On October 9, 2012, the President issued an Executive Order (http://www.whitehouse.gov/the-pressoffice/ 2012/10/09/executive-order-president-regarding-authorizing-implementation-certain-s) implementing a number of provisions under various Iran-related statutes, including Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA), which for the first time applies Office of Foreign Assets Control (OFAC) Iran sanctions to U.S.-controlled offshore subsidiaries. The language of Section 4 of the Executive Order, which gives effect to Section 218 of the ITRSHRA, is essentially identical to that of Section 218 and adds little in the way of clarification.
It is unclear from the Executive Order what the effective date of the prohibition is because it, as well as a related FAQ (FAQ 240), simply repeats the statutory language that penalties shall not apply if the U.S. parent “divests or terminates its business” with the non-U.S. subsidiary by February 6, 2013. This suggests that the only solution is divestiture or termination of the U.S. parent’s business with the subsidiary, which would appear to force a sell-off of non-U.S. subsidiaries by U.S. parents—surely a draconian and unintended result. However, in response to our request for guidance, OFAC staff have informally advised that the effective date of the Executive Order was October 9, 2012, and that it contains no wind-down authorization for prohibited Iranian activities by offshore subsidiaries. The February 6, 2013, grace period only applies to divestitures, according to OFAC. Accordingly, its prohibitions are effective immediately, and affected foreign subsidiaries should therefore implement an IMMEDIATE stand-down of their unlicensed activities with Iran, including receiving any unlicensed funds transfers from Iran (if they receive any such unlicensed funds, they must either block them if they originate from the Government of Iran (GOI) or any of its controlled entities, or otherwise reject them if from, or involving a non-GOI entity or person). OFAC advises that they will be receptive to reviewing applications for specific license to wind-down Iranian transactions by foreign subsidiaries of U.S. companies, presumably by the February 6, 2013, deadline.
The Executive Order’s definition of the term “subject to the jurisdiction of the Government of Iran,” as used in Section 218 of the statute and in Section 4 of the Executive Order, clarifies that the term applies, inter alia, to a “person ordinarily resident in Iran” or “in Iran.” It thus does not include an Iranian national outside Iran, unless that person is ordinarily resident in Iran. The possible breadth of that term had been a point of concern because it was at odds with the concepts used in OFAC’s Iranian Transactions Regulations, but this definition mitigates those concerns.
The White House also issued three FAQs (http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/ ques_index.aspx#itrshra_eo), as well as a press statement and letter to Congress, the latter two of which shed no additional light on Section 4 of the Executive Order. However, FAQ 239 clarifies that a non-U.S. subsidiary will be treated as a U.S. person for purposes of license application and issuance and that either it or its U.S. parent may apply for a license from OFAC. This clarification is of particular interest to non-U.S. subsidiaries that engage in activities eligible for licensing under the Trade Sanctions Reform and Export Enhancement Act of 2000 (TSRA), as well as other licensing.
In conclusion, any U.S. company that has offshore subsidiaries that conduct business with Iran should urgently review their activities and the above advice from OFAC on the meaning of the new Executive Order to ensure that they are in compliance with its requirements—and apply for a specific license if they need it.