b) public release of the notice on the SEC website through the EDGAR system, and (c) federal investigation of the disclosed activities. Thus, public companies should consider whether they have engaged in activities requiring disclosure, and the need to make timely and complete disclosure of any reportable activity.
Please contact us if you would like further information concerning these developments or other matters regarding compliance with U.S. export control and trade sanction laws.
1 “Affiliate” includes persons or entities who, directly or indirectly through one or more intermediary, control, are controlled by, or are under common control of the issuer, including foreign companies, directors and executive officers.
2 “Knowingly” refers to conduct, circumstances or results of which the person had knowledge or should have had knowledge.