Expanded U.S. Sanctions Against Iran Implemented by October 9 Executive Order

International Alert

On October 9, 2012, the President took the action mandated by Section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the "Act"), which became law on August 10, 2012.1 Section 218 of the Act directed the President to prohibit foreign entities owned or controlled by U.S. persons 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 by orders or regulations issued under the International Emergency Economic Powers Act ("IEEPA") if the transaction were engaged in by a United States person or in the United States. The Presidential action took the form of an Executive Order (the "Implementing Order"), and limited guidance was issued concurrently by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC").

Section 4(a) of the Implementing Order addressed the Section 218 mandate by providing that "no entity owned or controlled by a United States person and established or maintained outside the United States may knowingly engage in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran, if that transaction would be prohibited by [certain enumerated Executive Orders or regulations issued thereunder], if the transaction were engaged in by a United States person or in the United States."

The enumerated Executive Orders are (i) the three 1995 and 1997 orders that authorize the sweeping U.S. embargo of trade with Iran embodied in the Iranian Transaction Regulations; (ii) the February 5, 2012 order blocking all interests and property of the Government of Iran; (iii) the provisions of the August 2, 2012 order blocking all property and interests in property of persons determined by the Secretary of the Treasury to have materially assisted, sponsored or provided financial, material or technological support for, or goods or services in support of, the National Iranian Oil Company, Naftiran Intertrade Company, or the Central Bank of Iran, or the purchase or acquisition of U.S. bank notes or precious metals by the Government of Iran; and (iv) the provisions of the Implementing Order prohibiting transactions that evade or avoid (or are designed to), cause a violation of, or attempt to violate, the Iranian Transactions Regulations and underlying orders, the February 5, 2012 blocking order, or the Implementing Order, and conspiracies to violate these regulations and orders.

The targeted approach taken in Section 4(a) of the Implementing Order arguably is narrower than required by Section 218(b) of the Act, which extended to all transactions with the Government of Iran or subject to its jurisdiction prohibited by orders or regulations issued pursuant to IEEPA. Transactions related to Iran prohibited under IEEPA as to United States persons but not addressed in Section 4(a) notably include transactions prohibited by OFAC's non-proliferation sanctions program, under which property and interests in property of numerous persons and vessels (both Iranian and non-Iranian) have been blocked for support of Iran’s proliferation activities. Also excluded from the scope of Section 4(a) are the Export Administration Regulations ("EAR"), which currently are authorized under IEEPA, and the Secretary of Commerce, whose responsibilities include enforcement of the EAR, was not listed alongside the Secretaries of the Treasury and State in the Presidential Memorandum delegating functions and authorities under Section 218 of the Act. Thus, the extent to which the EAR and other IEEPA orders and regulations omitted from the list contained in Section 4(a) apply to U.S.-controlled foreign entities remains an open question.

Section 13 of the Implementing Order defines certain terms used in Section 4 and Section 218 of the Act. Some of these terms serve to clarify which U.S.-controlled foreign entities are subject to the prohibition, while others speak to the scope of the prohibition itself.

The definition of the term "entity" contained in Section 218 of the Act has been expanded slightly by Section 13(a) to include any "group" or "subgroup" in addition to any "partnership, association, trust, joint venture, corporation, or other organization." Thus, it appears that OFAC may look beyond strict legal form in identifying foreign entities subject to the prohibition.

The definition of the term "United States person" mirrors the definition of that term in the Iranian Transactions Regulations – i.e., any United States citizen, permanent resident alien, entity organized under the laws of the United States or any jurisdiction within the United States (including foreign branches), or any person in the United States. Section 13(e) provides that the term "person" means either an individual or an entity. These definitions make it clear that foreign entities owned or controlled by U.S. individuals are equally subject to the prohibition – i.e., the prohibition does not apply solely to foreign subsidiaries of U.S. entities.

Not reproduced in Section 13 of the Implementing Order is the definition of the term "own or control" that appears in Section 218(a)(2) of the Act. Section 4 of the Implementing Order must therefore be read in conjunction with the statutory definition, which defines the term to mean, "with respect to an entity –

(a) to hold more than 50 percent of the equity interest by vote or value in the entity;
(b) to hold a majority of seats on the board of directors of the entity; or
(c) to otherwise control the actions, policies, or personnel decisions of the entity."

Taken together with the definitions of "person" and "United States person," the third category of control makes it clear that foreign entities subject to the prohibition may be controlled by means other than ownership or board membership. Thus, for example, management control of a foreign entity by U.S. citizens may subject the entity to the prohibition even if the entity is not U.S.-owned and the U.S. citizens are not involved in the entity’s transactions with Iran.

