The new Obama administration may be expected to follow a dual course of engagement and amplified pressure, via sanctions and diplomatic actions, toward Iran’s nuclear proliferation efforts. The Congress, meanwhile, is already ratcheting up legislative efforts to bolster sanctions on Tehran and to increase the difficulty for both U.S. and foreign firms to operate businesses in, or to trade with, Iran. These developments will increase the already considerable political risk for companies operating in Iran.  

The Obama Administration

Prior to taking office, prominent members of President Obama’s foreign policy team contributed to a major publication aimed at guiding the administration’s policy on Iran.1 Key participants included Dennis Ross, now the State Department’s Special Envoy for Southwest Asia (i.e., the lead U.S. official on Iran) and Robert Einhorn, nominated to be Under Secretary for Arms Control and Nonproliferation at the State Department. These officials have publicly endorsed a strategy toward Iran that would seek to create leverage over the Tehran regime with respect to nuclear proliferation. This path has two elements:  

  • Engagement: To draw the entire international community into a joint effort to prevent Iran from attaining nuclear weapons production capabilities. We anticipate increased diplomatic efforts with governments, including primarily the UK, Russia, China, France and Germany, combined with new public diplomacy campaigns aimed at directing global scrutiny and condemnation of Iran’s attempt to develop nuclear weapons.  
  • Deterrence: The U.S. will not only seek to improve military defenses against an Iranian nuclear capacity, but will pursue means of extended deterrence, including new and ostensibly more effective sanctions against the regime that would reduce its ability to function as an effective economy. Companies active in Iran should anticipate that broader sanctions may affect supply lines, trade finance, capital repatriation to home markets and personnel movements. Considering their past track record, European Union governments may well view new sanctions as a necessary step prior to any military actions against Iran.

In addition, non-U.S. financial institutions can expect continued, and perhaps accelerated, efforts by Treasury Under Secretary for Terrorism and Financial Intelligence Stuart Levey, who is remaining in his position in the new administration, to curtail or eliminate Euro and Yen-denominated transactions with Iran. Treasury’s efforts so far have resulted in instances of curtailment of foreign bank lending, even for transactions licensed by Treasury’s Office of Foreign Assets Control (OFAC), such as exports of food and medicine to Iran.  

Heightened Political Risk for Companies Operating in Iran

U.S. government and “think tank” analysts point to several emerging trends regarding the Iranian proliferation issue. These trends pose risks for multinationals engaged in business activities in Iran. Companies should review existing contingency strategies for their Iranian operations at the earliest possible opportunity.  

  • Iran has accelerated its production of low-enriched uranium. This has created a narrow window for diplomatic overtures to persuade Iran to abandon its nuclear weapons capability. This will contribute to a more highly pressurized environment regarding efforts of the international community to foster pressure on Iran. Major investors in Iran should anticipate being targeted by “name and shame” campaigns as one element of stepped-up diplomatic pressure on the regime.  
  • Israel has reiterated its willingness to take unilateral military action against Iran’s nuclear proliferation activities. The Israelis, too, are running out of time to mount a successful campaign. Iran is on the cusp of bolstering its air defenses with a major purchase of Russian ground-to-air missiles (S-300), and Iran continues to harden research and development sites against air attack. These developments, coupled with the advanced pace of uranium enrichment, will increase pressure on the Israelis to launch attacks with the potential to destabilize the Iranian economy and the region.  
  • The administration and Congress are seeking better options to create leverage on the regime. The pursuit of a combined strategy of engagement and revised sanctions may well include new actions to target companies with Iranian operations. These will differ from previous efforts led mainly by non-governmental organizations and state governments, and will have the support of both Congress and the administration.  

The Congress

The 111th Congress has already shown signs of taking an activist role on Iran policy, with support for expanded Iran sanctions visible in both parties. Four pieces of legislation with Iranian implications have already been introduced, of which one has passed and three are pending.  

The 2009 Omnibus Appropriations Act (HR 1105)

The first piece of legislation, the 2009 Omnibus Appropriations Act (HR 1105), has already passed Congress. It contains a provision, Section 7043, that requires the Secretary of State to report to Congress within 180 days on existing sanctions on Iran and to provide, among other things, a list of all “United States and foreign registered entities” which the Secretary of State “has reason to believe may be in violation of existing United States bilateral and unilateral sanctions.” It is unclear what is meant by “registered,” but presumably it means companies whose securities are registered on U.S. stock exchanges. The intent behind the report appears to be to provide Congress with more information which will enable it to pressure the administration to step up enforcement of sanctions on Iran.

