On Friday, August 10, 2012, President Obama signed a law significantly expanding existing economic sanctions against Iran. The Iran Threat Reduction and Syria Human Rights Act of 2012 (H.R. 1905) (the “Act”) overwhelmingly passed the House and Senate on August 1, 2012. Although the Act strengthens existing sanctions tied to the current Syrian government’s continued human rights abuses against its people, the majority of the Act focuses on expanding—in some cases dramatically—sanctions against Iran.
We take this opportunity to highlight selected key aspects of the Act, along with the implications they present1:
- Non-US subsidiaries of US companies are now subject to direct prohibitions against dealing with Iran (and US parents are now liable for their violations of the same). Section 218 of the Act extends to non-US entities that are owned or controlled (as defined in the Act) by a US person prohibitions concerning knowing transactions with Iran previously applicable only to companies organized in the United States. Previously, under the authority of the International Emergency Economic Powers Act (“IEEPA”)—the principal statutory basis for US economic sanctions against Iran—the most pervasive prohibitions on dealing with Iran applied only to defined US persons (including anyone acting in the United States). Transactions by non-US subsidiaries of US persons that were acting independently (e.g., without prohibited “facilitating” support from a US person or from the United States) were deemed outside of US jurisdiction for IEEPA sanctions purposes.
Required to be implemented no later than 60 days after the effective date of the Act, and subject to a 180-day grace period for divestment by the US parent entity, Section 218 closes what many have described as a loophole in US sanctions enforcement against Iran, and imputes liability (and thus, exposure to penalties and consequences) for the actions of a non-US person to the US person that owns or controls the former. Combined with ever-increasing extraterritorial sanctions against non-US persons (including other measures set forth in the Act), Section 218 substantially circumscribes remaining opportunities for non-US persons to do business with Iran and still retain access to the US commercial and financial sectors.
- Companies are now required to file disclosures with the Securities and Exchange Commission (“SEC”) concerning certain activities relating to Iran. Section 219 of the Act amends Section 13 of the Securities Exchange Act of 1934 to expand mandatory disclosures by issuers of securities that are required by US securities laws to file annual and/or quarterly reports with the SEC. Among the activities required to be disclosed in such reports are whether the issuer or any affiliate thereof has knowingly engaged in any activity that triggers potential sanctions under the Iran Sanctions Act of 1996 (“ISA”), or has knowingly engaged in any transaction or dealing with any person whose property is blocked for terrorism or nonproliferation reasons or any person identified as part of the Government of Iran.
In addition to making a disclosure under the circumstances described above, an issuer would be required to file a separate statement with the SEC indicating whether its periodic report included such a disclosure, and the disclosure itself would be reported by the SEC to the President and the Congress. Furthermore, upon receiving such a disclosure, the President would be required (except where the disclosure arises solely due to a transaction counterparty’s listing as part of the Iranian government) to initiate an investigation and determine within 180 days whether sanctions should be imposed in connection with the disclosed activities. Section 219 will apply to reports filed 180 days after the Act’s enactment.
- Extraterritorial sanctions are significantly expanded and strengthened. The Act expands the range of activities that trigger sanctions against non-US persons already set forth in existing legal authorities, including the ISA, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, and the National Defense Authorization Act for Fiscal Year 2012. The Act also prescribes sanctions and other requirements for activities related to dealings with the Iranian Revolutionary Guard Corps, and adds other provisions otherwise intended to strengthen and expand extraterritorial sanctions against non-US persons who do business with Iran.
For example, whereas the ISA already targets specific activities related to the development of petroleum resources and refining capacity in Iran, the Act expands the types of activity that could trigger sanctions under the ISA to include making investments in Iran’s infrastructure directly associated with such development, including the construction of roads, railways, and ports. In addition, sanctionable activity under the ISA related to the exportation of refined petroleum products to Iran is expanded to include alternative payment arrangements related to such exportation, such as barter transactions.
The Act also targets persons involved in the transportation of Iranian crude oil, as well as those who insure or conceal such activity. Other activities targeted by the Act include knowing participation in post-2001 petroleum sector joint ventures outside Iran involving or benefiting Iran, and dealing in, or facilitating the issuance of, new Iranian sovereign debt.
The foregoing examples are merely illustrative. The Act, as described by its congressional sponsors, augments existing extraterritorial sanctions in numerous ways, the overall effect of which is calculated to disrupt non-US trade relating to Iran’s energy and transportation sectors, as well as activities that contribute to Iran’s efforts to develop weapons of mass destruction and oppress the Iranian populace.
The Act also increases the number of sanctions measures the President is required to impose under the ISA from three to five, and adds new sanctions measures to the Administration’s sanctions arsenal. Moreover, the Act imposes various limitations on the President’s ability to waive or suspend application of sanctions to non-US persons, and in some cases makes more stringent the national security standards that must be satisfied before such waivers or suspensions may be granted.
Overall, the Act represents a significant new development in the use by the United States of economic sanctions as a national security and foreign policy tool. Concerning Iran in particular, the US government has signaled—with rare bipartisan resolve—that non-US persons increasingly will have to choose between doing business with Iran and enjoying the benefits of access to the US commercial and financial marketplace, with consequences intended to make the choice a stark one. It remains to be seen whether these latest measures will achieve their intended effect of isolating Iran economically, and thereby compelling the Iranian regime to abandon its nuclear weapons ambitions, support for terrorism, and threats to its neighbors.2