On 10 August 2012, U.S. President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (the "Act"). The Act is the broadest increase in U.S. sanctions on Iran in over two years, imposing over twenty new sanctions against Iran. Most notable among the package of sanctions is the closing of a gap in U.S. law that allowed non-U.S. subsidiaries of U.S. companies to conduct business with Iran in certain limited scenarios. The second provision in the Act that is likely to garner significant attention is a requirement that U.S.-listed publicly traded companies disclose certain activities or dealings with Iran in their annual or quarterly reports filed publicly with the SEC. These two provisions, along with other provisions affecting non-U.S. companies and the shipping, insurance, and capital markets, are summarized below.
Non-U.S. Subsidiaries of U.S. Companies
Previously, non-U.S. companies owned or controlled by U.S. companies could conduct business with Iran so long as the subsidiary conducted the business without any involvement by the U.S. parent company or U.S. citizens. While the number of U.S. companies exploiting this gap in the law has significantly decreased in the past few years, the Act now completely closes the gap. Under the Act, if a non-U.S. company that is owned or controlled, directly or indirectly, by a U.S. company conducts a transaction with Iran that would violate U.S. law if the parent company itself had conducted the transaction, the parent company will be held liable as if it had conducted the transaction itself.
The Act instructs the President to impose the prohibition no later than 9 October 2012, but provides a safe haven to U.S. companies that divest or end their relationship with the non-U.S. subsidiary before 8 December 2012.
Disclosures to the SEC of Iran Transactions
In a move likely to affect many non-U.S. companies, the Act amends the Securities Exchange Act of 1934 (the “Exchange Act”) so as to require issuers that are listed on a U.S. exchange and required to file annual or quarterly reports with the SEC under the Exchange Act to include certain disclosures in their annual or quarterly reports if the issuer or its affiliates (including non-U.S. subsidiaries controlled by the issuer) have knowingly engaged in or conducted certain types of activities with Iran. Among the activities for which disclosure is now required are 1) investment in the Iranian petroleum industry, 2) the sale of goods, services, or technology to Iran that assist Iran in the development of its petroleum industry or related infrastructure, and 3) the sale of refined petroleum to Iran. The disclosure must include a detailed description of such activity, including its nature and extent, the gross revenues and net profits attributable to such activity and whether the issuer or its affiliate intends to continue such activity.
In addition, if the issuer reports that it has knowingly engaged in such activity, the issuer must separately file with the SEC (concurrently with its annual or quarterly report) a notice that such disclosure is included in its annual or quarterly report. Upon receiving such notice, the SEC must promptly transmit the report to the U.S. President and certain U.S. Government committees and make the notice publicly available on its website. This, in turn, will trigger an investigation by the U.S. President as to the potential imposition of penalties on such issuer under the Iran Sanctions Act, as discussed below.
These additional disclosure requirements will be effective for any quarterly and annual reports required to be filed after 6 February 2013.
Expansion of the Iran Sanctions Act and CISADA
The Iran Sanctions Act of 1996, as amended by the Comprehensive Iran Sanctions Accountability and Divestment Act of 2010 (CISADA), permits the U.S. Government to penalize non-U.S. companies that conduct specified transactions with Iran. Those activities include investment in the Iranian petroleum industry; the sale of goods, services, or technology that assist Iran in the development of its petroleum industry; and the sale of refined petroleum to Iran. The Act expands the specified activities that can subject a non-U.S. company to penalty with the following additions:
- sale of goods or services to Iran for the construction of infrastructure (e.g., roads, ports, and rail) related to the delivery of refined petroleum to Iran;
- sale of goods, services, and technology for Iran's petrochemical industry;
- transport of petroleum from Iran to another country (with a large exception for transport to countries exempted by the President under the National Defense Authorization Act for 2012, §1245);
- purchase of, subscription to, or facilitating the issuance of debt of the Government of Iran or any entity controlled by the Government of Iran; and
- underwriting, insurance and reinsurance of the National Iranian Oil Company or the National Iranian Tanker Company.
Upon determining that a non-U.S. company has conducted one of the specified activities (above certain monetary thresholds), the company can be penalized through the denial of certain types of access to the U.S. economy. The most commonly imposed penalties have been a prohibition on loans from U.S. financial institutions in excess of $10 million per year, a prohibition on U.S. Government procurement contracts, and a prohibition on assistance from the Export-Import Bank of the United States.
The Act also introduces three additional penalties that the U.S. Government can apply. The most notable addition is a prohibition on U.S. persons investing or purchasing significant amounts of equity or debt instruments of the penalized company.
In addition to the broad sanctions identified above, the Act imposes several targeted sanctions, which include:
- expansion of certain sanctions and definitions so that barter transactions with Iran are covered by existing sanctions;
- broadening of the activities that could result in a non-U.S. bank being denied correspondent accounts in the U.S.; and
- targeting of the supply of financial messaging services to Iran.
The Act imposes only minimal additional sanctions on Syria. It authorizes the freezing of assets of (i) persons contributing to the abuse of human rights in Syria, and (ii) companies supplying, or facilitating the supply of, crowd suppression equipment and arms to Syria.