On December 26, 2012, the Office of Foreign Assets Control (“OFAC”), a unit within the U.S. Department of the Treasury, published amendments to its economic sanctions regulations against Iran. These amendments implement changes required by the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRSHRA”).
Among other changes, these OFAC amendments address two upcoming deadlines affecting U.S. companies that own or control foreign subsidiaries doing business with Iran. Under ITRSHRA, for the first time, a U.S. company may now be penalized for the Iran-related activities of a foreign subsidiary unless the U.S. company sells off its subsidiary (or otherwise ends its ownership or control) by February 6, 2013. For another 30 days, until March 8, 2013, a U.S. company’s foreign subsidiary is authorized to take such actions as are ordinarily necessary to terminate its dealings with Iran, provided it can do so without any involvement by U.S. persons.
This eUpdate briefly explains the rules establishing these deadlines and their significance.
The Iran Threat Reduction and Syria Human Rights Act
The United States has maintained economic sanctions against Iran continuously since 1987. The sanctions have been amended many times during the past quarter-century as U.S. policies and priorities have evolved. In recent years, the sanctions have been tightened repeatedly as the United States has become more concerned about Iran’s covert nuclear weapons program.
Traditionally, Congress has given the President broad authority and discretion to impose economic sanctions. Since the 1990s, however, Congress has become more actively involved in specifying sanctions policies against particular target countries. This trend is quite visible in the case of Iran, notably in the Iran Sanctions Act of 1996, the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, and ITRSHRA in 2012.
On August 10, 2012, President Obama signed ITRSHRA into law. Among a variety of other changes to U.S. sanctions against Iran, ITRSHRA now effectively extends the OFAC trade sanctions that have long applied to U.S. companies to their foreign subsidiaries and thus creates, for the first time, a much broader reach for these tough sanctions to entities that had not previously been treated as “U.S. persons.” Specifically, ITRSHRA directs the President 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 ... if the transaction were engaged in by a United States person or in the United States.
ITRSHRA will now impose civil penalties, not directly on the foreign subsidiary doing business with Iran, but on the U.S. person that owns or controls that subsidiary.
It should be noted that ITRSHRA will effectively disregard the fact that a foreign subsidiary is separately incorporated and operating under local laws which may well allow (or even encourage) such business activity with Iran; that the foreign subsidiary may be entirely staffed by non-U.S. persons and no U.S. national personnel may be involved in that subsidiary’s Iranian business activity; or that the foreign subsidiary is trading with Iran entirely in goods of non-U.S. origin. Under ITRSHRA, it is now sufficient to create liability that the foreign subsidiary doing business with Iran is owned by a U.S. person, even if all of the preceding facts apply.
Congress created a 180-day safe harbor, providing that the penalties will not apply to a U.S. person for the conduct of its foreign subsidiaries “if the United States person divests or terminates its business with the entity” within that time. This is the origin of the February 6 deadline mentioned in the OFAC regulations. OFAC added a general license that authorizes “all transactions ordinarily incident and necessary to the winding-down” of prohibited transactions until March 8. This license is, however, subject to certain exceptions: it does not authorize winding-down transactions that involve a U.S. person or occur in the United States; it does not authorize the reexport of certain U.S.-origin goods, services, and technology; and it does not authorize dealings with certain Iranian banks.
Penalizing Conduct by Foreign Subsidiaries
Until the 1970s, U.S. economic sanctions were based primarily on the Trading With the Enemy Act of 1917 (“TWEA”). TWEA authorized the President to regulate the conduct of any “person … subject to the jurisdiction of the United States.” OFAC defined this term to include any foreign subsidiaries of a U.S. company. That definition persists today in the last vestige of TWEA sanctions: the U.S. trade embargo against Cuba.
Not surprisingly, such U.S. assertions of jurisdiction over the conduct of foreign-incorporated subsidiaries and their personnel and businesses proved controversial with U.S. allies and other nations. Difficulties flared when the United States sought to restrict sales by subsidiaries incorporated in other countries, but those other countries were trying to promote exports to the very markets targeted by U.S. sanctions. Notable examples of these controversies arose from U.S. sanctions against China (in the 1960s), the Soviet Union (in the 1980s), and Cuba (sporadically up to the present).
By the 1980s, OFAC limited its new assertions of jurisdiction to “U.S. persons,” a term that excluded foreign subsidiaries. However, this narrower approach proved controversial domestically, as advocates of sanctions were concerned that U.S. companies could too readily do business with target countries through their foreign subsidiaries. By the 1990s, OFAC sought a middle ground, where it continued to focus on U.S. persons but prohibited such persons from “facilitating” activities by foreign persons when such activities would violate OFAC regulations if they were done by U.S. persons themselves. Nevertheless, this middle ground failed to satisfy domestic critics of the “subsidiary loophole.” In fact, the domestic controversy probably achieved its greatest visibility during the Bush Administration, when critics called attention to Iranian dealings by the foreign subsidiaries of Halliburton, the oilfield services company that had once been headed by then-Vice President Richard Cheney.
With ITRSHRA, Congress has now effectively returned U.S. policy to asserting jurisdiction over the foreign subsidiaries of U.S. businesses, at least as to sanctions directed toward Iran. However, Congress has added a new technical twist, apparently in an effort to minimize some of the prior diplomatic controversy: while the prohibitions in ITRSHRA purport to regulate the conduct of foreign-incorporated subsidiaries, the penalties for any violations will be imposed only on their U.S. parent companies, not on the subsidiaries themselves. It remains to be seen how OFAC will implement and enforce ITRSHRA, whether the Act’s new approach will avoid or reduce diplomatic problems with U.S. allies or other nations, and even whether Congress may in the future extend this approach beyond Iran to other targets of U.S. sanctions.
Finally, it is useful to recall that there are so-called “blocking statutes” in other countries such as the Foreign Extraterritorial Measures Act (“FEMA”) in Canada or Council Regulation (EC) No 2271/96 of 22 November 1996 among the European Union member states that have previously sought to counteract such unilateral U.S. sanctions directed against Cuba. Although there have been no apparent efforts to apply such counter measures to the ITRSHRA sanctions that are directed to foreign subsidiaries of U.S. companies, these new sanctions have yet to take their full effect, and so only time will tell whether there might, at some point, be some comparable resistance on the part of other national governments.
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