New Reporting Requirements Under the Iran Threat Reduction and Syria Human Rights Act of 2012

by Smith Anderson
Contact

On August 10, 2012, the United States delivered its latest economic blow to Iran by enacting the Iran Threat Reduction and Syria Human Rights Act of 2012. U.S. companies have long been forbidden from engaging in most transactions with the Persian nation under sanctions administered by the Office of Foreign Assets Control. The purpose of the latest law, however, is to apply restrictions against non-U.S. entities that conduct business with Iran, particularly in the petroleum (including petrochemical) and uranium sectors or areas potentially related to the proliferation of weapons of mass destruction (“WMD”) or terrorism-related activities.

The Act imposes complex and sweeping regulations and sanctions. We do not intend to provide a complete overview of the Act in this alert. Instead, we highlight certain new provisions that should not be overlooked by public reporting companies.

Periodic Reporting Requirements; Expanded Liability. The Act mandates new disclosure requirements in annual and quarterly reports for reporting companies and expands the potential scope of liability for U.S. entities that own or control foreign entities that engage in sanctionable activities.

Section 219 of the Act creates new reporting requirements for all companies required to file annual and quarterly reports under Section 13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). (This includes smaller reporting companies and foreign private issuers, but does not include voluntary filers or other reporting companies that do not have securities registered under Section 12 of the Exchange Act.) New Section 13(r) of the Exchange Act requires all such reporting companies to disclose in quarterly and annual reports whether they, or their “affiliates,” have knowingly engaged in certain sanctionable transactions involving Iran during the reporting period. These transactions have no materiality threshold and generally relate to: 

  • The Iranian petroleum industry
  • The development of WMD or other military capabilities
  • Financial institutions that facilitate WMD, terrorism, or money laundering
  • The transfer of weapons and technology used in human rights abuses
  • “Blocked persons” who engage in activities related to terrorism or WMD
  • The government of Iran, or any entity owned or controlled by Iran

If a reporting company—or its affiliate—engages in any of these activities, the reporting company must disclose (1) the nature and extent of the activity, (2) any gross revenues and net profits derived from the activity, and (3) whether the company, or its affiliate, intends to continue the activity. Any disclosure made pursuant to Section 13(r) will automatically become public upon filing through EDGAR, the SEC’s online database. The reporting company is also required to provide notice to the SEC on a form type titled “IRANNOTICE”. Once the company discloses sanctionable activities to the SEC, the agency will then alert the office of the U.S. President and various other governmental authorities. This process could ultimately lead to an investigation and the imposition of sanctions, including penalties established under new Section 218 of the Act.

Section 218 of the Act prohibits any U.S.-owned or -controlled foreign entity from knowingly engaging in any transaction with Iran that would be illegal if it were engaged in by the U.S. entity or in the United States. Violations of new Section 218 could result in the imposition of civil penalties (the greater of $250,000 or twice the gross value of the violating transaction) against the U.S. parent or controlling entity for actions undertaken by the foreign entity. Section 218 provides a safe harbor for U.S. entities that divest, or terminate business with, foreign entities engaged in unlawful transactions by February 6, 2013. (It remains uncertain whether causing the foreign subsidiary to cease all business with Iran by that deadline would also satisfy this safe harbor.)

On December 4, 2012, the SEC provided guidance relating to Section 219’s reporting requirements in a Compliance and Disclosure Interpretation (“C&DI”). Highlights from this C&DI include: 

  • Timing. Reporting companies must comply with Section 13(r) in any periodic report with a due date after February 6, 2013. This requirement applies even if the issuer files the report with the SEC before February 6.
  • Disclosure period. Issuers must disclose all sanctionable activities that occurred during the period covered by the report, even if the activities occurred before August 10, 2012, the effective date of the Act.
  • Meaning of “affiliate”. For purposes of Section 219, “affiliate” is defined in Exchange Act Rule 12b-2 and encompasses “any person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the issuer.” This definition commonly includes directors, officers, and subsidiaries controlled by the issuer, as well as controlling shareholders, such as private equity firms.
  • Scope of disclosure. Section 13(r) does not require disclosure if the reporting company and its affiliates did not engage in any sanctionable activities during the reporting period. (It remains to be seen whether reporting companies will nevertheless provide an affirmative statement that there were no sanctionable activities.) In addition, a company does not need to disclose otherwise sanctionable activities if such activity was specifically authorized by a U.S. federal department or agency. However, if a company received authorization from a foreign governmental entity, it must make the required disclosures but may also describe the authorization provided by the foreign government in order to provide context to the transaction. 

 

Next Steps. The Act imposes new and significant obligations on reporting companies and U.S. entities generally. U.S. companies will need to engage in due diligence procedures and expanded employee training programs to ensure compliance.

For disclosure purposes, reporting companies should consider whether any of their businesses, or the business or foreign entities they own or control, involves sanctionable activities that require disclosure under Section 219. This will require updates to periodic disclosure controls and procedures to ensure quarterly and annual reporting requirements can be met. Specifically, companies could consider adding a risk factor related to the new disclosure requirements, particularly if it becomes necessary to make any affirmative disclosure under the Section 13(r) reporting requirements. Furthermore, U.S. companies could implement OFAC compliance software into their systems to confirm they do not engage in transactions with “blocked persons.” In addition to updating internal procedures, U.S. companies should also consider expanding compliance and training programs to cover foreign subsidiaries and other affiliates to ensure they understand the scope of the prohibitions that now apply to them.

For the purposes of Section 218, reporting companies should take prompt action to divest or terminate businesses that engage in sanctionable activities by the early February deadline. Moving forward, U.S. companies and nationals should also consider this section when acquiring a controlling interest in foreign entities.

Consideration of these issues will involve careful planning and a high degree of familiarity with newly updated OFAC regulations, the Act and other U.S. and relevant foreign laws. Please contact us if you have any questions or would like to learn more about the issues covered in this alert.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Smith Anderson | Attorney Advertising

Written by:

Smith Anderson
Contact
more
less

Smith Anderson on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.