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The Iran Threat Reduction Act: Prohibitions on U.S. Companies and their Foreign Subsidiaries and New SEC Disclosure Obligations

Client Advisory

October 18, 2012

Introduction

On October 9, 2012, President Obama signed an Executive Order[1] implementing key provisions of the recently enacted Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”).[2]  The Act, aimed mainly at tightening the sanctions against Iran in order to compel the country to stop its pursuit of a nuclear weapon, introduces new prohibitions and disclosure requirements that may have a broad effect on U.S. entities affiliated with companies operating overseas and public companies registered under the Securities Exchange Act of 1934 (“Exchange Act”).

Most significantly, the Act makes U.S. persons and entities liable for their foreign subsidiaries’ involvement in sanctionable activity in or with Iran and further subjects foreign companies and their corporate officers to possible U.S. sanctions. In addition, the Act requires that companies subject to the reporting requirements of the Exchange Act make certain disclosures in their quarterly and annual reports filed with the Securities and Exchange Commission (“SEC”) relating to activities that they and their worldwide affiliates knowingly engage in involving Iran.

The Act and the October 9, 2012 Executive Order contain other sanctions and disincentive measures, particularly concentrating on energy-related services, petroleum resources, the mining, production and distribution of uranium, insurance and reinsurance services and shipping services to Iran. In this client advisory, we highlight two of the abovementioned aspects of the Act, which we believe will have a significant impact on both domestic and foreign companies.

Foreign subsidiaries of U.S. corporations now fully subject to Iranian sanctions

While foreign entities were subject to certain extraterritorial U.S. sanctions even before the Act (applying mainly to transactions relating to Iran's petroleum), they were not bound by the broader sanctions that apply to U.S. entities. Prior to the enactment of the Act, foreign subsidiaries of U.S. persons or entities were generally permitted to conduct transactions involving Iran so long as no U.S. persons or U.S.-origin goods or services were involved in the transaction.  Now, however, foreign entities “owned or controlled” by a U.S. person or entity are barred from “knowingly”[3] engaging directly or indirectly in most transactions with Iran, the Iranian government or “with a person subject to its jurisdiction,” to the same extent as U.S. companies.[4]  The Act required the President to prohibit such transactions within 60 days of its enactment and, accordingly, last week’s Executive Order implemented these restrictions. 

The Executive Order clarifies some of the requirements of the Act, but does not contain a definition for the term “entity owned or controlled by a United States person.”  Accordingly, it is important to note that the status of foreign entities which are less than wholly owned, or other affiliated entities which may be controlled, but not owned, by a U.S. person, is not certain. Similarly, the Executive Order does not define the term “ordinary resident of Iran” which is part of the definition of a person “subject to the jurisdiction of the Government of Iran,” with whom the foreign entities may not engage in business transactions. Therefore, it is not clear if, for instance, foreign entities with U.S. parents may employ persons of Iranian nationality if they are not permanent residents of the country in which they are employed.

Importantly, the Act and the Executive Order make the U.S. parent company (or person) liable for the violations of its foreign subsidiaries and civil penalties may be imposed on U.S. persons if the parent fails to "divest or terminate its business” with its foreign subsidiary not later than February 6, 2013 (180 days from the signing of the Act).[5]  Interestingly, according the language of the Act and the Executive Order, it appears that in order to use this 180 days’ “safe harbor,” the U.S. company should “divest or terminate” the relationship with its own subsidiary, rather than cause it to terminate the business with Iran, which may be more consistent with the law’s intention. In any event, because foreign companies have generally been permitted to do business with Iranian companies in the past, various existing complex business arrangements need to be addressed in time for companies to comply with the February 6, 2013 deadline.

New SEC Disclosure Requirements

In an effort to expose and penalize companies doing business with Iran, the Act establishes new SEC disclosure obligations for reporting companies that are engaged, directly or indirectly (though affiliates), in business transactions with Iran. Section 219 of the Act requires all companies who file annual or quarterly reports under Section 13 of the Exchange Act, including foreign private issuers, to comply with new disclosure obligations for certain triggering activities. The disclosure requirements will come into effect for all registrants with respect to annual or quarterly reports filed on or after February 6, 2013. 

