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On October 9, 2012, President Obama signed executive order
13628, which implements a number of provisions contained in the
Iran Threat Reduction and Syria Human Rights Act of 2012
("ITRSHRA"), including a provision that directs the President to
ban non-US entities owned or controlled by US persons from engaging
in economic activity with Iran to the same extent that US persons
are so prohibited under US law and regulation. The President
signed ITRSHRA into law on August 10, 2012.
Section 218 of ITRSHRA directs the President, within 60 days of
the enactment of ITRSHRA, 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 by an order or regulation issued pursuant
to the International Emergency Economic Powers Act [("IEEPA")] if
the transaction were engaged in by a United States person or in the
United States." In addition, Section 218 provides that the
full range of civil penalties applicable under IEEPA - namely, up
to $250,000 per violation or twice the value of the relevant
transaction - can be imposed against the US owner or control person
where the non-US subsidiary or controlled entity violates, attempts
to violate, conspires to violate, or causes a violation of any US
executive order or regulation restricting economic interaction with
Iran.
Section 218 also contains a fairly unhelpful 180-day grace
period in which the US owner or control person is protected against
IEEPA civil liability. Instead of permitting liability to be
avoided where the non-US subsidiary or controlled entity terminates
its business with Iran within 180 days, this provision instead
provides protection only where the US owner or control person
divests or terminates its business with the non-US subsidiary or
controlled entity during this period of time.
Section 218 does not define most of the terms that it
uses. It does, however, contain a definition for "own or
control" with respect to a non-US entity: namely, "(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." This definition
appears to capture not only non-US subsidiaries of US corporations,
but also non-US controlled portfolio companies of US-based private
equity firms.
Executive Order 13628 sets forth the prohibition directed by
Section 218 of ITRSHRA, in a form that largely repeats the language
contained in Section 218. Hopes within the business community
that implementing action would soften the impact of Section 218
were unrealized - and, in fact, the executive order adds broad
definitions and increases some areas of ambiguity. In terms
of definitions, "knowledge" or "knowingly" captures not only actual
knowledge, but also a situation where a non-US entity "should have
known" about the relevant conduct, circumstance, or result related
to a transaction with Iran. In addition, "subject to the
jurisdiction of the Government of Iran" captures not only an entity
organized under the laws of Iran, an individual ordinarily resident
in Iran, and an entity or individual actually in Iran, but also any
non-Iranian entity "owned or controlled by any of the
foregoing."
In terms of added ambiguity, the executive order increases
uncertainty with respect to the manner in which penalties will be
imposed. Section 218 does not state that US enforcement may
be taken directly against the non-US subsidiary or controlled
entity; it refers only to civil IEEPA penalties being imposed
against the US owner or control person. The executive order
contains no statement that enforcement action will be limited to
the US owner or control person. Rather, it appears on its
face to threaten both criminal and civil penalties against non-US
subsidiaries and controlled entities that continue to do business
with Iran - an assertion of enforcement jurisdiction under US
sanctions law that the United States has largely avoided since the
embargo against Cuba was imposed in the 1960s.
Worse yet from the perspective of US owners or control persons,
the provision in the executive order that refers to penalties being
imposed against "the United States person that owns or controls the
[non-US] entity that engaged in the prohibited transaction" simply
uses the word "penalties." This language therefore raises the
question whether, despite the "civil penalties" language in Section
218, the Obama Administration might threaten criminal action
against US owners and control persons.
Hopes within the business community that implementing action
might improve the terms of the grace period contained in Section
218 were also dashed. The executive order simply states that
penalties will not apply "if the United States person that owns or
controls the [non-US] entity divests or terminates its business
with the entity not later than February 6, 2013." Like
Section 218, the executive order offers no recognition that, due to
contractual obligations, local law considerations, or other
factors, it may not be possible for non-US subsidiaries or
controlled entities to shut down immediately all newly prohibited
business with Iran. While it may be the case that, by
exercising enforcement discretion, the Obama Administration will
give non-US subsidiaries and controlled entities a reasonable
period of time in which to terminate prohibited business with Iran,
neither the executive order nor the guidance materials released to
date by the Obama Administration offer any assurance that such a
grace period will in fact be offered. Moreover, the current
vigorous approach to enforcing Iran sanctions by US enforcement
authorities does not offer much comfort in this regard.
Executive Order 13628 authorizes the Treasury Department to
issue regulations in furtherance of the executive order, and it is
likely that such regulations will be issued in the future. It
is possible that such regulations will soften to some degree - or
at least clarify - the impact of Section 218 and this executive
order. In the meantime, those US companies and other US-based
entities and control persons that have not yet done a global
assessment of business with Iran by their owned and controlled
entities would be well advised to do so on an expedited
basis. Due to Sarbanes-Oxley and other factors, many US
public companies have already moved in recent years to adopt
uniform global sanctions compliance policies; it is therefore
likely that the risk exposure presented by Section 218 and
Executive Order 13628 will fall predominantly on US privately held
companies, US private equity funds, and US citizens and permanent
residents who exercise control over non-US business entities.
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This memorandum is not intended to provide legal advice, and no
legal or business decision should be based on its content.
Questions concerning issues addressed in this memorandum should be
directed to: