President issues Executive Order implementing Iran Threat Reduction and Syria Human Rights Act of 2012; results in application of Iran sanctions to foreign subsidiaries of U.S. companies
On 9 October 2012, the President issued Executive Order 13628 (the “Executive Order”) implementing certain provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”). The Act was signed into law by the President on 10 August 2012 as described in our 13 August 2012 client alert. In addition, on 15 October 2012, the Council of the European Union (EU) took measures that will significantly expand the EU sanctions against both Iran and Syria.
Executive Order 13628
Significantly, as specifically required by Section 218 of the Act, the Executive Order effectively prohibits non-U.S. entities that are owned or controlled by U.S. persons (including foreign subsidiaries of U.S. companies) from knowingly taking virtually any action involving persons or entities in Iran if that transaction would be prohibited for U.S. persons under the Iranian Transactions Regulations (ITR), which are administered by Treasury Department’s Office of Foreign Assets Control (OFAC), or under certain other orders specifically enumerated in the Executive Order. Because of the Executive Order’s broad definition of one of the key terms from Section 218, the restrictions on dealings would extend beyond persons and entities in Iran to entities outside of Iran that are owned or controlled by Iranian companies or persons ordinarily resident in Iran.
Although the Executive Order allows for U.S. companies to divest or terminate their business with foreign subsidiaries that might conduct business related to Iran by 06 February 2013, the Executive Order does not provide for a more general wind-down period for foreign subsidiaries that will not be divested. In addition, there is no carve-out for contracts entered into prior to 9 October 2012. As such, U.S. companies and their foreign subsidiaries should take immediate action to confirm that the foreign subsidiaries do not conduct any activities that directly or indirectly relate to Iran.
The Executive Order takes a number of other actions, including the following:
- provides authority to OFAC to block property and interests in property of persons determined to have conducted certain activities related to human rights abuses against the people of Iran or to have conducted certain activities resulting in censorship of people in Iran, which largely mirror the restrictions in Sections 402 and 403 of the Act but also expand the types of activities that could result in a designation;
- provides authority to OFAC and State Department to implement restrictive measures for sanctions imposed under the Iran Sanctions Act of 1996 (ISA), the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) and the Act;
- expands the types of restrictive measures that could be imposed against those violating the ISA/CISADA, by implementing Section 204 of the Act; and
- provides authority to State Department to impose sanctions on persons who, during the 1 July 2010 — 10 August 2012 period, engaged in certain activities conducted in relation to the sale of refined petroleum products to Iran, or the provision of goods, services, or technology that could directly and significantly facilitate the maintenance or expansion of Iran’s domestic production of refined petroleum products, or the enhancement of its ability to import refined petroleum products (the activities that are targeted, and the applicable dollar thresholds, mirror those in Section 102(a) of CISADA).
Application of Iran sanctions to foreign subsidiaries of U.S. companies
Section 4 of the Executive Order expands the application of the prohibitions and restrictions of certain U.S. sanctions against Iran to foreign subsidiaries of U.S. companies. Primarily, the ITR restrictions on dealings with persons or entities in Iran now apply to foreign subsidiaries, as well as the restrictions imposed by most (but not all) of prior Executive Orders that relate to Iran. Section 4 applies to entities organized outside the United States that are “owned or controlled” by U.S. persons and that knowingly engage in transactions with the Government of Iran or any person or entity “subject to the jurisdiction of the Government of Iran.” Because that term is broadly defined in Section 13(g) of the Executive Order to include “a person organized under the laws of Iran …, ordinarily resident in Iran, or … owned or controlled by any of the foregoing,” the restrictions on dealings would extend to entities outside of Iran that are owned or controlled by Iranian companies or persons ordinarily resident in Iran, when an activity is prohibited by the ITR.
While the term “owned or controlled” is not explicitly defined in the Executive Order, the Act defines it as: (1) holding more than 50 percent of the equity interest by vote or value in the entity; (2) holding a majority of seats on the board of directors of the entity; or (3) otherwise controlling the actions, policies, or personnel decisions of the entity. The term “knowingly” is defined in the Executive Order to include actual and constructive knowledge.
