On December 26, 2012, the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) issued a general license giving foreign subsidiaries of U.S. companies through March 8, 2013, to wind down any open transactions or dealings involving Iran that would otherwise be unlawful. See 31 C.F.R. § 560.555, 77 Fed. Reg. 75845, 75850 (Dec. 26, 2012). This authorization will be of interest to foreign companies attempting to comply with the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Threat Reduction Act”) and Executive Order 13628 (October 9, 2012), which expanded the reach of U.S. sanctions against Iran by closing the long-standing “foreign-subsidiary loophole.
For more information on the Threat Reduction Act, please see Goodwin Procter’s August 16, 2012 Client Alert.
The Threat Reduction Act and Executive Order 13628
Section 218 of the Threat Reduction Act, as implemented by Executive Order 13628, extended the broad prohibitions in the U.S. sanctions against Iran to any foreign entity in which a U.S. person holds 50% or more of the equity interest (by vote or value) or appoints a majority of seats on the board of directors, or that a U.S. person “otherwise control[s].” A U.S. parent whose foreign subsidiary “knowingly” violates the new prohibition is liable for civil penalties.
New General License Alleviates Compliance Dilemma
Under Executive Order 13628, U.S.-parent companies faced two options to avoid penalties resulting from the Iran-related transactions of their foreign subsidiaries undertaken on or after October 9, 2012: divest their interest in the foreign subsidiary by February 6, 2013, or obtain a specific license from OFAC authorizing such transactions. As a result, OFAC was deluged with applications for specific licenses to authorize foreign subsidiaries to complete in-process transactions that had commenced prior to the closing of the “foreign-subsidiary loophole.”
The new general license addresses this dilemma by authorizing “all transactions ordinarily incident and necessary to the winding-down” of transactions between U.S.-owned or -controlled foreign entities and Iran, provided that the wind-down transactions:
- Do not involve a U.S. person;
- Do not take place in the United States;
- Do not involve the export or re-export of U.S.-origin goods, technology, or services to Iran or the Government of Iran, if prohibited by 31 C.F.R. § 560.205; and
- Do not involve certain blocked Iranian financial institutions.
The general license confers its authorization only through March 8, 2013. It also authorizes wind-down transactions occurring since October 9, 2012, with the beneficial result that such transactions that were not authorized by a general or specific license when undertaken are now licensed retroactively and need not be regarded as violations.
Reminder: New SEC Disclosure Obligations
Under the Threat Reduction Act, all public companies must disclose certain Iran-related activities to the Securities and Exchange Commission in quarterly and annual reports due on or after February 6, 2013. Reportable activities include transactions involving the Government of Iran or persons or entities subject to certain blocking orders, transactions relating to the Iranian petroleum industry, and transfers to Iran of certain sensitive technologies, among other activities, occurring during the period covered by the report (e.g., during 2012 for a fiscal year-end company filing its Form 10-K in early 2013). Issuers need not report transactions that are authorized by a general or specific license from OFAC, provided that all conditions of the applicable license are strictly observed.
Issuers must report their own Iran-related activities, as well as activities by any “affiliate” of the issuer. The definition of “affiliate” includes persons or entities that directly, or indirectly through one or more intermediaries, controls, are controlled by, or are under common control with, the issuer. This definition includes foreign companies that the issuer owns or controls, or foreign companies under common control with the issuer, and is also commonly interpreted to include directors and executive officers of the issuer. While we expect that the vast majority of public companies will not have anything to report under this new disclosure requirement, all issuers, at a minimum, will need to take appropriate steps to determine whether disclosure is required as a result of their activities and those of their affiliates.
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We are available to answer your questions about the Iran sanctions. If you would like additional information about the issues addressed in this Client Alert, please contact Richard Matheny, who chairs Goodwin Procter’s National Security and Foreign Trade Regulation practice, or the Goodwin Procter attorney with whom you typically consult.