The Iran Threat Reduction Act of 2009 (HR 1208)

Rep. Ileana Ros-Lehtinen (R-FL) has continued as the leading voice in efforts in the House of Representatives to legislate expanded sanctions against Iran. The Iran Threat Reduction Act of 2009 (HR 1208), introduced by Ros-Lehtinen with broad bipartisan support on February 26, 2009, is the first major attempt in the new Congress to expand the existing sanctions regime against Iran. The bill, which builds on earlier legislation advocated by Ros-Lehtinen that almost passed in the prior Congress, would do the following:  

  • Transshipment Activities Aiding Proliferation. The bill would require mandatory U.S. visa denials under the existing Iran Sanctions Act of 1996 for the following persons whom the Secretary of State has determined to have aided proliferation relating to Iran:  
    • Corporate officials and controlling shareholders of companies,  
    • Senior government officials of foreign governments with jurisdiction over such companies and persons, and  
    • Immediate family members of the above.  

The bill defines such persons to include persons who have “permitted, hosted or otherwise facilitated” any transshipment “that may have [emphasis added] enabled a person to export, transfer, or otherwise provide” goods, services or technology that would contribute materially to Iranian proliferation activities. Waivers would be sharply limited. This provision could particularly impact companies, persons and governments in transshipment hubs such as the UAE, Singapore and Hong Kong.  

  • Energy sector. The bill would expand entities subject to sanctions under the Iran Sanctions Act of 1996 for participation in the Iranian oil and gas sectors to include, specifically, financial institutions, insurers, underwriters, guarantors and any other business organizations, including any foreign subsidiary, parent or affiliate of the foregoing entities. These provisions would apply extraterritorially. Foreign government export credit agencies would also be subject to penalties for providing trade finance to entities involved in the Iranian energy industry.
  • Parents of foreign subsidiaries. The bill would extend existing OFAC sanctions to U.S. parent companies of foreign subsidiaries “created or availed of for the purpose of engaging” in any activities in or with Iran that are prohibited under U.S. law (not just in the energy sector). U.S. parent companies would therefore be subject to OFAC penalties to the same extent as if the parent company had engaged directly in such acts. However, this provision would not apply extraterritorially to non-U.S. parents. The bill contains a grandfather provision for contracts or other obligations entered into before the acquisition of such an entity by a parent company unless the parent company acquired the entity knowing or having reason to know that the contract or obligation existed, or unless the contract or obligation is expanded to cover additional activities beyond those that existed at the time of the acquisition.  
  • Penalties on principal executive officers. The bill would provide the President with broad powers to impose sanctions on “principal executive officers” of entities sanctioned under the Iran Sanctions Act, including blocking personal assets of such persons “to the same extent as the property of a foreign person determined to have committed acts of terrorism.”
  • Amend the U.S. tax code: The bill would amend the Internal Revenue Code to (1) deny a foreign tax credit to a taxpayer if it or any of its controlled affiliates engages in “business activity” with Iran that is prohibited by U.S. law and (2) increase U.S. taxes from 30 to 45 percent on any income derived by a foreign corporation from business activity with Iran that is prohibited by U.S. law. The provision contains unclear and ambiguous language as to whether covered “business activity” relates only to the Iranian energy sector or, more broadly, to any “contract to sell or purchase goods, services, or technology.” Penalties of $100,000 per day would apply for each failure to report certain information pursuant to the Internal Revenue Code.
  • Divestment. The bill would require publication of the names of U.S. and foreign companies with investments exceeding $20 million in Iran’s energy sector and require the U.S government, state and private sector pension funds, as well as mutual funds sold in the United States, to divest themselves of holdings in these companies. The Office of Global Security Risks at the Securities and Exchange Commission would be charged with identifying whether or not those investments in Iran constitute a “political, economic or other risk” to the United States and would be required to determine whether the entity concerned faces U.S. litigation or sanctions that are likely to have a “material adverse impact” on the entity.
  • Divestment Incentive. The bill would reward companies that “deliberately and willingly” divest all investments in Iran with the following: (1) expedited approval process and issuance of any guarantee, insurance, extension of credit or participation in the extension of credit in connection with the export of any goods or services; (2) preference for U.S. financial institution loans or credits to that entity; and (3) preference in U.S government contracting and procurement of goods or services. It is unclear how the U.S government would implement points 1 and 2 above in the context of private sector financial institutions (unless it is through leverage obtained by the provision of federal “bailout” money).
  • Restrictions on Nuclear Cooperation. The bill would bar any agreement for nuclear cooperation between the United States and the government of any country that is assisting the nuclear program of Iran or transferring advanced conventional weapons or missiles to Iran. The provision expressly names as barred the “Russia [sic] Federation” and any other country named by the President. The provision defines “advanced conventional weapons” to include not only all items on the Munitions List but also, broadly, all dual use goods, services and technologies controlled by the Wassenaar Arrangement, which is far more encompassing than what is normally understood to be “advanced conventional weapons.”  