Under the Executive Order, penalties for unauthorized activities by foreign subsidiaries would be imposed against the U.S. parent. OFAC has indicated that such penalties would be applied to the same extent that they would apply to a U.S. person for the same conduct. Penalties available to the U.S. Government for violations of its Iran sanctions programs are significant. For example, penalties available for violations of the ITR include criminal penalties of up to US$1 million per violation and 20 years in prison (for individuals) and up to US$1 million per violation (for corporations) for willful violations. Civil penalties can be imposed in the amount of up to US$250,000 per violation or twice the value of the transaction, whichever is greater.
Unlike in certain other circumstances when the U.S. government has taken action to significantly modify or expand its sanctions programs, the Executive Order does not provide for a wind-down period for activities by foreign subsidiaries involving Iran. Instead, the only “safe harbor” that would not subject U.S. persons to penalties for activities of foreign subsidiaries would be if the U.S. company divests from, or terminates its business with, the foreign subsidiary by 6 February 2013. However, this provision of the Executive Order does not provide companies with a general wind-down period for foreign subsidiaries that will not be divested nor does it provide a carve-out for pre-existing contractual obligations. While ongoing activities may be authorized under regulatory exemptions, general licenses or specific licenses, any authorizations would need to be reviewed closely to confirm that they specifically authorize the activities of the foreign subsidiary. For example, existing specific licenses that do not clearly authorize activities by foreign subsidiaries might need to be amended if an entity is going to rely on them to conduct activities that otherwise would be prohibited by the Iran sanctions.
Blocking property of entities involved in human rights abuses and censorship
Sections 2 and 3 of the Executive Order, which largely track the language of Sections 402 and 403 of the Act with respect to restrictions involving goods/technologies that are likely to be used to commit human rights abuses and censorship activities, provide authority to OFAC, in consultation with the State Department, to block the property of persons or entities that have knowingly:
- transferred, or facilitated the transfer of, goods or technologies to Iran or any Iranian entity that are likely to be used to commit serious human rights abuses against the people of Iran;
- provided services (including services related to hardware, software, or specialized information or professional consulting, engineering, or support services) with respect to goods or technologies that have been transferred to Iran and that are likely to be used to commit serious human rights abuses against the people of Iran;
- engaged in censorship prohibiting, limiting, or penalizing the exercise of freedom of expression or assembly by citizens of Iran, or limiting access to print or broadcast media, including the facilitation or support of intentional frequency manipulation that would jam or restrict an international signal; or
- materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, the activities described above.
Even before this Executive Order or the Act, the U.S. Government had the ability to designate persons and entities engaged in certain activities involving the provision of goods, services or technologies used to commit abuse of human rights, or the restriction or monitoring of communications in Iran pursuant to the authority set forth in two Executive Orders in 2010 and 2012. In addition, Sections 402 and 403 of the Act amended CISADA to require the President to submit a report to Congress by 8 November 2012 identifying persons and entities who have engaged in certain activities related to Iran, and to impose sanctions available under CISADA against such persons or entities. Executive Order extends legal basis for designations to include those persons who have materially assisted, sponsored, or provided financial, material or technological support for, or goods or services to or in support of, those prohibited activities. We note that Section 402 of the Act allows the President to exclude a person from the list that must be submitted to Congress (and thus exclude that person from the imposition of sanctions) if the President certifies in writing to Congress that the person is no longer engaging in, or has taken “verifiable steps” toward stopping the activity targeted by this provision, and that the President has received “reliable assurances” that the person will not engage in such activity in the future.
While the Executive Order does not define the types of goods and services that could be covered by these provisions, Section 402 of the Act provides some examples that include “surveillance technology” (which is not defined in the Act) as well as “sensitive technology,” which is defined under CISADA as “hardware, software, telecommunications equipment, or any other technology that the President determines is to be used specifically … to restrict the free flow of unbiased information in Iran; or to disrupt, monitor, or otherwise restrict speech of the people of Iran.” In addition, Section 412 of the Act requires the State Department to issue, by 8 November 2012, guidelines to further describe the technologies that may be considered ‘‘sensitive technology’’ with “special attention to new forms of sophisticated jamming, monitoring, and surveillance technology relating to mobile telecommunications and the Internet” and to determine the types of technologies that enable any indigenous capabilities that Iran has to disrupt and monitor information and communications in that country, and consider adding descriptions of those items to the guidelines.” Therefore, in the absence of further guidelines, we note that a broad range of goods, technologies, or services could be subject to these restrictions, including items such as Internet and mobile network management hardware, software, and related services.
Separate from the blocking provisions described above, the Executive Order also prohibits the entry into the United States, as immigrants or nonimmigrants, persons who have been determined to have conducted the activities described above involving human rights abuses or censorship in Iran.
Expansion of sanctions available under the Act, ISA, and CISADA
Section 204 of the Act revises the ISA/CISADA to expand the types of restrictive measures that could be imposed by the U.S. government against those engaging in sanctionable activities. The Executive Order implements those expanded measures by:
- prohibiting any U.S. person from investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person (the term “significant amounts” is not defined in the Act or the Executive Order);
- imposing one or more restrictive measures on the principal executive officer or officers, or persons performing similar functions and with similar authorities, of a sanctioned entity (those restrictive measures could include blocking of property or prohibition of financial transactions with or through U.S. financial institutions, among other measures; or
- restricting or prohibiting imports of goods, technology, or services, directly or indirectly, into the United States from the sanctioned person.
European Union sanctions
On 15 October the Council of the EU (the “Council”) took significant steps in broadening the EU's sanctions regimes against Iran and Syria. The EU added 34 Iranian entities and one person to its asset freeze list, which are involved in the oil and gas and financial sectors. In addition, the Council adopted a series of restrictions which would require further implementation to become directly applicable in the EU Member States.
With respect to Iran:
- ban all transactions between EU and Iranian banks, unless they are explicitly authorized in advance or exempted for humanitarian needs;
- impose additional restrictions against the Central Bank of Iran;
- ban on imports of natural gas from Iran;
- prohibit the purchase and transport of natural gas, as well as related finance and insurance activities;
- ban export, and related technical or financial assistance, to Iran of items relevant to nuclear proliferation, ballistic programs, or industries controlled by the Iranian Revolutionary Guard Corps: including graphite, raw or semi-finished metals such as aluminum and steel, as well as software for integrating industrial processes;
- broaden the export ban on key equipment for the Iranian oil, gas, and petrochemical industries;
- ban on vessels belonging to EU citizens and companies from transporting or storing Iranian oil and petrochemical products;
- ban EU industries from being involved in the construction of new oil tankers for Iran and prohibit the supply of key naval equipment and technology for ship building and maintenance;
- ban flagging and classification services for Iranian oil tankers and cargo vessels; and
- stop trade facilitation involving Iran by restricting new short-term export credits, guarantees, or insurance.
A copy of Council Decision 2012/635/CFSP of 15 October 2012 with respect to Iran is available here and a copy of Council Implementing Regulation (EU) No 945/2012 of 15 October 2012 listing additional Iranian entities and person is available here.
With respect to Syria, the EU added two Syrian entities and 28 persons to its asset freeze list. In particular all Syrian Government Ministers were designated for their collective responsibility in the repression against the Syrian population. In addition, the Council adopted the following restrictive measures which would require further implementation to become directly applicable in the EU Member States:
- ban on imports of arms from Syria;
- ban on any EU involvement in the transport of Syrian arms;
- ban EU nationals and entities from supplying financial services (including insurance and re-insurance) to Syrian arms exports; and
- ban EU nationals and entities from being involved in Syrian military cooperation with third countries, which could benefit the Syrian regime.
A copy of Council Decision 2012/634/CFSP of 15 October 2012 with respect to Syria is available here and a copy of the Council Implementing Regulation (EU) No 944/2012 of 15 October 2012 listing additional Syrian entities and persons is available here.