Non-U.S. Subsidiaries of U.S. Companies Now Prohibited From Engaging in Unlicensed Transactions With Iran
Today President Obama issued an Executive Order that contains the framework for implementing various provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012. HR 1905 which has variously been referred to as ITRSHRA, ITRA or TRA, was passed by Congress on August 1, 2012 and signed into law by the President on August 10, 2012 (Public Law 112-158).
[October 12, 2012 Update: The full text of Executive Order 13628 published in the Federal Register on October 12, 2012 is below. OFAC has indicated that it is referring to the Iran Threat Reduction and Syria Human Rights Act of 2012 as the "TRA".]
The provision of ITRA that has generated the most interest and will have the most significant impact on U.S. companies is section 218, which prohibits entities owned or controlled by a U.S. person and established or maintained outside the U.S. (i.e., non-U.S. subsidiaries) 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, if the transaction is prohibited by any U.S. laws or regulations. In other words, ITRA prohibits non-U.S. subsidiaries from engaging in unlicensed transactions with Iran, even if no U.S. persons are involved in the transaction.
Section 4 of today's Executive Order implements the foreign subsidiary provision of ITRA and authorizes the imposition of penalties on U.S. parent companies that own or control the non-U.S. entity that engaged in the prohibited transaction.
The Treasury Department has been delegated by the President to implement this provision and the Office of Foreign Assets Control (OFAC) will be responsible for implementing and enforcing this new aspect of the long-standing U.S. sanctions on Iran.
As a result of today's action, Iran now joins Cuba as the only U.S. sanctions programs that apply to non-U.S. subsidiaries of U.S. companies.
In accordance with ITRA, the Executive Order states that penalties for violations of the subsidiary prohibition in will not apply if the U.S. person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013.
In connection with the issuance of the Executive Order OFAC today issued three Frequently Asked Questions (FAQ) on its website (reprinted below) that provide additional guidance on OFAC's policy regarding the new prohibitions applicable to foreign subsidiaries of U.S. companies.
[OFAC Answers to] Questions Related to Section 4 of Executive Order Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Threat Reduction and Syria Human Rights Act of 2012 and Additional Sanctions with Respect to Iran
Section 4 of the Order prohibits an entity owned or controlled by a U.S. person and established or maintained outside the United States (a “foreign subsidiary”) 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, if that transaction would be prohibited by certain Executive orders prohibiting trade and other dealings with, and investment in, Iran and blocking the Government of Iran and Iranian financial institutions, or any regulation issued pursuant to the foregoing, if the transaction were engaged in by a United States person or in the United States. 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.
239. Are foreign subsidiaries of U.S. companies covered under OFAC general licenses and/or permitted to apply for specific licenses from OFAC?
To the extent a transaction is exempt from the prohibitions of the Iranian Transactions Regulations, E.O. 13599, section 5 of E.O. 13622, or Section 12 of the Order, 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 subsidiary (as defined above) to engage in the transaction, provided that it satisfies all the conditions and requirements of the exemption or general license. Similarly, 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. Note: 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.
240. Is there a wind-down or safe harbor provision in Section 4 of the Order?
Consistent with Section 218(d) of the TRA, Subsection 4(c) of the Order provides that civil penalties shall not apply if the U.S. person divests or terminates its business with the foreign subsidiary (as defined above) not later than February 6, 2013.
Executive Order 13628 (10.9.12)