Exchange Act reporting companies must disclose whether the company or any of its affiliates knowingly engaged in any of the following triggering activities:

  • the transfer (or provision of services after the transfer) of certain goods or technologies that are likely to be used to commit serious human rights abuses against the people of Iran;10] or
  • activities related to Iran’s energy sector,[6] including owning, operating, controlling or insuring a vessel which transports crude oil from Iran to another country;[7]
  • activities that would contribute to Iran’s ability to acquire or develop weapons of mass destruction and participation in a joint venture with the government of Iran and certain other persons and entities involving the mining, production or transportation of uranium,8] including participation in a joint venture with Iran relating to the mining, production or transportation of uranium;
  • activities with foreign financial institutions that facilitate efforts by the Government of Iran and related persons and entities to acquire or develop weapons of mass destruction;
  • activities with foreign financial institutions that facilitate efforts by the Government of Iran to support terrorism;
  • activities with foreign financial institutions that facilitate the activities of persons subject to financial sanctions under certain resolutions of the United Nations Security Council;
  • activities with foreign financial institutions that facilitate transactions or provide financial services for certain persons and entities, including Iran’s Revolutionary Guard Corps, whose property or property interests are blocked pursuant to the International Emergency Economic Powers Act;[9]
  • transactions with any “blocked persons” specified under Executive Orders Nos. 13224 and 13382 or with the “Government of Iran,”[11] without the specific authorization of a Federal department or agency, including the purchasing or facilitating the issuance of sovereign debt of the Government of Iran or an entity it owns or controls.

If a reporting company or its affiliate has engaged in any of the above triggering activities during the period covered by its annual or quarterly report (to be filed after February 6, 2013), the reporting company must disclose and explain them. The Act requires that this disclosure include a detailed, comprehensive report, including: (1) a detailed description of the activity, its nature and scope; (2) gross revenues and net profits attributable to the activity; and (3) whether the reporting company intends to continue to engage in such activities. 

Further, the Act requires that companies notify the SEC separately if their annual or quarterly report contains disclosure of triggering activities. After receiving such a notice, the SEC will promptly submit the report of activities to the President and various Congressional committees. The report will also be available to the public on the SEC’s website. When the activities involve dealings with entities other than the Government of Iran and its controlled entities, the President will be required to begin an investigation into whether sanctions under the Iran Sanctions Act of 1996 (“ISA”) are appropriate. The President will have 180 days after the beginning of this investigation to make a determination regarding such sanctions.

The failure of a reporting company to disclose any of the above-discussed Iran-related activities could subject the company to liability under the Exchange Act and even sanctions under ISA. 

Conclusion

The Act introduces new prohibitions and disclosure requirements that may have a far reaching impact on U.S. entities and foreign private issuers. To prepare for the February 6, 2013 compliance deadline, companies should review all activities conducted by their subsidiaries to make sure that they conform with U.S. law. Reporting companies should take the following steps to ensure their activities and those of their subsidiaries comply with the Act:

  • review their activities and the activities of their affiliates to determine whether there has been any conduct (i.e. triggering activities) that could be viewed as violating the Act;
  • analyze whether their data gathering systems, disclosure controls and other business procedures need to be modified in order to adequately track, record, summarize and report the above-mentioned activities;
  • update systems, controls and procedures as necessary; and
  • institute a method for disclosing conduct which violates the Act through a detailed report.

Oftentimes, large companies with subsidiaries overseas may experience a disconnect between their operations and those of their subsidiaries. It is imperative that companies obtain full knowledge of any interaction they or their subsidiaries have with the Iranian Government or Iranian entities in order to analyze whether these interactions might amount to activities which would trigger disclosure or other penalties under the Act.


Questions regarding this advisory should be addressed to Steven J. Glusband (212-238-8605, glusband@clm.com), Gideon Even-Or (212-238-8658, evenor@clm.com) or Natalie F. Wilson (212-238-8669, wilson@clm.com).

Endnotes


[1] Executive Order 13628, “Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Threat Reduction and Syria Human Rights Act of 2012 and Additional Sanctions with Respect to Iran.”

[2] Iran Threat Reduction and Syria Human Rights Act of 2012, Pub. L. No. 112-158 (August 10, 20120).

[3] Executive Order 13628, supra note 1, in Section 13(d): The term “knowingly” is defined by the Executive Order broadly so that “a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.”

[4] Iran Threat Reduction and Syria Human Rights Act of 2012, supra note 2, Section 218.

[5] Id., at Section 218(d); see also Executive Order 13628, supra note 1, Section 4(c).

[6] For full description of such activities see the Iran Sanctions Act of 1996 50 U.S.C. §1701, Section 5(a).

[7] Except countries that received exemptions as a result of their reduction in imports of Iranian oil.

[8] Iran Sanctions Act of 1996, supra note 6.

[9] Comprehensive Iran Sanctions and Divestment Act of 2010 124 Stat. 1312 ; Sections 104(c)(2) and 104(d)(1) .

[10] Id., at Section 105A(b)(2).

[11] As defined in the U.S. Code of Federal Regulations, 31 C.F.R. § 560.304.



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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