On August 10, 2012, President Obama signed into law H.R. 1905, the Iran Threat Reduction and Syria Human Rights Act of 2012, which was passed by the U.S. Congress on August 1 with wide bipartisan support. H.R. 1905 represents a significant expansion of U.S. sanctions targeting Iran because, among other things, it (i) subjects non-U.S. entities owned or controlled by U.S. entities to the Iranian Transactions Regulations (“ITR”) and makes U.S. parent companies liable for any violations, (ii) requires publicly traded companies engaging in certain types of Iran-related business to publicly disclose such business to the U.S. Securities and Exchange Commission (“SEC”), and (iii) significantly expands the petroleum-related sanctions in the Iran Sanctions Act ("ISA"). In addition, on July 31, 2012, the Obama Administration issued Executive Order 13622 (“EO 13622”), which provides the U.S. Treasury Department with additional authority to sanction persons engaging in certain types of transactions involving Iran’s petroleum or petrochemical sectors.
Implications for Companies Engaging in Transactions with Iran
As a result of these developments, it will become increasingly difficult for U.S. and non-U.S. companies to engage in business with Iran, particularly for non-U.S. banks and non-U.S. companies involved in the energy sector. Iran has been the subject of comprehensive U.S. trade sanctions for many years, pursuant to which “U.S. Persons” (defined below) have been prohibited from virtually all dealings with Iran or the Government of Iran. Previously, separately incorporated non-U.S. subsidiaries of U.S. companies were not subject to U.S. sanctions, and it was possible for non-U.S. subsidiaries under certain circumstances to engage in business with Iran without violating U.S. sanctions. H.R. 1905 extends the ITR’s scope to non-U.S. subsidiaries of U.S. companies so that this business is no longer permissible. These developments do not appear to affect the favorable licensing regime in the ITR for the export/reexport to Iran of medicine, medical devices, and agricultural commodities.
Furthermore, companies that are required to disclose Iran-related activities to the SEC may face public pressure to end such business. The expansion of U.S. extraterritorial sanctions through the ISA and EO 13622 broadens the scope of activities that can result in non-U.S. persons being sanctioned for doing business with Iran’s petroleum and petrochemical industries, including purchases of petroleum, petroleum products, and petrochemicals from Iran, and transporting crude oil from Iran. Finally, it is likely that non-U.S. banks will operate with increased vigilance regarding any transactions involving Iran, particularly those involving the petroleum or petrochemical sectors.
What H.R. 1905 Says
H.R. 1905 is a complex bill with many provisions. Below we provide summaries of the most significant provisions in H.R. 1905.
Treatment of Non-U.S. Subsidiaries
H.R. 1905 extends the reach of current prohibitions against U.S. Person dealings with Iran and the Government of Iran to non-U.S. entities owned or controlled by U.S. Persons that are separately organized under the laws of a non-U.S. jurisdiction (“Non-U.S. Subsidiaries”). Prior to H.R. 1905, most of the prohibitions in the ITR applied only to U.S. Persons (i.e., entities organized under U.S. laws and their non-U.S. branches; individuals and entities in the United States; U.S. citizens or permanent resident aliens wherever located). Non-U.S. Subsidiaries were not considered to be U.S. Persons for purposes of the ITR.
H.R. 1905 would change that by requiring the Executive Branch to issue regulations within 60 days to prohibit Non-U.S. Subsidiaries from knowingly engaging in transactions with Iran or the Government of Iran that would be prohibited if undertaken by U.S. Persons. Penalties for non-compliance would be imposed against the U.S. parent company, not the Non-U.S. Subsidiary. H.R. 1905 appears to contemplate only civil penalties for U.S. parent companies, not criminal penalties.
Penalties will not be imposed against a U.S. parent company that, within 180 days of H.R. 1905’s enactment, divests from or terminates business with a Non-U.S. Subsidiary doing business with Iran or the Government of Iran. H.R. 1905, however, does not expressly address whether a Non-U.S. Subsidiary’s termination of Iran-related business within 180 days of enactment would remove potential liability for the U.S. parent company, nor does it address whether any grandfathering of pre-enactment agreements might be permitted. These issues may be addressed or clarified by implementing regulations.
Required Disclosures to the SEC
Effective 180 days after H.R. 1905’s enactment, companies subject to the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended (“34 Act Reporting Companies”), will be required to publicly disclose specific information about relevant Iran-related activities in annual and quarterly reports filed with the SEC. 34 Act Reporting Companies will have an obligation to determine whether they or any affiliates have knowingly:
- engaged in any sanctionable activity under the ISA;
- engaged in any activities targeted by the Iranian Financial Sanctions Regulations (“IFSR”);
- engaged in the transfer of goods or technologies or the provision of services to Iran or Iranian parties to commit serious human rights abuses against the people of Iran; or
- conducted transactions with blocked persons (“Specially Designated Nationals” or “SDNs”) designated for (i) involvement in activities related to terrorism or the proliferation of weapons of mass destruction (“WMD”) or (ii) being part of the Government of Iran (including owned or controlled entities), except in the latter case for transactions authorized by the Office of Foreign Assets Control (“OFAC”) in the U.S. Treasury Department.