The term "Government of Iran" as defined in Section 13(b) "includes the Government of Iran, any political subdivision, agency, or instrumentality thereof, including the Central Bank of Iran, and any person owned or controlled by, or acting for or on behalf of, the Government of Iran." This definition essentially mirrors that contained in Section 560.304 of the Iranian Transactions Regulations. The term "subject to the jurisdiction of the Government of Iran" is defined to mean "a person organized under the laws of Iran or any jurisdiction within Iran, ordinarily resident in Iran, or in Iran, or owned or controlled by any of the foregoing." Inclusion of persons "in Iran" within the scope of the prohibition is problematic for U.S.- controlled foreign entities providing goods and services to non-Iranian entities whose operations may place them "in Iran" from time to time.

The definition of "knowingly" gives notice that willful blindness will not exculpate prohibited conduct ("the terms 'knowledge' and 'knowingly,' with respect to conduct, a circumstance, or a result, mean that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result"). In other words, liability may be imposed even if a party did not have actual knowledge, but should have known, that its conduct was prohibited.

Section 4(d) of the Implementing Order makes it clear that there will be no "carve out" from the prohibition in order to preserve contract sanctity, stating that the prohibition applies "notwithstanding any contract entered into . . . prior to the date of" the Implementing Order. The prohibition also is stated to apply notwithstanding "any license or permit granted prior to the date of this order" but the intent of this language is unclear, as it appears to be inconsistent with the OFAC guidance. The OFAC guidance provides that to the extent a transaction is exempt from the prohibitions of the Iranian Transactions Regulations or the Executive Orders enumerated in Section 4(a), or is authorized by a general license issued pursuant to these authorities if engaged in by a U.S. person, "it would not be prohibited for a foreign entity to engage in the transaction, provided that it satisfies all the conditions and requirements of the exemption or general license."

In addition, Section 4(d) of the Implementing Order contemplates that statutes or regulations, orders, directives, or licenses issued pursuant to the Implementing Order may authorize conduct subject to the prohibition. OFAC guidance clarifies that "if the transaction is one for which a U.S. person might apply for a specific license — for example, the exportation of medical devices to Iran — a foreign subsidiary or its U.S. parent may apply for a specific license for the foreign subsidiary to engage in the transaction." However, the guidance also states that "whether a U.S. parent company’s specific license covers transactions by its foreign subsidiary that are otherwise prohibited by section 4 of the Order will depend on the terms of that license and the scope of the authorized activities." Thus, parties to licenses involving U.S.-controlled foreign entities issued prior to the date of the Implementing Order should confirm with OFAC that their licenses provide adequate protection against violation of the prohibition.

Section 218(c) of the Act provides that civil penalties will apply to a U.S. person who owns or controls the foreign entity that violates, attempts to violate, conspires to violate or causes a violation of the prohibition against dealings with Iran. Section 4(b) of the Implementing Order, on the other hand, states that penalties "may be assessed" against the U.S. person (emphasis added), although the guidance issued by OFAC regarding the Implementing Order more closely follows the statutory language. As provided in the guidance, "civil penalties for the foreign subsidiary’s violation shall be applied to the U.S. parent company to the same extent that they would apply to a U.S. person for the same conduct." (emphasis added) Absent from both the Implementing Order and the guidance, however, is a clear indication of whether OFAC may seek to impose penalties or sanctions directly against the foreign entities who violate the prohibition.

Consistent with Section 218(d) of the Act, Section 4(d) of the Implementing Order provides that penalties shall not be imposed with respect to any prohibited transaction by a foreign entity owned or controlled by a United States person if the United States person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013. Guidance issued by OFAC likewise confirms the existence of this wind-down or safe harbor provision.

The Implementing Order also sets the stage for imposition of the sanctions required by Sections 105A and 105B of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 ("CISADA"), which were added by the Act (see our August 21, 2012 alert on these sanctions). Sections 2 and 3 of the Implementing Order authorize blocking of property and interests in property of persons determined to have (i) transferred goods or technology or provided services likely to be used by the Government of Iran or on its behalf to commit serious human rights abuses against the people of Iran or (ii) engaged in censorship activities with respect to Iran or provided material assistance in support of such activities, while Section 10 of the Implementing Order suspends entry into the United States of such persons.

Other provisions of the Implementing Order empower the Secretaries of the Treasury and State and the heads of other relevant agencies to take actions necessary for the imposition of sanctions meted out under the Iran Sanctions Act, CISADA, and the Act.  

1See our August 20, 2012 Alert entitled "New Legislation Expands U.S. Sanctions Against Iran" and our August 21, 2012 Alert entitled "New Law Targets Human Rights, Network Surveillance, and Information Freedoms in Iran and Syria."  

For more information, please contact:

Barbara D. Linney, blinney@milchev.com, 202-626-5806

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