U.S. sanctions on trade with Iranian interests are expanding to cover more activities, and public companies will soon have to disclose any such activities in their SEC reports.

Controlled Foreign Companies Now Subject to Iran Sanctions

Our previous client advisories have highlighted the risks facing U.S. businesses that run afoul of the Iranian sanctions regime, intentionally or not1. Now the stakes are higher. The Iran Threat Reduction and Syria Human Rights Act of 2012 (the Sanctions Act) and a recent Executive Orderincrease the longstanding economic sanctions on Iran. Significantly, they require foreign companies owned or controlled by U.S. companies to start complying with the sanctions and would penalize a U.S. parent for its subsidiary’s noncompliance. This closing of the foreign subsidiary loophole means that U.S. companies with foreign subsidiaries, or U.S. investors planning to acquire control of a foreign company, need to take steps to avoid violations. Divestiture of the controlled company by February 6, 2013 is an approach provided by the Sanctions Act.

New Reporting Requirements

In addition, the Sanctions Act requires public reporting companies, including foreign private issuers, to disclose such activities by themselves or their control affiliates (including parent companies) in their annual and quarterly Securities and Exchange Commission reports.

These new disclosures will first be required in Forms 10-K and 10-Q required to be filed after February 6, 2013, which would cover activities during the fourth calendar quarter of 2012. Reporting companies will be required to disclose each activity in which the reporting company or any of its affiliates was knowingly engaged during the period covered by the report, if such activity is sanctioned under:

  • Sections 5(a) or (b) of the Iran Sanctions Act of 1996, which impose sanctions on investments and other transactions that directly or indirectly enhance:
    • the development of the petroleum resources of Iran;
    • the production of refined petroleum products in Iran;
    • the exportation of refined petroleum products to Iran; or
    • the ability of Iran to develop weapons of mass destruction or other military capabilities; or
  • Sections 104(c)(2) or (d)(1) or Section 105A(b)(2) of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, which prohibit activities (including by financial institutions) that:
    • facilitate efforts by various parties to acquire or develop weapons of mass destruction or support terrorism;
    • facilitate the activities of certain persons subject to sanctions by the United Nations Security Council; or
    • benefit Iran’s Revolutionary Guard Corps or other persons whose assets have been blocked by the United States.

A reporting company must also disclose any transaction or dealing that it or one of its affiliates knowingly engaged in with:

  • any person whose property is blocked under Executive Order No. 13224 — persons who commit, threaten to commit or support terrorism;
  • any person whose property is blocked under Executive Order No. 13382 — proliferators of mass destruction and their supporters; or
  • the Government of Iran or any entity owned or controlled by, or acting on behalf of, the Government, without specific authorization to do so from the U.S. government.

Disclosure of any of these activities must include a detailed description of (i) the nature and extent of the activity, (ii) the gross revenues and net profits, if any, attributable to the activity, and (iii) whether the reporting company or its affiliate intends to continue the activity.

The reporting company also must file a separate notice with the SEC regarding the reportable activity. The SEC is required to post this notice on its website and transmit the relevant report to the President and certain Congressional committees. Upon receipt of such report, the President is required to initiate an investigation into the possible imposition of sanctions against the reporting company or its affiliate.

What to Do Now

Every reporting company should promptly:

  • determine whether it or any of its affiliates, including foreign owned or controlled companies, is engaged in any of the disclosable activities and, if so, how to come into compliance before February 6, 2013;
  • develop or enhance compliance policies and procedures to identify potentially sanctionable or disclosable actions before they are taken; and
  • enhance its disclosure controls and procedures to ensure that any such activities are properly disclosed in future SEC reports.