U.S. Government May Prohibit Sales to DOD by Companies with Affiliates Who Trade with Cuba, Iran, Sudan or Syria

International Alert

The National Defense Authorization Act for Fiscal Year 2013 ("NDAA") passed the House of Representatives in May. It is now pending in the Senate. In the bill passed by the House, Section 803 of the NDAA addresses trade with state sponsors of terrorism, currently Cuba, Iran, Sudan, and Syria ("U.S. embargoed countries"). Section 803 would prohibit the U.S. Department of Defense ("DOD") from entering into procurement contracts with any person or company that has "business operations" with a state sponsor of terrorism. The prohibition extends to business operations conducted by U.S. and non-U.S. parent companies, independent non-U.S. subsidiaries, subsidiaries organized under U.S. law, and other affiliated entities of a person or company wishing to contract with DOD. The bill does not maintain the current exemption for reexports of medicine, medical devices, or agricultural items under specific licenses issued by the Office of Foreign Assets Control ("OFAC") under the Trade Sanctions Reform and Export Enhancement Act of 2000 ("TSRA") or third country trade outside the scope of OFAC rules.

If passed by the Senate and signed into law, Section 803 would impact many U.S. and foreign firms in two ways:

(1) By its terms, the current language of the NDAA does not permit exemptions. For that reason, companies that rely on OFAC licenses for sales to sanctioned countries such as Iran, Sudan, Syria or Cuba under various OFAC regulations such as the TSRA AgMed program would be barred from DOD sales. Thus, the NDAA would preclude DOD from contracting with persons or companies that engage in licensed sales of agricultural products, medicine, or medical devices to U.S.-embargoed countries. Companies would be forced to choose between sales to DOD or licensed third-country trade with U.S. embargoed countries.

(2) Under the NDAA as drafted, any non-licensed sales to a U.S.-embargoed country by a foreign parent, affiliate, or independent foreign subsidiary could result in the same outcome--debarment by the DOD--regardless of involvement by U.S. persons or domestic concerns and regardless of whether the items exported from abroad contain any U.S.-origin content.

Section 803 could jeopardize the coalition between the United States and its allies regarding relations with Iran. If passed, this provision will force non-U.S. multinational companies to choose between (a) benign trade with Iran supported by their own governments and (b) DOD procurement involving their U.S. subsidiary. There are indications that certain allies of the United States will oppose Section 803 in its entirety.

More specifically, the NDAA legislation would expand several existing obligations that require DOD contractors to certify that they and entities owned or controlled by them comply with U.S. sanctions laws. The NDAA's expansion would prohibit sales to DOD if the contractor has OFAC-licensed transactions. In addition, the expansion would require the contractor's parent company and sister companies or affiliates under the common ownership of the parent company to certify they have no business operations with U.S. embargoed countries even when the contractor does not own or control the sister companies and affiliates. In addition, the expansion would extend the required certification to third country trade that is not otherwise regulated by certain U.S. sanctions laws.

The NDAA's proposed restrictions go beyond the new sanctions signed into law by the President just last week under the Iran Threat Reduction and Syria Human Rights Act of 2012 ("Act"). When implemented by regulations, this Act will hold U.S. parent companies liable for unlicensed transactions with Iran by their foreign subsidiaries and other owned or controlled non-U.S. entities. The Act will also prohibit third country trade with Iran by such non-U.S. entities if the trade would be prohibited by a U.S. person.  For a detailed discussion of the Act, see our alert of August 20, 2012.

There is sufficient time to communicate with the Senate on this matter during the next three and one-half weeks of the summer recess. Once the Congress returns from its summer recess, this matter could move quickly.

For more information, please contact:

Larry Christensen, lchristensen@milchev.com, 202-626-1469

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