The year 2012 saw vigorous activity in the creation and implementation of increasingly restrictive sanctions, particularly with respect to Iran. Enforcement of the sanctions has been accompanied by at times very significant penalties. The following update from Gibson Dunn reviews sanctions developments in the United States, European Union and the United Kingdom in 2012 in four areas — legislation, Executive Orders, regulatory developments, and enforcement — and assesses what the experiences in 2012 suggest about how business practices might evolve to adapt to current sanctions. Here is an excerpt:
During 2012 the United States enacted some of its most restrictive sanctions, isolating Iran with trade barriers similar to those imposed on Cuba, to devastating effect. Augmented sanctions spelled disaster for Iran’s economy while reminding us of their crippling power. The most recent volley targets specific deficiencies in the Iran sanctions regime, constraining bartering and non-monetary means of carrying out transactions. Turkey, a strong U.S. ally and trading partner with Iran, in fact exploited this bartering loophole, trading gold for fossil fuels.
Near the end of the year, a law targeting Russia’s failures to protect human rights and the rule of law led to retaliatory actions from the Duma at the behest of the Kremlin. Meanwhile bills contemplating more extensive sanctions on Syria languish in committee. Given the high stakes involved and effectiveness of the U.S. program to date, expect Iran to remain the focus of sanctions activity in 2013.
A. Iran Threat Reduction and Syria Human Rights Act (Pub. L. No. 112-158).
On Friday, August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act (“TRA”), greatly expanding the scope of Iran sanctions. According to Representative Ileana Ros-Lehtinen, a principal proponent, the Act “seeks to tighten the choke hold on the regime beyond anything that has been done before.”
The TRA vastly expands the reach of sanctioned activity under the International Emergency Economic Powers Act (“IEEPA”). Section 218 of the TRA directs the President to prohibit:
[A]n 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 [IEEPA] if the transaction were engaged in by a United States person or in the United States.
This language represents a tidal shift, as it effectively bars trade with Iran through foreign subsidiaries. Following regulatory implementation of Section 218, Iran sanctions now closely resemble the prohibitions against U.S. companies and their foreign subsidiaries doing business with Cuba.
Congress has for years attempted to enact similar expansions. Prior legislation met stiff opposition from both Republican and Democratic administrations, because of fears that the extraterritorial reach of such a restriction would conflict with diplomatic considerations. U.S. allies, desiring to govern under their own laws, saw the expansion of U.S. law as an infringement on their ability to regulate domestic business. Indeed, the European Union and Canada have gone so far as to set up “blocking” statutes, which prohibit compliance with Cuba sanctions. And yet election-year politics appears to have pushed the Obama administration to embrace this latest round of escalated Iran sanctions.
Violators face civil penalties of $250,000 or twice the value of the illegal transaction. But the TRA also provides a safe harbor, foreclosing liability if the U.S. person divests or terminates its business with the entity by February 6, 2013.
Public companies face additional reporting requirements, if they engage in certain prohibited transactions involving Iran. The TRA amends Section 13 of the Securities Exchange Act of 1934 (the “Exchange Act”) to require an issuer that knowingly engaged in a sanctionable transaction involving blocked persons (e.g., terrorist organizations or the government of Iran), the proliferation of weapons of mass destruction, or substantial investment in the Iranian petroleum industry to disclose such violation in its quarterly and annual reports. The disclosure must describe the activity in detail and include:
- the nature and extent of the activity;
- the gross revenue and profit attributable to the activity; and
- whether the issuer or its affiliate intends to continue the activity.
Additionally, if a company discloses in its quarterly or annual report that it knowingly engaged in this prohibited activity, the company must file a separate notice of such disclosure for publication on the SEC’s website. The SEC must send this notice to the President; the House Committees on Foreign Affairs and Financial Services; and the Senate Committees on Foreign Relations and Banking, Housing, and Urban Affairs. The TRA also provides that, as a consequence of receiving such notice, the President must investigate the disclosed activity and, within 180 days of initiating the investigation, determine whether to impose sanctions. These reporting provisions will “take effect with respect to reports required to be filed . . . after” February 6, 2013. Because the TRA amends the Exchange Act directly, it is not conditioned on SEC rulemaking, although the SEC does have the authority to clarify the reporting obligation.
The TRA includes several other provisions that are likely to have a narrower effect than those discussed above. Certain provisions, for example, augment the United States’ ability to identify officers in Iran’s Revolutionary Guard Corps and impose greater sanctions on those who provide support to it; whereas others expand restrictions on Iran’s energy sector and financial instruments issued by the Government of Iran. Finally, the law augments sanctions against Syria in response to the Assad regime’s myriad human-rights violations.
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