Iran Sanctions: U.S. Bans Foreign Subsidiaries of U.S. Companies from Doing Business with Iran

President Obama issued an Executive Order on Oct. 9, 2012, implementing recent legislation barring foreign subsidiaries of U.S. companies from engaging in most transactions with Iran and making the U.S. parent companies liable for violations by their foreign subsidiaries. Prior to Oct. 9, such foreign subsidiaries were subject to extraterritorial U.S. sanctions that applied to transactions relating to Iran's petroleum and with certain barred entities, but not to the broad U.S. sanctions on Iran that apply to U.S. entities. However, the U.S. parent and U.S. citizens, wherever located, were and are prohibited from facilitating transactions with Iran that they cannot enter into directly.

On Aug. 10, 2012, the president signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITSHRA or the "Act"), further ratcheting-up sanctions on Iran through a wide range of sanctions. (See our International Trade alert, "U.S. Significantly Expands Sanctions Against Iran Considerably Limiting Trade in Petroleum Products to and From Iran," Aug. 16, 2012.)

The Order

On Oct. 9, 2012, the president issued an Executive Order (the "Order"), implementing a prohibition as required under the Section 218 of the Act that:

• prohibits any foreign entity owned or controlled by a U.S. individual or U.S. company from knowingly engaging directly or indirectly in most transactions with Iran, the Iranian government, or Iranian entities to the same extent as such prohibitions apply to U.S. persons
• makes the U.S. parent company liable for the violations of its foreign subsidiaries and makes it subject to civil penalties
• provides for a "safe harbor" for the U.S. parent company, if the parent "divests or terminates its business with its [foreign subsidiary] not later than Feb. 6, 2013."

No Contract Sanctity

The Order expressly provides that there is no grandfathering of preexisting contractual obligations. OFAC guidance indicates that certain activities falling under general license or authorized pursuant to certain executive orders may continue. However, a U.S. parent company's existing license (for example, to export medical equipment to Iran) will likely not cover the activities of its foreign subsidiaries not authorized in the parent's license that previously did not require a license.

Requirement to Divest

In September 2012, a coalition of U.S. trade groups filed a public letter with the U.S. Treasury Department Office of Foreign Assets Controls (OFAC) and the U.S. State Department outlining the potential ramifications of Section 218 of the Act and suggesting clarifications. A major concern of the trade groups was that the U.S. person must "divest" itself of the foreign subsidiary rather than cause the foreign subsidiary to cease doing business with Iran in order to fall within safe harbor. Limited guidance issued by OFAC in connection with the Order appears to indicate that the U.S. parent must divest or terminate business with the foreign subsidiary to take advantage of the safe harbor. However, it is possible that regulations to be issued by OFAC in the near future will provide additional clarification or guidance.

Particular Concerns for Public Companies

Under ITSHRA, U.S. publicly traded companies will be subject to enhanced disclosure requirements related to Iran in their annual and quarterly reports filed with the Securities and Exchange Commission (SEC). The new disclosure requirements will apply to reports filed after Feb. 6, 2013, and will cover specified Iran-related activities that occurred during the periods covered by such reports.

In particular, under ITSHRA §219, if the issuer, or any affiliate of the issuer during the relevant reporting period, knowingly engages in certain Iran-related transactions, they must file a report detailing the nature and extent of the activity, the gross revenues and net profits attributable to the activity, and whether the issuer or its affiliates intends to continue the activity. The reports will be published on the SEC website. For a U.S. parent company that is publicly traded this creates additional compliance considerations for U.S. parent companies regarding how to address the change in law pertaining to U.S. subsidiary activity in Iran.

What Actions Should U.S. Companies Be Taking?

While Section 218 of the Act may have been targeting U.S. parent companies that had established foreign subsidiaries primarily or exclusively to do business in Iran (for example, in the oil and gas sector), some U.S. parent companies with foreign subsidiaries that may be directly or indirectly engaged in transactions relating to Iran will face difficult decisions in that they may not be able to avoid potential penalties by winding down their foreign subsidiary's business with Iran. While regulations to be issued by OFAC may provide more specific guidance and address pending questions, U.S. parent companies should not wait for these regulations, but should be taking action now to mitigate their exposure to penalties. The best course of action will depend on the circumstances of each particular company.

Petroleum-Related Sanctions

The Order also implements other sections of the Act, such as those relating to the provision of goods and services relating to Iran's petroleum sector. In particular, for shipments of oil to countries that have received presidential waivers under certain U.S. sanctions, the Order clarifies language in a prior Executive Order to allow parties not under the primary jurisdiction of the country that received the waiver to engage in most related transactions. For example, this would now allow a Norwegian ship owner to provide a vessel for carriage of oil to India (and insurers from various countries to insure the voyage), rather than requiring such parties to be from India.

U.S. sanctions on Iran are complex. This alert merely highlights certain provisions of the Order, and therefore, should not be construed as comprehensive or as legal advice.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.