On August 10, President Obama signed into law another expansion of US sanctions against Iran and Syria that, most significantly, makes US firms liable for their foreign subsidiaries’ involvement in sanctionable activity in Iran and further subjects non-US firms and their corporate officers to possible US sanctions. The Iran Threat Reduction and Syria Human Rights Act of 2012 (“Act”), like its 2010 predecessor, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”), broadens the Iran Sanctions Act of 1996 (“ISA”) by requiring the President to take action against non-US firms involved directly or indirectly in specified transactions with Iran. In its broad extraterritorial application, the Act provides strong disincentives to firms that provide energy-related services, insurance and reinsurance services, and shipping services to Iran. It targets not just the firms themselves, but also their corporate officers and principals by restricting their access to the United States and permitting the imposition of other sanctions against them in their individual capacities. The Act also applies sanctions to firms involved in joint ventures with Iran related to the development of petroleum resources and the mining, production and distribution of uranium, establishes new reporting requirements for issuers under the Securities Exchange Act of 1934, and expands both the “menu” of sanctions available to the President and the requisite number of sanctions that the President must apply to firms engaging in sanctionable conduct.¹ 

The Act provides exceptions for many of its restrictions and grants the President some discretionary waiver authority. However, these exceptions and waivers are narrow and the Administration’s recent history of enforcement demonstrates both an increased focus on Iran and an increased willingness to apply US law in an extraterritorial manner. Companies should monitor ongoing implementation of the new legislation, review its potential impact, and establish effective due diligence and compliance programs that address their conduct in the United States and abroad.

This legislative action targeting Iran complements increasingly strong executive action. Last month, President Obama signed Executive Order 13622, “Authorizing Additional Sanctions With Respect to Iran,” which made sanctionable knowingly conducting or facilitating significant transactions with a private or public foreign financial institution or other entity for the purchase or acquisition of Iranian oil. It also authorized sanctions against those who provide material support to major entities in the Iranian energy sector or the Central Bank of Iran for the purchase or acquisition of US bank notes or precious metals by the Government of Iran. The Executive Order was accompanied by the Treasury Department imposition of sanctions under CISADA against two banks—including Bank of Kunlun in China—found to have facilitated significant transactions or providing significant financial services to previously designated Iranian banks. These measures are the latest in a series of Presidential actions this year targeting Iran’s access to international financial markets and those who engage in activities intended to evade existing sanctions.

Application of US Sanctions Against Iran to Foreign Subsidiaries of US Firms

Previously, US firms were not liable under US sanctions law with respect to Iran-related transactions of their foreign subsidiaries if neither the US firm itself nor any individual who was a US person was involved in such transactions. The Act extends the reach of US sanctions law by directing the President to prohibit an entity—including a partnership, association, trust, joint venture, and corporation—owned or controlled by a US person and established or maintained outside the United States from knowingly engaging in any transaction with the Government of Iran, or any person subject to its jurisdiction, that would be prohibited if it were engaged in by the US person or in the United States.

Notably, the Act provides that civil penalties may be assessed against a US person if a non-US entity that it owns or controls attempts to violate, conspires to violate, or causes a violation as described above.

Expanded Scope of Activities Now Subject to ISA/CISADA Sanctions

As we discussed in an earlier alert, CISADA amended ISA by requiring the imposition of sanctions against non-US firms engaged in certain specified activities, including investment in Iran’s petroleum production, transactions that could facilitate the maintenance or expansion of Iran’s refined petroleum industry, and exports of refined petroleum products to Iran. CISADA also added three new punitive measures to ISA’s “menu” of sanctions that could be imposed against violating firms.

The Act signed on Friday further expands the scope of ISA/CISADA by requiring the imposition of sanctions against parties engaged in the following activities:

• Joint ventures relating to the development of petroleum resources: Any person who knowingly participates in a joint venture established after January 1, 2002 with respect to the development of petroleum resources outside of Iran, if the Government of Iran is a “substantial partner or investor” or could (e.g., through a direct operational role in the JV) receive technological knowledge or equipment that could directly and significantly contribute to its ability to develop petroleum resources in Iran;
• Transportation of crude oil from Iran: Any person who is a controlling beneficial owner of, or otherwise owns, operates, controls, or insures, a vessel that is used to transport crude oil from Iran to another country. Sanctions apply to controlling beneficial owners who have “actual knowledge” of the use of the vessel and to those who own, operate, control, or insure the vessel if they “knew or should have known” of the use. The sanction is applicable only if the President has made a sufficiency finding under the National Defense Authorization Act of 2012 (“NDAA”) with regard to the global availability of non-Iranian crude, and it includes an exception with respect to the transportation of crude oil from Iran to countries that have been granted an exception under the NDAA for reducing their imports of Iranian crude;
• Concealing Iranian origin of crude oil and refined petroleum products: Any person who is a controlling beneficial owner of, or otherwise owns, operates, controls, or insures, a vessel that is used in a manner that conceals the Iranian origin of crude or refined petroleum products transported on that vessel (e.g., by obscuring or concealing the ownership, operation, or control of the vessel by the Government of Iran, the National Iranian Tanker Company (“NITC”), or the Islamic Republic of Iran Shipping Lines). Sanctions apply to controlling beneficial owners who have “actual knowledge” of the use of the vessel and to those who own, operate, control, or insure the vessel if they “knew or should have known” of the use;
• Joint ventures relating to the mining, production or transportation of uranium: Any person who knowingly participates in a joint venture involving any activity related to the mining, production, or transportation of uranium, if the joint venture is established on or before February 2, 2012 with the Government of Iran, an entity acting at its direction or that it owns or controls, or an entity incorporated in Iran or subject to the Government of Iran’s jurisdiction. Sanctions would also apply to joint ventures established prior to February 2, 2012 if uranium is transferred directly or indirectly to Iran through such joint ventures, if the Government of Iran receives significant revenue from them, or if it could receive previously unavailable technological knowledge or equipment that could contribute materially to Iran’s ability to develop nuclear weapons or related technologies;
• Provision of underwriting services or insurance or reinsurance: Any person who knowingly provides underwriting services or insurance or reinsurance for the National Iranian Oil Company (“NIOC”), the NITC, or a successor company. The Act gives the President the discretion not to impose sanctions if he finds that the person has exercised due diligence in establishing and enforcing compliance procedures, and it disallows sanctions for the provision of insurance or reinsurance for activities relating to the provision of food, medicine, medical devices or humanitarian assistance; and
• Purchase, subscription to, or facilitation of the issuance of debt: Any person who knowingly purchases, subscribes to, or facilitates the issuance of sovereign debt of the Government of Iran or any entity that it owns or controls, including government bonds.

Several of the new prohibitions are designed to encourage firms that are currently engaged in sanctionable conduct to terminate their participation in those activities. For example, the Act does not allow the imposition of sanctions on persons who terminate their participation in a sanctionable joint venture within 180 days of the date of enactment of the Act, and it gives the President the discretion not to sanction underwriters, insurers or reinsurers who provide reasonable assurances that they will cease providing their services to the NITC or the NIOC not later than 120 days after enactment of the Act.

In addition to these new expansions of ISA/CISADA, the Act codifies Executive Order 13590, which imposed ISA/CISADA-type sanctions against firms involved in transactions with Iran that could directly and significantly contribute to the maintenance or enhancement of Iran’s ability to develop petroleum resources located in Iran, or to the maintenance or expansion of Iran’s domestic production of petrochemical products. It also amends the ISA/CISADA sanctions with respect to the export, transfer, or provision to Iran of goods, services, technology, and other items that would materially contribute to Iran’s ability to acquire or develop chemical, biological or nuclear weapons, or destabilizing numbers and types of advanced conventional weapons. As amended, this section of ISA/CISADA now applies to transactions with any party (i.e., not just Iran) where the firm knew that the transaction would likely result in another person exporting, transferring, transshipping, or otherwise providing the item to Iran and that the transaction would contribute to weapons proliferation. Finally, the Act expands the scope of key definitions under ISA/CISADA to target those associated with infrastructure improvements that are provided for the maintenance or expansion of Iran’s domestic refined petroleum production, e.g., port facilities, railways and roads.

Expansion of Sanctions Available to the President Under ISA

ISA/CISADA included nine sanctions that the President could impose on parties engaged in prohibited transactions: 1) prohibition on receiving Export-Import Bank credits; 2) prohibition on receiving licenses under various export control regimes; 3) prohibition on receipt of large loans from US financial institutions; 4) for financial institutions, restrictions on their ability to deal in US government bonds and serve as a repository for government funds; 5) prohibition on government procurement from the violating entity; 6) prohibition on “transactions in foreign exchange that are subject to the jurisdiction of the United States and in which the sanctioned person has any interest”; 7) prohibition on transfers of credit or payments that involve “any interest of the sanctioned person” through US financial institutions; 8) prohibition on any person from participating in any property transaction “with respect to which the sanctioned person has any interest”; and 9) additional sanctions to restrict imports from that party, in accordance with the International Emergency Economic Powers Act.

The new legislation provides for three additional sanctions, and the President must now impose five or more of the sanctions authorized under the Act. One unique feature of the new sanctions is that two of the measures target the individuals involved in the decision-making at sanctioned firms, as opposed to the firms themselves. The additional sanctions are:

• Prohibition on US persons investing in or purchasing significant amounts of equity or debt instruments of a sanctioned person;
• Prohibition on the provision of visas to, and the entry into the United States of, corporate officers or principals of, or shareholders with a controlling interest in, a sanctioned entity; and
• Imposition of ISA/CISADA sanctions on the principal executive officers of any sanctioned person, or on persons performing similar functions and with similar authority.

