Iran Sanctions and the Iran Nuclear Agreement Part Two: Foreign Subsidiaries of U.S. Companies

As we look ahead to the new year, we expect that 2016 may involve significant reorientation for global businesses as companies around the world seek to begin or renew business with Iran. If Iran passes inspections of its nuclear facilities, as required under the multilateral agreement adopted October 18, 2015, then most European Union and United Nations sanctions against Iran will be lifted. As discussed in our prior briefing on the Iran Nuclear Agreement, most U.S. sanctions against Iran will remain in place, and U.S. persons will still be subject to a broad prohibition against trade with Iran. However, it is anticipated that the United States will issue a general license allowing foreign subsidiaries of U.S. persons to engage in business with Iran. Although there has been no formal announcement, there have been informal indications from the Office of Foreign Assets Control (OFAC). Timing of the issuance of a general license is uncertain, as is the timing of the Iran inspections. If and when such a general license is issued, U.S. parent companies will need to review their internal practices carefully to ensure that if any foreign subsidiaries do engage in business with Iran, the U.S. parents do not facilitate such action and expose themselves to liability under the Iran sanctions.

Current Restrictions on Foreign Subsidiaries

The current reach of U.S. sanctions on Iran covers not only entities organized under U.S. law or present in the U.S., but also any foreign entity that is owned or controlled by a U.S. person. This includes any foreign entity or subsidiary in which a U.S. person holds a 50 percent or greater interest by vote or value in the entity; holds a majority of seats on the board of directors of the entity; or otherwise controls the actions, policies, or personnel decisions of the entity. 31 C.F.R. § 560.215. These regulations give the Iran sanctions a broad reach that can cover a wide range of overseas subsidiaries of U.S. companies. These restrictions on the actions of foreign subsidiaries have been in place since 2012.

Sanctions Relief for Foreign Subsidiaries Controlled by U.S. Persons

In the Joint Comprehensive Plan of Action (JCPOA), Annex II, Section 5.1.2, the United States commits to “license non-U.S. entities that are owned or controlled by a U.S. person to engage in activities with Iran that are consistent with this JCPOA.”

The U.S. Government has yet to act on this provision, and will not do so until the effectiveness of the JCPOA is demonstrated, and that is contingent on Iran passing required nuclear inspections. The date on which this will occur—Implementation Day—is not certain, but some observers expect it will occur in early-to-mid-2016. Possible avenues for authorizing trade with Iran by foreign subsidiaries include either a general license applicable to all foreign subsidiaries or company-by-company specific licenses requiring approval of an application. Either form of license would authorize U.S.-owned or controlled entities outside the United States to engage in trade with Iran. However, a general license would be simpler to administer and have broader reach. OFAC has given informal indications that it intends to issue a general license.

Concerns about Facilitation Liability

The issuance of a license by OFAC to allow foreign subsidiaries to do business with Iran would not eliminate a major source of potential sanctions liability for U.S. companies. U.S. sanctions law prohibits covered entities from “facilitating” prohibited transactions as well as undertaking them directly. Facilitation involves the provision of assistance or support for a transaction with a sanctioned party that could not be undertaken lawfully by a covered entity. Examples of prohibited facilitation may include:

• Providing financing for a transaction with a sanctioned entity
• Providing equipment or technical support to be used in a prohibited activity or in a transaction with a sanctioned party
• U.S. persons working overseas assisting a foreign company to trade with a sanctioned party
• U.S. parent companies approving a foreign subsidiary’s contracts with, or payments to, sanctioned entities

The risk of a facilitation violation of sanctions law will be familiar to U.S. companies whose foreign subsidiaries transacted with Iran prior to 2012. However, there are new considerations that have arisen because of the suspension of such business activities in the intervening years. For example, making changes in the corporate policies of a U.S.-based company to approve or enable a foreign affiliate to transact business involving Iran could potentially trigger facilitation liability and should be carefully considered.

Conclusion

Given the complexity of sanctions regulations as well as the potential for concerns about facilitation, parties with overseas subsidiaries eager to do business with Iran should exercise caution and seek sound legal advice before allowing action in this area. U.S. companies providing financing to foreign subsidiaries operating under the anticipated general license should also be careful to ensure that such financing is not deemed facilitation of transactions with sanctioned Iranian entities. Companies should seek advice as to whether specific transactions would be deemed facilitation.