International Trade & Regulatory ADVISORY February 21, 2012

Congress Readies Additional Iran Sanctions That Would Close the Foreign Subsidiary Loophole On February 13, 2012, the Senate Banking Committee placed on the Senate legislative calendar the “Iran Sanctions, Accountability, and Human Rights Act of 2012” (S. 2101) (the “Bill”), which it had approved on February 2, 2012. The 92-page Bill would effectively close the so-called “foreign subsidiary loophole” under which foreign incorporated subsidiaries of U.S. companies have to date not been subject to the Iranian Transactions Regulations (ITR) administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). The Bill contains an extensive package of new sanctions on Iran, including at least five new sanctions that could significantly impact non-U.S. companies or financial institutions. It also contains a variety of sanctions aimed at Iranian sectors other than petroleum or petrochemicals. The Bill is expected to receive prompt consideration, with passage in substantially its current form possible in the coming months. Companion legislation has not yet been introduced in the House of Representatives, but it is expected to be shortly.

Elimination of “Foreign Subsidiary Loophole” Section 213 of the Bill requires that no later than 60 days after its enactment, the President must prohibit any entity outside the United States owned or controlled by a United States person from engaging in any transaction, directly or indirectly, with the government of Iran or any person subject to Iranian jurisdiction that would be prohibited under the ITR if it were engaged in by a United States person or a person in the United States. Penalties for violations would be the same as currently exist under the ITR. The penalty provision, which would apply to the U.S. parent, would not apply to a prohibited transaction if the United States person “divests or terminates its business with” the relevant subsidiary not later than 180 days after enactment of the Bill. The above provision would in effect apply the ITR extraterritorially for the first time in a meaningful fashion to non-U.S. persons. This provision, if enacted, would constitute a major expansion of U.S. sanctions on Iran, as currently embodied in the ITR. It would effectively eliminate the so-called “foreign subsidiary loophole,” under which non-U.S. subsidiaries of U.S. companies have continued to do business with Iran. However, the provision would appear not to change the current de minimis rule under Section 560.420 of the ITR, under which non-U.S. persons can reexport up to 10 percent de minimis U.S.-origin content to Iran. Nor would it appear to change the current “substantial transformation” rule that allows transshipment to Iran of U.S.-origin content substantially transformed into a foreign-made product under Section 560.205(b) of the ITR. It also would not affect the ability of This advisory is published by Alston & Bird LLP to provide a summary of significant developments to our clients and friends. It is intended to be informational and does not constitute legal advice regarding any specific situation. This material may also be considered attorney advertising under court rules of certain jurisdictions.

non-U.S. companies that are not subsidiaries of U.S. parents to reexport U.S.-origin EAR99 goods, such as medicines or medical devices, to Iran.

Extension of CISADA Sanctions to Subsidiaries and Agents In addition, Section 212 of the Bill would require the Secretary of the Treasury to issue regulations within 90 days following its enactment under Section 104 of the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA) to extend sanctions under CISADA to include subsidiaries and agents of parties sanctioned under CISADA. This provision also would represent a significant expansion of U.S. sanctions to embrace not just the specific legal entity that is sanctioned, but also all of its affiliates.

Mandatory Disclosure and Investigation of Iran-Related Activity by the Securities and Exchange Commission (SEC) Section 214 of the Bill would require all companies whose stock (including ADRs) is traded on U.S. stock exchanges to disclose whether they or their affiliates have engaged in activities that may be subject to sanction under U.S. law (including, among other things, activities related to Iran’s energy sector; conducting or facilitating certain banking activities that support weapons of mass destruction (WMD) activities or terrorism, money laundering and the Iranian Revolutionary Guard Corps (IRGC); transferring weapons and certain other technologies to Iran; transferring sensitive communications jamming or monitoring technology to Iran; interacting with persons or firms who have been designated for WMD or terrorism sanctions; and engaging in transactions with entities representing the government of Iran). It would mandate detailed public disclosure of any such information by the SEC and the conveyance of that information by the SEC to Congress and the President. Finally, it would require that the President initiate an investigation into whether any such disclosed activities are sanctionable and that a decision on imposition of sanctions be made within 180 days after the start of the investigation.

