As we know, the recently enacted Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA) expands the reach of the U.S. sanctions program and imposes new SEC disclosure requirements on issuers if they or their affiliates do business with Iran (although, their affiliates may not have violated U.S. law in any way, because U.S. law may not apply to their affiliates). Pursuant to Section 219, these disclosures must be investigated by the president, although the mechanism by which these investigations are to be accomplished remains uncertain.

ITRSHRA amended Section 13 of the Securities Exchange Act of 1934 to eliminate any materiality threshold for disclosures about Iran-related activities. Essentially, an issuer hose stock is traded on a U.S. exchange must now disclose in its periodic reports whether it or any of its affiliates knowingly engaged in specified activities involving Iran, including substantial investment in the Iranian petroleum industry, transactions involving blocked persons, the proliferation of weapons of mass destruction, or the transfer of goods or services that are likely to be used to further human rights violations, among other things. In fact, the ITRSHRA disclosures are beginning to make appearances in 10-Ks.

There has already been a good deal of discussion among practitioners about what constitutes an affiliate, but there are other aspects of Section 219 that have not received appropriate attention. Specifically, Section 219 imposes a requirement on the president to initiate an investigation of all disclosures to determine whether sanctions are warranted against the U.S. issuer or its affiliate. The statute also puts the executive branch on the clock by requiring the president to make his determination as to the imposition of sanctions within 180 days of initiating the investigation.

The scope of these presidential investigations is entirely unclear and many questions remain unanswered:

  • Will a U.S. issuer’s conduct be directly investigated even if the only activity reported relates to a foreign affiliate?
  • Because the statute requires the issuer to state whether it intends to continue with the activity, will the United States investigate to determine if future conduct comports with the stated intention?
  • Could a discrepancy between the stated intention and actual conduct support a prosecution for false statements?

Indeed, at this point, U.S. issuers are left guessing which elements of the executive branch will be employed to conduct the investigations required of the president.

The Treasury’s Office of Foreign Assets Control (OFAC) seems to be the most likely candidate to investigate these ITRSHRA disclosures. OFAC already administers sanctions against Iran under the Iranian Transactions Regulations and the Iranian Assets Control Regulations (not to mention all the other economic and trade sanctions against other specific countries, terrorist organizations and certain drug traffickers). It also has broad administrative subpoena power under 31 CFR 501 to further investigate these transactions. But, an administrative subpoena issued to a U.S. issuer may not produce much in the way of documents or information because the U.S. business has, in all likelihood, either terminated its business relationship with the foreign affiliate or never had access to the affiliate’s records or information overseas. OFAC may have great difficulty using its ordinary investigative tools under these circumstances.

In the alternative, the president may turn to the Department of State as another possible investigative body for ITRSHRA. The State Department currently enforces sanctions in the energy-related sector under the Iran Sanctions Act of 1996, and it relies on a much different form of information gathering than OFAC. According to the State Department, it uses intelligence organizations, such as its own Bureau of Intelligence and Research and the Central Intelligence Agency, to gather information about foreign companies and possible sanctions violations. It then asks foreign embassy and government officials to engage with stakeholders to corroborate the information gathered. When possible, the State Department will hold a U.S. parent company accountable for sanctions violations.

Particularly in light of the obstacles that the United States encounters in gathering evidentiary information abroad, 180 days is not much time to complete an investigation. The deadline appears even more challenging when one considers the other, related matters that these agencies are working upon. Moreover, given the congressional interest in this issue, Congress will likely be watching these investigations closely. They are not the only ones.