34 Act Reporting Companies will be required to describe in detail each activity listed above, which disclosure must include, at a minimum: (i) the nature and extent of the activity, (ii) the gross revenues/net profits, if any, attributable to the activity, and (iii) whether the company or any affiliate intends to continue the activity. To the extent a 34 Act Reporting Company includes such disclosure in its annual or quarterly report, H.R. 1905 will also require the 34 Act Reporting Company to submit a separate report with the same information to the SEC. H.R. 1905 requires the SEC to promptly forward reports about such Iran-related activities to the President and Congress for further investigation and to post such reports on the SEC website.
Expansion of the ISA’s Scope
The ISA is the main piece of legislation targeting Iran's energy sector. Subject to certain monetary thresholds, it authorizes the President to impose sanctions on parties, including non-U.S. companies, that invest in petroleum resources in Iran or engage in certain activities related to Iran's refined petroleum industry.
H.R. 1905 adds three new potential sanctions that may be imposed on sanctioned persons, bringing the total number of potential sanctions to 12. The new ISA sanctions are (i) a ban on U.S. Person investment in or purchase of “significant amounts” of equity or debt of a sanctioned person, (ii) exclusion of a sanctioned person’s corporate officers from the United States, and (iii) the possibility of imposing ISA sanctions on a sanctioned person’s principal executive officers. H.R. 1905 requires that a minimum of five sanctions be imposed on a party sanctioned under the ISA.
Moreover, H.R. 1905 makes the following activities sanctionable under the ISA or subject to the ISA’s sanctions:
- participating in joint ventures ("JVs") wherever located with Iranian parties related to developing petroleum resources,
- engaging in activities targeted by Executive Order 13590, which contains sanctions similar to the ISA but also targets Iran's petrochemical sector,
- transporting crude oil from Iran,
- concealing the Iranian origin of crude oil and refined petroleum products,
- participating in a JV wherever located with Iranian parties related to the mining, production, or transportation of uranium,
- providing underwriting, insurance, or reinsurance services to the National Iranian Oil Company (“NIOC”) or National Iranian Tanker Company (“NITC”),
- involvement in the issuance or purchase of the sovereign debt of the Government of Iran or its owned or controlled entities, and
- dealing with Iran's Revolutionary Guard Corps ("IRGC").
Sanctionable activities (i) and (v) can be applied retroactively to pre-H.R. 1905 activities while the others apply only prospectively. In addition, H.R. 1905 expands the U.S. Government’s contracting ban for persons that engage in activities targeted by the ISA to include those that deal with the IRGC or engage in new sanctionable activities (i) to (v) above.
H.R. 1905 would also expand and strengthen the statutory basis for the IFSR. The expanded IFSR will now target foreign financial institutions that:
- engage in significant financial transactions with (i) persons acting on behalf of or that are owned or controlled by persons designated under the UN Security Council’s Iran-related resolutions or (ii) any Iran-related SDNs (including but not limited to banks) designated under OFAC’s WMD proliferation and terrorism sanctions programs;
- engage in activities targeted by the IFSR by acting on behalf of, at the direction of, as an intermediary for, or otherwise assisting a person engaged in such targeted activities;
- attempt or conspire to facilitate or participate in activities targeted by the IFSR; or
- are owned by a foreign financial institution subject to IFSR sanctions.
Separately, H.R. 1905 limits the exemption available for countries under the National Defense Authorization Act for Fiscal Year 2012 (“NDAA”) by imposing more stringent requirements on such countries to reduce Iranian crude oil purchases to zero and limiting the scope of exempt transactions. We expect these IFSR changes to be implemented via future regulations.
Additional Blocking Authorities
H.R.1950 expands OFAC’s authority to block parties who engage in Iran-related activities to include a range of new activities. Such activities include those related to transporting WMD- or terrorism-related goods, providing financial messaging services for designated banks, being related to the IRGC, and providing goods, technology, or services to Iran to commit serious human rights abuses against the Iranian people. (There are also provisions authorizing OFAC to block parties involved in serious human rights abuses in Syria.)
Exemption for Natural Gas Projects
H.R. 1905 includes an exemption for three specific categories of natural gas projects. These projects are (i) the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe, (ii) those that provide Turkey and European countries energy security from Russia and sanctioned countries, and (iii) those initiated before H.R. 1905’s enactment pursuant to a production-sharing agreement entered into with or a license granted by the government of a country other than Iran. These projects are exempt from any prohibitions or sanctions in H.R. 1905.
What EO 13622 Says
EO 13622 imposes various additional sanctions on Iran, some of which overlap with the expanded sanctions in H.R. 1905. OFAC issued Frequently Asked Questions regarding EO 13622.
EO 13622 authorizes OFAC to impose IFSR sanctions on non-U.S. financial institutions found to have "conducted or facilitated any significant financial transaction" related to any of the following: (i) NIOC or Naftiran Intertrade Company ("Naftiran"), (ii) the purchase or acquisition of petroleum or petroleum products from Iran, or (iii) the purchase or acquisition of petrochemical products from Iran. Non-U.S. financial institutions engaged in such activities may be prohibited from having, or have restrictions imposed on, their U.S. correspondent accounts.
In addition, ISA-type sanctions may be imposed on persons (including banks) engaged in a "significant transaction" for the purchase or acquisition of petroleum, petroleum products, or petrochemical products from Iran, or who own or control, or are owned or controlled by, a person engaged in these activities. EO 13622 does not define the term “significant transaction.” The above-described EO 13622 sanctions do not apply to countries that benefit from the NDAA exemption.
Finally, EO 13622 authorizes OFAC to block any person found to have provided support for, or goods or services in support of, NIOC, Naftiran, or the Central Bank of Iran, or the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran.