New Iran Sanctions Legislation: Tighter Restrictions on Indirect Dealings and Enhanced Reporting Obligations

August 14, 2012

On Friday, August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act (the "Act"), greatly expanding the scope of Iran sanctions.  According to Representative Ileana Ros-Lehtinen, a principal proponent, the Act "seeks to tighten the chokehold on the regime beyond anything that has been done before."[1]  Among its most important provisions, the Act places tighter restrictions on U.S. companies that indirectly transact business with Iran through foreign subsidiaries.  Additionally, it imposes disclosure obligations on public companies that violate Iran sanctions.

Expanded Sanctions

The Act vastly expands the reach of sanctioned activity under the International Emergency Economic Powers Act ("IEEPA").  Section 218 of the Act directs the President to prohibit

an entity owned or controlled by a United States person and established or maintained outside the United States from knowingly engaging in any transaction directly or indirectly with the Government of Iran or any person subject to the jurisdiction of the Government of Iran that would be prohibited [pursuant to the IEEPA] if the transaction were engaged in by a United States person or in the United States.[2]

Though it awaits regulatory implementation, this language represents a tidal shift, as it effectively bars trade with Iran through foreign subsidiaries.  If implemented in this manner, the program would be analogous to the prohibition against U.S. companies and their foreign subsidiaries doing business with Cuba. 

Congress has for years attempted to enact similar expansions.  Prior legislation met stiff opposition from both Republican and Democratic administrations, because American allies objected to the extraterritorial reach of such a restriction.  Those allies, desiring to regulate businesses under their own laws, saw the expansion of U.S. law as an infringement on their ability to regulate domestic business.  The European Union and Canada have gone so far as to set up "blocking" statutes, which prohibit compliance with Cuba sanctions.  However, election-year politics have pushed the Obama administration to embrace this latest round of Iran sanctions, despite any latent resistance from foreign governments.

Violators of this new provision face civil penalties of $250,000 or twice the value of the prohibited transaction.[3]  But the Act also provides a safe harbor, preventing liability if the U.S. person divests or terminates its business with the entity within 180 days of enactment; that is, by February 6, 2013.[4]  All U.S. persons–corporations, companies, partnerships–engaged in international trade should take this opportunity to review their current organizational structure and determine if any of their foreign affiliates may be involved in sanctionable activities.

Reporting Obligations

Public companies face additional reporting requirements under the Act if they engage in certain prohibited transactions involving Iran.  The Act amends section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") to require an issuer that knowingly engaged in a sanctionable transaction involving blocked persons (e.g., terrorist organizations or the government of Iran), the proliferation of weapons of mass destruction, or substantial investment in the Iranian petroleum industry to disclose such violation in its quarterly and annual reports.[5]  The disclosure must describe the activity in detail and include:

• the nature and extent of the activity;
• the gross revenue and profit attributable to the activity; and
• whether the issuer or its affiliate intends to continue the activity.[6]

Additionally, if a company discloses in its quarterly or annual report that it knowingly engaged in this prohibited activity, the company must file a separate notice of such disclosure for publication on the SEC’s website.[7]  The SEC must send this notice to the President; the House Committees on Foreign Affairs and Financial Services; and the Senate Committees on Foreign Relations and Banking, Housing, and Urban Affairs.[8]  The Act also provides that, as a consequence of receiving such notice, the President must investigate the disclosed activity and, within 180 days of initiating the investigation, determine whether to impose sanctions.[9]  These reporting provisions will "take effect with respect to reports required to be filed . . . after" February 6, 2013.[10]  Because the Act amends the Exchange Act directly, it is not conditioned on SEC rulemaking, although the SEC does have the authority to clarify the reporting obligation through rulemaking.

Additional Provisions

The Act includes several other provisions that are likely to have a narrower effect than those discussed above.  Title III, for example, augments the United States’s abilities to identify officers in Iran’s Revolutionary Guard Corps and imposes greater sanctions on those who provide support to it; whereas other provisions expand restrictions on Iran’s energy sector[11] and financial instruments issued by the Government of Iran.[12]  And title VII augments sanctions against Syria in response to the Assad regime’s myriad human-rights violations. 

* * * 

Expanded prohibitions under the Act place companies at risk of inadvertently engaging in illegal activities involving Iran, which were once legal.  Compliance officers should review foreign affiliates that may run afoul of these new restrictions.  Proactive changes to company operations, aimed at preventing impermissible indirect dealings with Iran, may head off burdensome penalties and reporting obligations while preventing ugly public-relations gaffes involving this pariah state.