The U.S. House of Representatives recently passed legislation authorizing funding for the U.S. Department of Defense (DOD). Included in this legislation is a provision (the Provision) that would require the DOD to submit an annual report to Congress listing all of its contractors and subcontractors that are engaged in significant transactions with Iran. This Provision is the latest variant in U.S. provisions requiring foreign companies to report their transactions with Iran. The fate of this Provision is still uncertain, but has a reasonable possibility of being enacted.
Specifically, Section 1262 of the bill requires the Secretary of Defense to send an annual report to specified Senate and House Committees that includes a list describing:
- any DOD contractors (including any subcontractors at any tier of the contractor) and any person owned or controlled by the contractor or that owns or controls the contractor that has conducted significant transactions with an Iranian person or with the government of Iran; and
- DOD contractors (including any subcontractors at any tier of the contractor) and any person owned or controlled by the contractor or that owns or controls the contractor that has conducted significant transactions with Iranian persons whose property has been blocked under Executive Orders 13224 or 13382 during the five-year period preceding the date of the report.
There are a number of issues and questions related to this legislation.
Collection of information. Presumably, the DOD would need to secure this information from the affected companies in order to include the information in the report. It is unclear how DOD would go about doing so.
Interpretation of key terms. The Provision itself does not define important terms, such as what constitutes a “significant transaction.” Nor does it clarify whether, for example, indirect activities relating to Iran would be covered. It is likely that current State Department interpretation and factors related to the term “significant,” as defined in Treasury Department’s Iranian Financial Sanctions Regulations, will apply. To determine whether a transaction is significant, the Treasury Department considers, among other things, the size, number, and frequency of the transactions; the nature of the transaction; the entity’s level of awareness; the nexus between the financial service provider and the blocked person; the impact of the transaction; and whether the transaction involved deceptive practices. See 31 C.F.R. § 561.404.
Collection of historic information. The Provision would have a five-year look back requirement. This raises issues as to which entities would need to be reviewed during the period of time. Moreover, companies would need to assess whether they acquired businesses that undertook such activities, among other issues.
Comparison to existing Securities and Exchange Commission (SEC) reporting requirements. Although there are some similarities with the existing SEC reporting requirements of Section 13(r) of the Securities Exchange Act of 1934, as added by section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA), the Provision’s requirements contain some important differences. Section 13(r) requires, among other things, reporting certain activities, including (1) a transaction or dealing with certain Specially Designated Nationals (SDNs) named under Executive Orders 13224 or 13382, and (2) a transaction or dealing with the government of Iran that is not specifically authorized by the U.S. government (pursuant to a general or specific license). Accordingly, both the legislation and ITRA require reporting transactions with SDNs named under the same two orders, with the Provision requiring reporting only “significant” transactions with such SDNs. However, the Provision also contains a five-year look back, whereas Section 13(r) covers only transactions or dealings during the period covered by the applicable report being filed with the SEC. The basis of reporting under the Provision is broader than the current requirement under Section 13(r). Under Section 13(r), only transactions with the government of Iran that are not authorized by a specific or general license from Treasury require reporting to the SEC. In contrast, the Provision requires reporting of any significant transactions with an Iranian person or with the government of Iran regardless of whether such transaction was authorized under a specific or general license from Treasury. However, it is possible that the term “significant” could be defined or interpreted to exclude authorized (i.e., licensed) transactions with Iranian persons or the government of Iran.
This defense authorization bill containing this Provision was passed by the full House of Representatives on 22 May 2014. The full Senate has not yet acted on companion legislation. A final defense authorization bill may very well be enacted, since it authorizes the activities of the DOD and therefore is a popular bill with members of Congress. Therefore, this Provision bears monitoring as the legislation moves through the Congressional process.