New measures targeting activities of non-US companies
New measures affecting US companies
Authorization for state and local Iran divestment measures
On July 1 2010 President Obama signed into law the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010.(1) As the United States already maintains a nearly comprehensive embargo of Iran, this act largely targets the activities of non-US companies doing business in Iran, particularly in the petroleum sector. However, even US companies – especially US financial institutions and US government contractors – may be affected by the act's wide-ranging provisions.
New measures targeting activities of non-US companies
The act targets the activities of non-US companies in a number of ways. For example, the act prevents US federal agencies from entering into or renewing contracts with persons that export 'sensitive technology' (ie, items used to restrict free speech and information dissemination) to Iran, with limited exceptions.
The act's greatest potential impact on non-US companies is its expansion of the Iran Sanctions Act. This act, enacted in 1996, targets investments by non-US companies in Iran's petroleum and weapons sectors. Due to the controversy surrounding its extraterritorial application, no president has ever imposed sanctions under the Iran Sanctions Act. As explained below, the new act limits the president's enforcement discretion and expands the scope of activities sanctionable under the Iran Sanctions Act. Thus, non-US companies may face a greater risk of sanctions under the Iran Sanctions Act for an expanded array of activities.
Expanded scope of Iran Sanctions Act
The new act maintains the existing Iran Sanctions Act sanctions on persons that invest in the development of Iran's petroleum resources over a certain dollar threshold. However, the act revises the definition of an 'investment' in an important way. Under the original Iran Sanctions Act, the entry into, performance or financing of a contract to sell or purchase goods, services or technology was expressly excluded from the definition of 'investment'. The act eliminates this exclusion, suggesting that such supply activities could constitute sanctionable investments under the Iran Sanctions Act if they otherwise meet the definition of 'investment' (eg, involve participation in royalties).
The new act also expands the Iran Sanctions Act to capture additional activities. Companies that supply refined petroleum products to Iran are now also targeted by the Iran Sanctions Act. In addition, the act now targets companies that sell, lease or provide to Iran goods, services, technology or other support that could permit (i) the maintenance or expansion of Iran's domestic production of refined petroleum products, or (ii) the import of refined petroleum products into Iran. Such companies can include exporters, as well as underwriters, insurers and transportation providers. It is understood that these sanctions are largely intended to inhibit the supply of gasoline in Iran.
Limited presidential discretion
The new act also requires the president to investigate potentially sanctionable conduct on receipt of credible information that a person may be engaged in a sanctionable activity. The initiation of investigations was not mandatory under the original Iran Sanctions Act, thereby permitting the president to avoid enforcement of the Iran Sanctions Act by declining to initiate an investigation. Congress is therefore limiting the president's investigatory discretion to encourage greater use of Iran Sanctions Act sanctions. Similarly, the new act seeks to curb presidential discretion by changing the standard for waivers of the Iran Sanctions Act. Currently, the president may waive sanctions under the Iran Sanctions Act if "it is important to the national interest of the United States". The new act requires that the waiver be "necessary to the national interest of the United States".
However, the new act also permits the president to retain significant discretion in the enforcement of the Iran Sanctions Act if certain conditions are met. For example, the president may decline to initiate an investigation or terminate an ongoing investigation if he determines that a person is no longer engaged in sanctionable activity (or is "taking significant verifiable steps toward stopping" such activity) and will not engage in the sanctionable activity in the future. This provision gives the president the flexibility to reach diplomatic solutions with persons suspected of engaging in activities sanctionable under the Iran Sanctions Act, rather than resorting immediately to investigation and sanctions under the Iran Sanctions Act.
The new act also permits the president to waive mandatory investigations with respect to activities related to Iran's production or import of refined petroleum products (ie, newly sanctionable activities) by certifying to Congress that he has engaged in diplomatic efforts to dissuade persons and governments from engaging in such activities. His certification must also detail the results of these efforts and any investigations undertaken pursuant to the Iran Sanctions Act. On submission of this certification, the mandatory investigation requirement is suspended for 180 days with respect to activities related to Iran's production or import of refined petroleum products. Subsequent suspensions will continue in 180-day increments, so long as the president continues to provide similar certifications to Congress.
In addition, the act permits the president to waive Iran Sanctions Act sanctions against individual entities for no more than 12 months if the president certifies to Congress that the government with jurisdiction over the entity in question is cooperating with the United States in an effort to deny Iran the ability to develop weapons, as long as this waiver is deemed vital to US national security interests. These waivers can be extended indefinitely, as long as the president decides that an extension is appropriate.
Increased sanctions for targeted activities
The Iran Sanctions Act originally required the imposition of two sanctions. As amended by the act, it now requires the president to impose at least three sanctions against entities that engage in targeted activities. The act also expands the list of available sanctions, including prohibitions on foreign exchange, banking and property-related transactions, to the extent that such transactions are subject to the jurisdiction of the United States.
