On October 9, 2012, President Obama signed an Executive Order (“ITRA EO”) to implement portions of the Iran Threat Reduction and Human Rights Act of 2012 (“ITRA”), which was enacted on August 10, 2012. (Background on the ITRA is available in our recent Client Alert.) The ITRA EO represents a marked expansion of U.S. sanctions targeting Iran because it subjects non-U.S. entities owned or controlled by U.S. entities to the comprehensive prohibitions applicable to “U.S. Persons” (defined below) and makes U.S. parent companies liable for violations by their owned/controlled non-U.S. entities. The ITRA EO also provides for the blocking of individuals and entities in connection with human rights abuses or censorship in Iran and implements new potential sanctions under the Iran Sanctions Act (“ISA”). The ITRA EO became effective immediately.
Implications for Companies Engaging in Transactions with Iran
Though Iran has been subject to comprehensive U.S. trade sanctions for many years, separately incorporated non-U.S. subsidiaries of U.S. companies were generally not subject to these U.S. sanctions. Therefore, while U.S. Persons have been prohibited from virtually all dealings with Iran, the Government of Iran, or Iranian financial institutions, non-U.S. subsidiaries could engage in business with Iran under certain circumstances without violating U.S. sanctions. The ITRA EO extends the scope of prohibitions found primarily in the Iranian Transactions Regulations (“ITR”) to cover non-U.S. subsidiaries of U.S. companies so that their business with Iran is generally no longer permissible unless licensed or exempt, thereby implementing ITRA Section 218. The implementation of other ITRA provisions through the ITRA EO shows that increasing economic sanctions on Iran continues to be a priority for the U.S. Government.
What the ITRA EO Says
Expansion of U.S. Sanctions to Non-U.S. Subsidiaries
ITRA Section 218 extended the scope of current prohibitions found primarily in the ITR against dealings with Iran, the Government of Iran, and Iranian financial institutions by 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). Pursuant to the ITRA, these prohibitions now apply 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”).
Section 4 of the ITRA EO implements ITRA Section 218. Under this provision, Non-U.S. Subsidiaries are prohibited from knowingly engaging in transactions with the Government of Iran (including its owned/controlled entities) or with a “person subject to the jurisdiction of the Government of Iran” that would be prohibited if undertaken by a U.S. Person. For these purposes, a “person subject to the jurisdiction of the Government of Iran” is a person “organized under the laws of Iran or any jurisdiction within Iran, ordinarily resident in Iran, or in Iran, or owned or controlled by any of the foregoing,” which is consistent with the ITR. General authorizations, statutory exemptions, and specific licensing in the ITR are applicable to Non-U.S. Subsidiaries now subject to U.S. sanctions. Specific licenses include those issued under the Trade Sanctions Reform and Export Enhancement Act of 2000 for the export to Iran of agricultural commodities, food, medicine, and medical devices.
ITRA Section 218 authorizes the imposition of civil penalties against a U.S. parent company for a Non-U.S. Subsidiary's violations of U.S. sanctions but is silent on the issue of whether criminal penalties would be available for "willful" rather than "knowing" violations. The ITRA EO does not provide further clarity about this issue. Potential civil penalties per violation are $250,000 or twice the value of the transaction, whichever is greater. The ITRA EO provides that civil penalties will not be imposed against a U.S. parent company that, prior to February 6, 2013, divests from or terminates business with a Non-U.S. Subsidiary doing business with Iran through that date. By strictly implementing ITRA Section 218(d), the ITRA EO does not provide any general authorization for owned/controlled non-U.S. entities to wind down Iran-related transactions or business, and specific licenses from the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) may be required to complete such transactions.
Additional Blocking Authorities
Pursuant to the ITRA, the ITRA EO also authorizes OFAC to block the property or property interests of (i) persons who knowingly supply, on or after August 10, 2012, goods, technology, or services used by the Government of Iran to commit serious human rights abuses or (ii) persons who, on or after June 12, 2009, engage in acts of censorship related to Iran. Targeted services include those relating to hardware, software, or specialized information or professional consulting, engineering, or support services.
Implementation of Potential ISA Sanctions
The ITRA added three new potential sanctions that may be imposed on sanctioned persons engaged in activities targeted by the ISA or ITRA. 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) imposition of ISA sanctions on a sanctioned person’s principal executive officers. The ITRA EO provides that OFAC is responsible for implementing the first and third new ISA sanctions as directed by the State Department.