Keeping an Eye on Shifting Sanctions Against Iran

Alexandra Wrage

Corporate Counsel

10-04-2012

While the possibility of an Iranian nuclear-weapons program is very much in the news and a key discussion point in the 2012 presidential election, there is a sanctions issue with the Middle Eastern country that should be on the radar for in-house compliance officers: U.S. companies are facing a fast-approaching deadline to ensure that their non-U.S. affiliates end all transactions with Iran.

Previous U.S. sanctions prohibited persons from engaging in transactions with Iran, but foreign-incorporated subsidiaries of U.S. parent companies were generally outside the scope of those sanctions. However, the recently enacted Iran Threat Reduction and Syria Human Rights Act of 2012 [PDF], signed into law by President Barack Obama on August 10, 2012, closes that loophole.

Under the Act, beginning October 9, 2012, if a non-U.S. entity that is owned or controlled by a U.S. company engages in any transaction with Iran that would be sanctionable if committed by the U.S. parent company, the U.S. parent company will be held liable as if they had conducted the transaction themselves.

If a U.S. company’s foreign affiliate violates the Act, the U.S. parent company could face significant civil penalties of up to $250,000 or twice the value of the transaction, whichever is higher. There is a grace period, though: the U.S. parent company will not face a penalty if it divests or terminates its business with the foreign affiliate by December 8, 2012.

The recent Standard Chartered Bank settlement highlights the significant financial repercussions of running afoul of U.S. sanctions on Iran. In August, Standard Chartered Bank agreed to pay a civil penalty of $340 million to the New York State Department of Financial Services (DFS) and admitted to conducting at least 60,000 transactions with Iran worth $250 billion between 2001 and 2010. The settlement requires the appointment of a monitor to report directly to the DFS for two years, and also provides for DFS examiners to work on-site at the bank.

The Act also increases pressure on publicly traded companies, and their affiliates, to comply with U.S. sanctions on Iran by instituting a new disclosure requirement. Under the Act, companies listed on a U.S. stock exchange and required to file annual or quarterly reports with the U.S. Securities and Exchange Commission are now required to disclose if they or any of their affiliates have “knowingly engaged in” certain sanctionable activities or “knowingly conducted any transaction or dealing with” persons whose property had been blocked or identified as part of the government of Iran, without the U.S. government’s authority. Publicly traded companies that make such a disclosure must also file a separate notice with the SEC indicating that such a disclosure had been made in their annual or quarterly report. The SEC must make that notice public and provide it to Congress and the White House, which must initiate an investigation into the possible imposition of sanctions.

Publicly traded companies must comply with the new reporting obligations by February 6, 2013.

Several other key provisions are included in the Act, including expanded sanctions against Iranian and Syrian officials for human rights abuses; additional specific activities that non-U.S. companies are prohibited from conducting in relation to Iran; new sanctions that the president may use; and an expanded number of sanctions the president must apply to persons who violate the sanctions on Iran.

In order to ensure their foreign affiliates are in compliance with the Act, companies should take the following steps:

1. Get the Word Out Now

Make sure your affiliates are aware of the sanctions and their scope. Not surprisingly, their ignorance will not be an excuse if they are caught conducting business with Iran. Virtually all trade and investment activities involving Iran by U.S. persons are prohibited. Your foreign affiliates should know that, similar to their U.S. parent company, those prohibitions now apply to them.

On the same principle, a U.S. parent company’s lack of knowledge regarding their foreign affiliates’ actions is not a defense. As Senator Tim Johnson (D-South Dakota), chairman of the Senate Committee on Banking, Housing, and Urban Affairs, said during Congressional consideration of the Act: “[T]his legislation mandates penalties on a U.S. parent company if its foreign subsidiary has knowledge or should have had knowledge that the subsidiary was doing prohibited business with Iran, even if the U.S. parent company has no knowledge of these transactions.”

Counsel should review and update your company’s compliance policies and procedures to include coverage of the sanctions and to ensure all employees, and affiliates, are aware of the new regulations, but a carefully drafted company-wide email is a good, quick, and inexpensive place to start.

2. Review Affiliate Activity

Do your due diligence, and be aware of the activities of your foreign affiliates. To avoid incurring penalties for your foreign affiliate’s actions or having to divest your foreign affiliate, your company should review your foreign subsidiaries’ transactions and determine if any transactions must be terminated by October 9, 2012. Your company should continue their review throughout the grace period (until December 8) to ensure that no prohibited transactions occur.

3. Monitor Future Activity

Under the new disclosure requirements, certain publicly traded companies are responsible to disclose if they or any of their affiliates have “knowingly engaged in” certain sanctionable activities or “knowingly conducted any transaction or dealing with” persons whose property had been blocked or identified as part of the government of Iran, without the U.S. government’s authority. Publicly traded companies should be vigilant in their review of the activities of their foreign affiliates to ensure they are not doing business with Iran, or risk incurring a government investigation and severe penalties.

Alexandra Wrage is the president of TRACE, an antibribery compliance organization offering practical tools and services to multinational companies. TRACE offers several anti-bribery training resources to members and non-members including the training DVD, Toxic Transactions: Bribery, Extortion, and the High Price of Bad Business. TRACE recently launched TRAC, a publicly accessible platform that establishes a global standard for baselines due diligence and makes the information available to companies at no cost.