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Media Briefing Note: The new scope of the Iran Threat Reduction and Syria Human Rights Act of 2012 comes into effect

08 October 2012

LONDON, 08 OCTOBER 2012 - Aleksandar Dukic, partner (Washington) and Jamie Rogers, senior associate (London), outline the scope of new US legislation (the Iran Threat Reduction and Syria Human Rights Act of 2012), implemented by a recent Presidential Executive Order.

The legislation is effective from 9 October 2012 and will expose UK companies (who are owned or controlled by US groups) to the full scope of existing US OFAC sanctions against Iran (i.e. the Iranian Transactions Regulations). The ITR, which had not hitherto extended to non-US entities, contain some of the most expansive sanctions against Iran and have been in place for some time. This will be an additional compliance burden for these companies. The sanctions cannot be ignored because they create criminal liability and are vigorously enforced.

In addition to this extension, the new Executive Order implements a number of additional sanctions concerning Iran applicable even to non-US persons including:

  • Sanctions against those who knowingly provide underwriting services to National Iranian Oil Company or the National Iranian Tanker Company.
  • Sanctions against those who knowingly insure vessels transporting crude oil from Iran (this is similar to existing EU sanctions).
  • Sanctions against those who knowingly insure shipments of goods to Iran that could materially contribute to the Government of Iran's proliferation of WMD or support acts of international terrorism.
  • An extension of sanctions that may be imposed under existing extraterritorial US sanctions against Iran (CISADA).

The Act was signed into law on 10 August 10 2012 and was described in a prior Hogan Lovells client alert available at:http://ehoganlovells.com/cv/ba47db1c7e98d1a2a789cf6e6ab093ab7203fe38

On 9 October 2012 the President issued an Executive Order (the “Executive Order”) implementing certain provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”):

These provisions include, for example, the following:

  • Revises the sanctions that may be imposed under the Iran Sanctions Act of 1996 (“ISA”), the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”) and the Act.
  • Blocks property and interests in property of persons determined to have conducted certain activities related to human rights abuses against the people of Iran.
  • Blocks property and interests in property of persons determined to have conducted certain activities resulting in censorship of people in Iran.
  • Expands the scope of existing U.S. economic sanctions against Iran to apply to any entity owned or controlled by a U.S. person who knowingly engages in any transaction involving Iran.  (The term “knowingly” is defined in the Executive Order to include actual and constructive knowledge.)  The Executive Order effectively prohibits non-U.S. subsidiaries of U.S. companies from engaging in transactions involving any persons or entities in Iran even if the non-U.S. subsidiary is acting independently of the U.S. parent or U.S. persons, unless authorized by OFAC. The Executive Order specifically notes that any penalties for unauthorized activities by non-U.S. subsidiaries would be imposed against the U.S. person that owns or controls the subsidiary. 
  •  We note that there is a carve out from civil penalties if the U.S. parent divests or terminates its business with the non-U.S. subsidiary no later than February 6, 2013.  The actual utility of this carve out may be limited however, unless the U.S. company is willing to terminate all ties with the subsidiary.
  • Provides additional penalties for certain activities conducted in relation to refined petroleum products involving Iran.
  • The Act also required the President to impose sanctions on persons (including entities with no US nexus, such as non-US companies that are not owned or controlled by US persons) if the President determines that the person knowingly, on or after October 9, 2012, provides underwriting services or insurance or reinsurance for the National Iranian Oil Company (NIOC), the National Iranian Tanker Company (NITC), or a successor entity to either such company.
  • There is a possible “safe harbor” to this provision for companies who have conducted appropriate due diligence. Specifically, the Act allows the President to not impose sanctions if the target has exercised due diligence in establishing and enforcing official policies, procedures, and controls to ensure that the target does not provide underwriting services or insurance or reinsurance for NIOC, NITC, or any successor to either.
  • In addition, the Act allows sanctions to be imposed against persons (including purely non-US entities that are not owned or controlled by US persons) who insure vessels used to transport crude oil from Iran, if the insurer knew or should have known that the vessel was being so used. 
  • There is a similar “due diligence” safe harbor against potential sanctions imposed pursuant to this provision of the Act.
  • More broadly, the Act allows sanctions against persons (including purely non-US entities that are not owned or controlled by US persons) who knowingly insure or reinsure shipments to or from Iran of goods that could materially contribute to the Government of Iran’s proliferation of weapons of mass destruction or support for acts of international terrorism.
  • This provision does not include a due diligence “safe harbor” and does not define, nor does it list examples, of goods that could be considered to be covered by this provision. 
  • In addition, the statute does not define what is considered to be “material” contribution for purposes of this provision so the U.S. Government will have discretion in interpreting that term based on specific facts of a given case (for purposes of CISADA, the State Dept. has not defined, and likely will not define what is considered as “material” as the similar language is used in oil/gas related restrictions, so it is not likely that the implementing agency would define this term).
  • Due to the broad and vague language of this provision, a large number of transactions could potentially create exposure for non-US insurers because a variety of the goods sent to or from Iran could be considered by the US Government as materially contributing to the Iranian Government’s proliferation or international terrorism efforts.  The safest course of action to avoid potential exposure is not to insure shipments to/from Iran or those involving Iranian-origin goods.
  • For  insurers and reinsurers outside the United States that are owned or controlled by US companies (e.g., subsidiaries of US companies) or US persons (e.g., companies where the majority of board directors are US persons), the most significant impact of the Act relates to the expansion to these insurers/reinsurers of the full set of restrictions under OFAC’s Iran Transactions Regulations (ITR) that prohibit virtually all dealings with persons or entities in Iran (even if they are not owned by the Iranian Government).  Essentially, if an activity with Iran is prohibited by the US parent or US person, the non-US subsidiary of such insurer/reinsurer is now subject to the same restrictions.  This provision became effective on October 9, 2012, as noted above.
  • The Act also expands the types of activities that can cause a non-US insurer/reinsurer to be sanctioned under the ISA (as amended by CISADA), and the US government must now chose at least five, rather than at least 3, of the sanctions available. The list of nine total available sanctions previously in play has been expanded to include a prohibition on US person investments or purchase of significant equity or debt of the sanctioned person, a denial of visa for offices, principals or shareholders of the sanctioned person, or imposition of sanctions against the principal officers of the sanctioned person. 
  • Beyond the Act, in July 2012 the President issued an Executive Order (the EO) that authorizes imposition of sanctions on foreign financial institutions for conducting or facilitating certain significant financial transactions with NIOC or the Naftiran Intertrade Company (NICO), purchases of petroleum, petroleum products or petro chemical products from Iran.  For purposes of the EO, “foreign financial institutions” do not include non-US insurers (similar to the approach taken under CISADA).
  • We note that the Act also requires disclosures of certain Iran-related activities by issuers and their affiliates in reports that are due to the U.S. Securities and Exchange Commission (SEC) after Feb. 6, 2013. For those that are required to file reports, reportable activities would include certain activities described by the ISA or CISADA, or activities with certain SDNs as well as any dealings with the Government of Iran or entities owned/controlled by the Iranian Government.


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