Sanctions Against SWIFT Section 216 of the Bill expresses the “sense of Congress” that the Administration should intensify efforts to force “global financial communications services providers,” including the Society for Worldwide Interbank Financial Telecommunication (SWIFT), to “cut off services” to Iranian financial institutions sanctioned under the International Emergency Economic Powers Act (IEEPA). It also would require a report to Congress within 60 days after enactment on all entities that provide financial communications services to the Central Bank of Iran or designated Iranian banks, and it would authorize the President within 90 days after enactment to sanction those financial communications services providers and their directors and significant shareholders under IEEPA (these sanctions would include imposition of civil penalties and potentially freezing of their assets in the United States; because member banks own SWIFT, this section could potentially target those banks and their executives). Although sanctions under this section are discretionary with the President, if pursued they could effectively shut down all international banking. Separately, SWIFT reportedly is working to eliminate access by sanctioned

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Iranian banks to its services.

Shipping Services Sanctions Section 211 of the Bill would require mandatory sanctions (including blocking of property subject to U.S. jurisdiction) as to any person who “knowingly” provides a vessel, insurance or reinsurance or “any other shipping service” (a broad and undefined term) for the transportation to or from Iran of goods that could “materially contribute” to the activities of the government of Iran with respect to the proliferation of WMD or support for acts of terrorism. Note that the knowledge standard includes “reason to know” and that the “material contribution” requirement relates only to the goods themselves and to the “shipping service” (thus allowing almost any kind of shipping service, however minimal, to potentially trigger sanctions). Sanctions under this section would also apply to upstream and downstream affiliates of the sanctioned party if they merely knew or should have known that the party provided the vessel, insurance, reinsurance or other shipping service (not knowledge of whether the goods transported were related to WMD or terrorism). A waiver provision in the U.S. national security interest is available. Sanctions under this section could potentially reach a wide variety of activities under the term “other shipping service.”

Expansion of U.S. Jurisdiction One of the possibly least understood provisions of the Bill, Section 503 under “Miscellaneous,” would significantly rewrite and expand U.S. legal jurisdiction over non-U.S. persons. The section appears to be designed to facilitate attachments relating to judgments against Iran for personal injury damages resulting from terrorism. Section 503 defines any Iranian interest in a blocked asset to include an interest held in “book entry form” and credited to a securities account in the United States. It also specifically states that the property interest of Iran in a funds transfer exists at “any intermediary bank necessary to complete” a funds transfer (thus resolving a technical legal dispute as to whether such an interest exists at the intermediary bank stage). Further, Section 503 states that notwithstanding any other provision of law, the ownership by Iran or the Central Bank of Iran of any interest in property—in the United States or apparently outside the United States—is deemed to be “commercial activity in the United States” and that that property shall be deemed not to be held for the central bank’s own account. This provision thus negates any claims to sovereign immunity under the U.S. Foreign Sovereign Immunities Act, 28 U.S.C. 1602 (FSIA). It also appears to subject any property of “Iran” or the Central Bank of Iran to U.S. jurisdiction. One consequence may be to facilitate attachment in the U.S. of Iranian assets located outside the U.S., a result that may pose a concern for U.S. offices of foreign banks which are frequently subject to attachment orders in the U.S. seeking offshore assets. Moreover, the provision also, perhaps unintentionally, might be construed as bolstering U.S. jurisdiction over non-U.S. persons for criminal and civil enforcement because of their use of the U.S. banking system, such as for U.S. Dollar clearing, a trend that has already begun with enforcement positions taken by the U.S. Department of Justice in various so-called “stripping” cases involving funds transfers and OFAC-sanctioned countries, as well as in recent enforcement cases under the U.S. Foreign Corrupt Practices Act. -3-