New certification requirement for government contracts
The new act mandates amendment of the Federal Acquisition Regulation to require each prospective US government contractor to certify that it does not engage in activities sanctionable under the Iran Sanctions Act. The prospective contractor must also make the certification as to any person that it owns or controls. This requirement may be waived by the president on a case-by-case basis. Subject to certain exceptions, contractors found to have submitted false certifications will have their contracts terminated or will be ineligible for federal contracts for three years.
Expanded parent liability
The new act effectively expands parent liability under the Iran Sanctions Act. Currently, a parent entity is liable under the Iran Sanctions Act if it knowingly engaged in the sanctionable activities of its subsidiary. Under the act, if an entity owns or controls another entity that engages in activities sanctionable under the Iran Sanctions Act, that entity is also liable under the Iran Sanctions Act if it knew or should have known about the sanctionable activities, regardless of whether it participated in such activities.
New measures affecting US companies
Although US companies with non-US parent companies, subsidiaries or affiliates may be affected by the new measures targeting non-US companies (particularly US government contractors), the new act also contains a number of measures that will affect US companies, including US financial institutions. Many of these measures will likely be reflected in amendments to the Iranian Transactions Regulations, which describe the current prohibitions applicable to US companies. In most cases these anticipated amendments will impose additional restrictions on US companies regarding Iran; however, as explained below, certain amendments may also provide business opportunities for exporters of certain items that may now be licensed for supply to Iran.
Measures affecting importers
The act bans US imports of goods and services from Iran, whether direct or indirect (except information and informational materials). This measure therefore eliminates the Iranian Transactions Regulations' current exception for US imports of pistachios, carpets and other Iranian products. This provision is effective 90 days after enactment, to give goods in transit time to clear Customs.
Measures affecting exporters
Through the Iranian Transactions Regulations, the United States currently imposes a nearly comprehensive ban on the export of goods, services and technology to Iran from the United States or by US persons, wherever located. Certain exceptions to this ban are maintained by the new act. However, the act also adds some new exceptions aimed at promoting certain desirable activity within Iran. For example, the act permits the licensed export of goods, services and technology necessary to enable internet communications within Iran.
The act also establishes a programme to prevent the diversion of certain goods, services and technologies to Iran. Under this programme, countries that permit the diversion of certain sensitive US-origin goods, services or technologies to Iran will be identified as 'destinations of diversion concern'. Licences will be required for the export from the United States of certain sensitive items to these countries. However, this licensing requirement may be delayed if the president determines that the government of a destination of diversion concern is taking steps to prevent diversion to Iran in the future. Licensing requirements may also be waived if the president finds it to be in the national interest. Designation as a destination of diversion concern may be terminated if the president certifies to Congress that a government has sufficiently enhanced its export control system to prevent diversion to Iran.
Measures affecting financial institutions
The new act also requires the Treasury Department to promulgate regulations that would sanction financial institutions that engage in certain transactions involving Iran. Such regulations would prohibit or impose conditions on the opening or maintenance in the United States of a correspondent or payable-through account by a foreign financial institution that knowingly facilitates Iran's weapons development or other targeted activities involving Iran. In addition, the act calls for Treasury regulations that require domestic financial institutions to monitor existing accounts of foreign financial institutions for indications of targeted activities. The act also calls for Treasury regulations that prohibit any person owned or controlled by a domestic financial institution from knowingly engaging in transactions that benefit Iran's Revolutionary Guard Corps or any of its agents whose property is blocked by the United States. The domestic financial institution itself is subject to sanctions if the person that it owns or controls violates the Treasury regulations and the domestic financial institution knew or should have known about the actions giving rise to the violation.
Authorization for state and local Iran divestment measures
The act authorizes state and local governments to divest from certain companies that invest in Iran. Specifically, the act provides that state and local governments may adopt and enforce measures to divest their own assets from or prohibit the investment of their own assets in (i) persons found to have an investment of $20 million or more in Iran's energy sector, or (ii) financial institutions that extend $20 million or more in credit to another person, for 45 days or more, if that person will use the credit for investment in the energy sector in Iran.
The act contains many of the same provisions found in the Sudan Accountability and Divestment Act 2007. For example, the act requires state and local governments to adhere to certain procedural requirements if they adopt divestment measures. The act also creates a safe harbour from suit for investment managers that divest from or avoid investing in securities issued by persons that engage in the foregoing activities involving Iran. In addition, the act sets out the sense of Congress that a fiduciary of an employee benefit plan could, consistent with fiduciary duties, divest plan assets from, or avoid investing plan assets in, persons that engage in the foregoing activities involving Iran, if certain conditions are met.
For further information on this topic please contact Robert Torresen or Lisa Crosby at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email ([email protected] or [email protected]).
Endnotes
(1) HR 2194, online at www.sidley.com/files/News/5174fb9f-95d6-4d06-a2c4-228ef3062478/Presentation/NewsAttachment/3b57488e-d3fa-4b2e-8b2f-28369321c955/finaliranbill.pdf.
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