On October 9, 2012, the President issued a new Executive Order, EO 13628, “Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Threat Reduction and Syria Human Rights Act of 2012 and Additional Sanctions with Respect to Iran.” This EO was issued to implement certain provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012 (Public Law 112-158) (ITRSHRA), including those extending certain prohibitions on dealings with Iran to non-US companies owned or controlled by US persons. Simultaneously, OFAC issued three new Frequently Asked Questions to clarify certain aspects of the new rules.
ITRSHRA was enacted on August 10, 2012. Among other things, the statute prohibits any non-US entity owned or controlled by a US person from knowingly engaging in any transaction with the Government of Iran (GOI) or with a person subject to the GOI’s jurisdiction, if US law prohibits US persons from engaging in the same transaction. Under the EO, “knowingly” with respect to conduct, a circumstance, or a result, means that “a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.” ITRSHRA required the President to prohibit such transactions within 60 days of its enactment, and that prohibition has now been implemented through this EO. Civil penalties may be imposed on US persons whose foreign subsidiaries do not comply with this prohibition as of February 6, 2013.
Prior to the enactment of the ITRSHRA, independent foreign subsidiaries of US persons were generally permitted to conduct transactions involving Iran so long as no US persons or US-origin goods or services were involved in the transaction. Because European, Asian and Middle Eastern companies have generally been permitted to do business with Iranian companies in the past, various complex business arrangements exist and need to be addressed in time for companies to comply with the February 6, 2013 deadline.
The EO specifies that if a transaction involving Iran is exempt from the existing prohibitions, or is authorized by a general license if engaged in by a US person, it would not be prohibited for a foreign subsidiary to engage in the transaction provided that it satisfies all the conditions and requirements of the exemption or general license. It also appears that foreign subsidiaries will be able to apply for licenses under the Trade Sanctions Reform Act (TSRA) for the export of agricultural commodities, medicines, and medical devices to Iran. Presumably, other licenses that can be obtained by US persons under favorable licensing policies of OFAC will also be available to foreign subsidiaries. On the other hand, if a US company has already received a specific license to conduct a transaction, and the foreign subsidiary is not referenced in the license, then it may be necessary to amend the license or request a second license in order to complete the transaction with the involvement of the foreign subsidiary.
The EO contains several definitions which help to clarify the new restrictions, but not all important terms are defined and the definitions do not answer critical questions. For instance, there is no definition for the term “entity owned or controlled by a United States person.” Wholly-owned foreign subsidiaries of a US parent are clearly intended to be covered, but the status of foreign entities which are not wholly owned, or other affiliated entities which may be controlled, but not owned, by a US person, is less certain. For example, if a UK parent has a subsidiary in the United States which controls many of the activities of an affiliate in Europe or Asia, the EO does not specify the degree of control necessary to subject the affiliate to the prohibitions found in the EO. The FAQs seem to suggest that OFAC intends to subject only wholly- or majority-owned foreign subsidiaries to the new rules, but that interpretation is not explicitly stated in the EO or the FAQs themselves.
The term “subject to the jurisdiction of the Government of Iran” is defined in the EO to include any “person organized under the laws of Iran or any jurisdiction within Iran, ordinarily resident in Iran, or in Iran, or owned or controlled by any of the foregoing.” However, the terms “ordinarily resident in Iran” and “owned or controlled” are not defined. Prior to the enactment of the ITRSHRA, foreign subsidiaries of US companies were permitted in certain circumstances to have Iranian nationals on their staff. Now, if an Iranian national is working in Germany for a subsidiary of a US company, and the Iranian national does not have permanent residency status in Germany, the new EO could be interpreted to require that the German subsidiary terminate the employment of the Iranian national since the Iranian national might not be considered “ordinarily resident” in Germany with only a temporary visa. Furthermore, if the German subsidiary of a US person has a long-standing business relationship with a UAE/Iranian joint venture that is 51% owned by the UAE entity, but is controlled in fact by the Iranian partner, the new EO may require that the German subsidiary terminate its business relationship with the joint venture since the joint venture is controlled by the Iranian entity, even though the entity is majority owned by the UAE company. In both of these examples, the German company could apply for a license from OFAC. TSRA license requests related to the export of agricultural commodities, medicines, or medical devices are likely to be favorably considered, but OFAC’s licensing policy with respect to non-TSRA activity is less likely to be favorable. In addition, it is possible that license applications submitted to OFAC may not receive a response prior to the February 6, 2013 deadline.
The EO does allow US entities to avoid liability by distancing themselves from their foreign affiliates engaged in Iran-related activity within a certain time period following the enactment of the EO; however, this provision could benefit from further clarification. Specifically, Section 4(c) of the EO provides that civil penalties will not apply “if the United States person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013.” While it would seem that the intent of the EO is to pressure US companies to require their foreign subsidiaries to terminate all business with Iran not later than February 6, 2013, the wording of this section is unclear. It appears that the EO is requiring the US person to divest or terminate its business with its own foreign subsidiary. While divestiture can be accomplished (though the US person would be given very little time to complete the sale), the termination of business with one’s own subsidiary could be more difficult and raises additional practical questions. For example, what if the parent terminates its business (e.g., the supply of parts or components) with its subsidiary, and the parent merely receives revenues from the subsidiary? In that case, the new EO has accomplished little since the foreign subsidiary was already required by US law to operate independently of the US parent with respect to its Iran-related business. The administration should clarify this requirement in the coming weeks so companies have time to implement the necessary changes. If the US parent does not have time to implement these changes, it could potentially request a license that would allow some additional time, but OFAC may not grant such a license or even act upon the request prior to the February deadline.
Finally, it appears that the EO does not permit grandfathering of existing contracts. Under Section 4(d) of the EO, the prohibitions of Section 4 apply “notwithstanding any contract entered into… prior to the date of this order.” As such, if a foreign subsidiary did not negotiate early termination clauses based on changes to applicable export control and sanctions laws, the subsidiary risks facing either commercial penalties for early termination of agreements, or civil penalties imposed on their US parent. Even if a company does not have a foreign subsidiary which is doing business with Iran, this new EO should serve as a reminder of the importance of contractual protections relating to changes in export control and economic sanctions laws.
We will continue to keep you apprised of developments regarding sanctions against Iran and other countries.