Additional Measures Contained in the Bill Highlights of other provisions in the Bill include the following: U.S. Sanctions on Iranian Energy Joint Ventures. The Bill would extend U.S. sanctions under the Iran Sanctions Act (ISA) to firms engaged in new energy-related joint ventures anywhere in the world in which Iran’s government is a substantial partner or investor or by which Iran could otherwise receive critical advanced energy sector technology or know-how not previously available to its government. (Section 201). Codification and Expansion of Sanctions on Suppliers to Iran’s Energy and Petrochemical Sectors. The Bill would codify the President’s decision in Executive Order 13590 of November 21, 2011, to extend U.S. sanctions to Iran’s petrochemical sector, adopting the standards, monetary thresholds ($250,000 per transaction, or multiple transactions aggregating to $1 million in a 12-month period) and specific petrochemicals list contained in that Executive Order. It also would sanction all suppliers who knowingly provide goods, services and technologies valued at $1 million or more, or $5 million annually, to a person or firm involved in Iran’s energy sector, including petroleum resource projects and domestic production of refined petroleum products, primarily gasoline, in Iran. Further, it would clarify somewhat the CISADA term “domestic production of refined petroleum products” to make clear that it includes any “direct and significant assistance” with respect to the contribution, modernization or repair of refineries or “directly associated infrastructure, including port facilities, railroads or roads,” if their “predominant use” is for the transportation of refined petroleum products. (Section 202). Sanctions on Iranian Uranium Mining Joint Ventures. The Bill would require at least three ISA sanctions to be imposed on firms that knowingly engage in joint ventures with Iran’s government, Iranian firms or persons acting for or on behalf of Iran’s government in the mining, production or transportation of uranium anywhere in the world. There would, however, be an exemption for persons who agree to withdraw from such projects within 180 days after the effective date of the bill. (Section 203). Expansion of ISA Menu of Sanctions to Senior Corporate Officers. The Bill would expand the current menu of sanctions under the ISA to authorize exclusion from the United States of principal corporate officers (or other senior officers performing a similar function) or controlling shareholders in a sanctioned firm. It also provides for application of ISA sanctions personally to the CEO or other senior officers of a sanctioned firm (these sanctions could include a freeze of their U.S. assets). Iranian Revolutionary Guard Corps (IRGC) Sanctions. • The Bill would require the President to identify and designate for sanctions known officials, as well as “agents and affiliates,” of the IRGC within 90 days of enactment and periodically thereafter. It would require exclusion of such persons from the U.S. and freezing of their assets subject to U.S. jurisdiction.

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• The Bill also would make foreign persons and firms who are “agents” or “affiliates” of the IRGC, and anyone who materially assists such persons or firms or engages in any “significant transaction” with them, including through barter transactions, subject to at least three ISA sanctions. (Section 302). It would apply similar sanctions against any persons or firms who engage in significant transactions with UN-sanctioned persons or those acting for them or on their behalf. (Section 212). Both of these provisions are potentially broad, and the latter one could subject to sanctions under ISA, as amended by CISADA, non-U.S. persons who, for example, conduct “significant transactions” with IRISL or its “agents” or “affiliates.” • The Bill would extend a U.S. government procurement ban to foreign persons who interact with the IRGC by requiring certification by all prospective U.S. government contractors that neither they nor any of their subsidiaries have engaged in “significant economic transactions” with designated IRGC officials, agents or affiliates. • The Bill would require the Secretary of the Treasury to determine within 60 days of enactment whether the National Iranian Oil Company (NIOC) and the National Iranian Tanker Company (NITC) are agents or affiliates of the IRGC and impose sanctions, as above, on persons who conduct business with them. (Section 312). Syria Sanctions Finally, the Bill would impose IEEPA sanctions on persons responsible for human rights abuses in Syria and on persons who provide goods or technology to Syria likely to be used to conduct human rights abuses, including certain telecommunications equipment. (Sections 702 and 703). * * * If you have any questions concerning S. 2101 or Iranian sanctions in general, please contact Thomas E. Crocker of Alston & Bird’s International Trade & Regulatory Group at 202-239-3318 or at [email protected].

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