On October 9, 2012, President Obama signed executive order 13628, which implements a number of provisions contained in the Iran Threat Reduction and Syria Human Rights Act of 2012 ("ITRSHRA"), including a provision that directs the President to ban non-US entities owned or controlled by US persons from engaging in economic activity with Iran to the same extent that US persons are so prohibited under US law and regulation. The President signed ITRSHRA into law on August 10, 2012.
Section 218 of ITRSHRA directs the President, within 60 days of the enactment of ITRSHRA, to "prohibit an entity owned or controlled by a United States person and established or maintained outside the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited by an order or regulation issued pursuant to the International Emergency Economic Powers Act [("IEEPA")] if the transaction were engaged in by a United States person or in the United States." In addition, Section 218 provides that the full range of civil penalties applicable under IEEPA - namely, up to $250,000 per violation or twice the value of the relevant transaction - can be imposed against the US owner or control person where the non-US subsidiary or controlled entity violates, attempts to violate, conspires to violate, or causes a violation of any US executive order or regulation restricting economic interaction with Iran.
Section 218 also contains a fairly unhelpful 180-day grace period in which the US owner or control person is protected against IEEPA civil liability. Instead of permitting liability to be avoided where the non-US subsidiary or controlled entity terminates its business with Iran within 180 days, this provision instead provides protection only where the US owner or control person divests or terminates its business with the non-US subsidiary or controlled entity during this period of time.
Section 218 does not define most of the terms that it uses. It does, however, contain a definition for "own or control" with respect to a non-US entity: namely, "(A) to hold more than 50 percent of the equity interest by vote or value in the entity; (B) to hold a majority of seats on the board of directors of the entity; or (C) to otherwise control the actions, policies, or personnel decisions of the entity." This definition appears to capture not only non-US subsidiaries of US corporations, but also non-US controlled portfolio companies of US-based private equity firms.
Executive Order 13628 sets forth the prohibition directed by Section 218 of ITRSHRA, in a form that largely repeats the language contained in Section 218. Hopes within the business community that implementing action would soften the impact of Section 218 were unrealized - and, in fact, the executive order adds broad definitions and increases some areas of ambiguity. In terms of definitions, "knowledge" or "knowingly" captures not only actual knowledge, but also a situation where a non-US entity "should have known" about the relevant conduct, circumstance, or result related to a transaction with Iran. In addition, "subject to the jurisdiction of the Government of Iran" captures not only an entity organized under the laws of Iran, an individual ordinarily resident in Iran, and an entity or individual actually in Iran, but also any non-Iranian entity "owned or controlled by any of the foregoing."
In terms of added ambiguity, the executive order increases uncertainty with respect to the manner in which penalties will be imposed. Section 218 does not state that US enforcement may be taken directly against the non-US subsidiary or controlled entity; it refers only to civil IEEPA penalties being imposed against the US owner or control person. The executive order contains no statement that enforcement action will be limited to the US owner or control person. Rather, it appears on its face to threaten both criminal and civil penalties against non-US subsidiaries and controlled entities that continue to do business with Iran - an assertion of enforcement jurisdiction under US sanctions law that the United States has largely avoided since the embargo against Cuba was imposed in the 1960s.
Worse yet from the perspective of US owners or control persons, the provision in the executive order that refers to penalties being imposed against "the United States person that owns or controls the [non-US] entity that engaged in the prohibited transaction" simply uses the word "penalties." This language therefore raises the question whether, despite the "civil penalties" language in Section 218, the Obama Administration might threaten criminal action against US owners and control persons.
Hopes within the business community that implementing action might improve the terms of the grace period contained in Section 218 were also dashed. The executive order simply states that penalties will not apply "if the United States person that owns or controls the [non-US] entity divests or terminates its business with the entity not later than February 6, 2013." Like Section 218, the executive order offers no recognition that, due to contractual obligations, local law considerations, or other factors, it may not be possible for non-US subsidiaries or controlled entities to shut down immediately all newly prohibited business with Iran. While it may be the case that, by exercising enforcement discretion, the Obama Administration will give non-US subsidiaries and controlled entities a reasonable period of time in which to terminate prohibited business with Iran, neither the executive order nor the guidance materials released to date by the Obama Administration offer any assurance that such a grace period will in fact be offered. Moreover, the current vigorous approach to enforcing Iran sanctions by US enforcement authorities does not offer much comfort in this regard.
Executive Order 13628 authorizes the Treasury Department to issue regulations in furtherance of the executive order, and it is likely that such regulations will be issued in the future. It is possible that such regulations will soften to some degree - or at least clarify - the impact of Section 218 and this executive order. In the meantime, those US companies and other US-based entities and control persons that have not yet done a global assessment of business with Iran by their owned and controlled entities would be well advised to do so on an expedited basis. Due to Sarbanes-Oxley and other factors, many US public companies have already moved in recent years to adopt uniform global sanctions compliance policies; it is therefore likely that the risk exposure presented by Section 218 and Executive Order 13628 will fall predominantly on US privately held companies, US private equity funds, and US citizens and permanent residents who exercise control over non-US business entities.