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Tougher Sanctions on Iran: What it Will Mean for Businesses

Tougher sanctions went into effect on October 9, 2012, that broadly expand the extraterritorial reach of the U.S. Government with regard to conducting business with Iran.  Most significantly, with the Iran Threat Reduction and Syria Human Rights Act of 2012, any business owned or controlled by a U.S. parent may expose its parent to sanctions for its business activities with Iran.

Significantly, the new law allows for the imposition of civil penalties of up to $250,000, or twice the value of the transaction, for activities completed by any foreign entity owned or controlled by a U.S. parent, if such activities would violate U.S. sanctions laws if they were to be undertaken in the U.S. or completed by a US person.  Stated another way, if a U.S.–owned or U.S.–controlled foreign entity enters into a transaction with an Iranian party that the parent could not engage in directly, penalties may be assessed against the U.S. parent company, not against the foreign entity.

Other than by ensuring that owned/controlled foreign entities cease all transactions with Iran or obtain OFAC licenses for such activities, a U.S. parent can avoid civil penalties only by divesting itself of the foreign entity or its interest therein no later than April 7, 2013.

The extra-territorial application of these new sanctions is likely to be particularly problematic for several reasons.  For example, under existing regulations, most uncontrolled or “EAR99” medicines or medical devices may be re-exported to Iran by foreign persons with no license required under the Export Administration Regulations (EAR), so long as they are not specifically destined for export to Iran when they leave the U.S. (e.g., they are sold from inventory held outside the U.S.).

After October 9, 2012, there is no indication that the licensing requirements under the EAR will change.  Therefore, companies not owned or controlled by a U.S. parent will be able to continue to do business in Iran, even if they source goods from the U.S.  However, after October 9, 2012, non-U.S. companies owned or controlled by a U.S. parent will be largely unable to transact business with Iran at all, regardless of the origin of the goods they sell.  Therefore, a U.S. company that sells through an unrelated distributor will be in a better position to continue its status quo than a company that sells through an affiliate will be.  This distorted result is not the positive outcome U.S. companies are looking for in this troubled global economy.

In addition, although it is unlikely that other countries will be as hostile to U.S. sanctions against Iran as they are to U.S. sanctions against Cuba, many countries, such as Canada and countries in the European Union, have implemented blocking legislation prohibiting companies in those countries from complying with such extraterritorial restrictions.  Given that U.S. implementation regulations may take years to be drafted and published,  predicting whether or how these issues may be resolved is difficult.

Beyond the new sanctions against and restrictions on doing business with Iran, the new legislation also requires ’34 Act reporting companies to disclose detailed information about their Iran-related activities, beginning with their first periodic report filed after February 6, 2013, and thus requires increased monitoring and internal controls to evaluate on-going activities in the region.

Life science companies doing business in Iran should carefully review the new law and should take appropriate steps to avoid unnecessary sanctions or penalties.

©2014 Drinker Biddle & Reath LLP. All Rights Reserved

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About this Author

Counsel

Joan Koenig is counsel in the Customs & Trade team. She possesses substantial experience in international trade regulations, particularly those relating to U.S. export controls (ITAR, EAR, FACR, FTR) and customs regulations. Joan has considerable experience applying U.S. export controls, customs and international trade laws and regulations to various situations and business transactions for both U.S. and non-U.S. companies. She has extensive experience representing clients before administrative agencies involved in international trade, including the U.S. Departments of State, Commerce...

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