HR 1208 was referred to multiple House committees for review, including the Committee on Foreign Affairs, as well as the Committees on Financial Services, Oversight and Government Reform, Ways and Means, the Judiciary, Education and Labor, and Science and Technology. No further action has been taken at this time. There is not yet companion legislation in the Senate. While it is too early to predict its chances of passage, we note that predecessor legislation came close to enactment in the last session of Congress.  

The Stop Business With Terrorists Act of 2009 (HR 1367)

Introduced March 5 by Rep. Anthony Weiner (D-NY), the Stop Business With Terrorists Act of 2009 (HR 1367) contains similar provisions to Rep. Ros-Lehtinen’s bill described above, which would apply OFAC penalties to U.S. parent companies for activities with Iran by their controlled foreign subsidiaries. However, the Weiner bill would allow the U.S. parent 90 days following enactment of the bill to divest the subsidiary in order to avoid a penalty.

The Iran Sanctions Enabling Act (HR 1327)

Rep. Barney Frank (D-MA), Chair of the House Committee on Financial Services, introduced the Iran Sanctions Enabling Act of 2009 (HR 1327) on March 5. The bill seeks to encourage divestment in publicly traded companies that operate in Iran. Specifically, the bill would formally establish U.S. policy to support decisions by state and local governments and educational institutions to divest from any (U.S. or foreign) companies that have investments greater than $20 million in Iran’s energy sector. Furthermore, the bill would provide specific authority to state and local governments to adopt and implement such divestment decisions, notwithstanding any other provisions of law.  

HR 1327 defines the following investments as triggering divestment action:  

  • An investment of $20 million in Iran’s energy sector;
  • Investment in any entity that provides tankers or pipeline products for Iran’s energy sector; or
  • A financial institution lending $20 million or more, for 45 days or more, to an entity, if that credit will be used for direct investment or provision of supplies and products as outlined above.  

HR 1327 would require state and local governments to provide the following in the event of a divestment decision:  

  • Written notice to entities that they will be subject to divestment.
  • 90 days must be allowed from the receipt of written notification prior to implementing divestment.
  • Governments must provide notified entities with the opportunity for a hearing to demonstrate that their business in Iran does not meet divestment criteria.
  • Governments must notify the U.S. Department of Justice of any divestment within 30 days after the action has been taken.

HR 1327 would grandfather prior divestment actions by state or local governments, making them allowable under U.S. law (state or local laws requiring divestiture have been subject to challenges under the supremacy clause of the U.S. Constitution which prohibits state legislation that inhibits the federal government’s conduct of U.S. foreign policy). The bill would also protect asset and investment company managers from liability for divestments by creating safe harbor provisions under the Investment Company Act of 1940 (USC 80a – 13c(1)).

The bill was co-sponsored by senior Democrat members of the House, including Foreign Affairs Committee Chair Howard Berman (D-CA); Chair of the Foreign Affairs Subcommittee on Terrorism, Nonproliferation and Trade Brad Sherman (D-CA); and Greg Meeks (D-NY). The bill was referred to the Committee on Financial Services, and will likely be referred to the Committee on Foreign Affairs and Committee on Ways and Means prior to proceeding to a floor vote in the next several months.