The Act also allows the President to prohibit a vessel owned, operated or controlled by a sanctioned person from landing at a US port for not more than two years if the person used the vessel in a manner that concealed the Iranian origin of the crude or refined petroleum products that it transported.

Expansion of CISADA Section 104

Section 104(c) of CISADA requires the Secretary of the Treasury to prohibit or impose strict conditions on the opening or maintaining of correspondent and payable-through accounts in the United States by foreign financial institutions found to have knowingly engaged in certain proscribed activities, including the facilitation of efforts by the Government of Iran to acquire or develop weapons of mass destruction or provide support for international terrorism and the facilitation of a significant transaction or provision of significant financial services for Iran’s Revolutionary Guard Corps ("IRGC") or other persons and entities whose property is blocked by the Treasury Department in connection with those activities. The Treasury Department regulations effectuating these provisions are included in the Iranian Financial Sanctions Regulations, 31 C.F.R. § 561.

The Act amends Section 104 to expand its scope:

• Section 104 previously applied to foreign financial institutions that facilitated the activities of persons subject to United Nations Security Council resolutions imposing sanctions on Iran. The Act expands that provision to include foreign financial institutions that facilitate the activity of anyone acting on behalf of, at the direction of, or under the ownership or control of, such persons;
• The Act expands the application of Section 104 to foreign financial institutions that facilitate the activity of any person, not just any financial institution, whose property or interests in property are blocked by the Treasury Department for activities related to the proliferation of weapons of mass destruction; and
• The Act expands the application of Section 104 to foreign financial institutions found to knowingly facilitate or participate or assist in certain proscribed activities, including by acting on behalf of, at the direction of, or as an intermediary for, another person with respect to the activity; attempting or conspiring to facilitate or participate in the activity; or being owned or controlled by a foreign financial institution found to be knowingly engaged in the activity.

New SEC Reporting Requirement

The Act creates a new disclosure requirement for issuers required to file reports under Section 13 of the Securities Exchange Act of 1934. The required disclosure includes whether the issuer or any of its affiliates knowingly engaged in an activity described in Section 5(a) or 5(b) of ISA or Section 104(c)(2) or 105A(b)(2) of CISADA, or knowingly conducted any transaction or dealing with a person whose property and interests in property are blocked pursuant to various Executive Orders and Treasury Department sanctions related to Iran.

If an issuer (or its affiliate) does engage in any of these activities, it must provide a detailed description of the activity in its disclosure, including the gross revenues and net profits gained thereby, and provide a separate notice to the Commission, which the Commission must transmit to the President and the Congress and make publicly available on the Internet. Upon receipt of the notice, the President must initiate an investigation into the possible imposition of sanctions under ISA/CISADA.

Additional Sanctions

In addition to the sanctions described above, the Act directs the President to block the property and interests in property of parties that sell, lease, or provide vessels, insurance, reinsurance, or another shipping service for transportation of goods to or from Iran that could materially contribute to the Government of Iran’s proliferation of weapons of mass destruction or its support for international terrorism. It also extends the block—depending on the level of knowledge—to any successor entity to the party, to any entity that owns or controls the party, and to any entity owned or controlled by, or under common ownership with, the party.

The Act also requires the Secretary of the Treasury to submit a report to Congress on persons identified as providing specialized financial messaging services to, or enabling or facilitating direct or indirect access to such services for, the Central Bank of Iran or other Iranian financial institutions described in Section 104 of CISADA. The Act authorizes the President to impose sanctions on such persons unless the person has terminated its provision of the services in response to the sanctions regime of its governing foreign law. Earlier this year, the European Council established prohibitions targeting SWIFT, which is headquartered in Belgium.

Other Key Measures

• The Act denies visa privileges and access to the United States for senior officials in the Government of Iran involved in proliferation activities, international terrorism, and human rights abuses;
• The Act imposes further sanctions with respect to Iran’s Revolutionary Guard Corps, including an expansion of ISA’s procurement prohibition to foreign persons that engage in certain restricted activities with the IRGC and an expansion of ISA/CISADA and other sanctions on individuals and foreign government agencies acting in cooperation with the IRGC;
• The Act provides for the imposition of specific sanctions, including the blocking of property and interests in property, against a person involved in the transfer of goods or technologies or provision of services to Iran or Syria that the Iranian or Syrian government is likely to use to commit serious human rights abuses against its people, including firearms or ammunition and “sensitive technology” (i.e., hardware, software, telecommunications equipment and other items that are to be used to restrict the free flow of unbiased information in Iran or Syria or disrupt, monitor, or otherwise restrict speech);
• The Act subjects blocked assets that are the subject of proceedings in Peterson et al. v. Islamic Republic of Iran et al., the case brought by victims of the 1983 attack on the US Marine barracks in Beirut, to execution or attachment to satisfy compensatory damage awards against Iran.

¹ The text of the law as enacted can be found here.