New OFAC Regulations Implement Iranian Sanctions

January 08, 2013

Grace period through March 8 provided to foreign subsidiaries to wind down Iranian transactions.

On December 26, 2012, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) amended the Iranian Transactions and Sanctions Regulations (ITSR), 31 C.F.R. pt. 560, to implement section 218 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the Act), 112 P.L. 158. Section 218 of the Act caused OFAC to add a new section to the ITSR to prohibit certain transactions by non-U.S. entities owned or controlled by a U.S. person and established or maintained outside the United States. OFAC also added a second new ITSR section to provide a grace period for the winding down of these prohibited transactions. The ITSR amendments follow an earlier October 9, 2012, Executive Order, which was also promulgated to implement portions of the Act.[1]

Prohibited Transactions

The first new ITSR section, 31 C.F.R. § 560.215, prohibits a non-U.S. entity that is owned or controlled by a U.S. person and established or maintained outside the United States from knowingly engaging in any transaction, directly or indirectly, with the government of Iran or any person or entity subject to the jurisdiction of the government of Iran that would be prohibited by the ITSR if engaged in by a U.S. person or in the United States.

A non-U.S. entity is "owned or controlled" by a U.S. person if the U.S. person (i) holds a 50% or greater equity interest by vote or value in the entity; (ii) holds a majority of seats on the board of directors of the entity; or (iii) otherwise controls the actions, policies, or personnel decisions of the entity.

The term "knowingly" means that an entity engages in a transaction with actual knowledge or reason to know of prohibitions on the transaction. The term "subject to the jurisdiction of the government of Iran" means that a person or entity is organized under the laws of Iran or any jurisdiction within Iran, is ordinarily resident in Iran or located in Iran, or is owned or controlled by any of the foregoing.

If a transaction engaged in by a U.S. person is exempt from the prohibitions of the ITSR, generally it would not be prohibited for an entity that is owned or controlled by a U.S. person and established or maintained outside the United States (a "U.S.-owned or -controlled foreign entity") to engage in the transaction as well. Concomitantly, if a transaction prohibited by the new ITSR section 560.215 is one for which a U.S. person might apply for an OFAC-specific license—for example, the exportation of medical devices to Iran—a U.S.-owned or -controlled foreign entity may also apply for a specific license to engage in such a transaction.

Grace Period

The second new ITSR section, 31 C.F.R. § 560.555, in and of itself, retroactively authorizes from October 9, 2012, and up until March 8, 2013, all transactions ordinarily incident and necessary to the winding down of transactions prohibited by section 560.215, provided that those ordinarily incident and necessary transactions do not involve a U.S. person or occur in the United States. Transactions involving Iranian financial institutions are authorized pursuant to section 560.555 only if the property and interests in the property of the Iranian financial institution are blocked solely pursuant to the ITSR and not blocked by another set of regulations or another act of Congress.

The bolded terms above are not defined by OFAC in section 560.555, but OFAC traditionally has construed these terms reasonably, provided that the end goal of compliance is being pursued.

[1]. For more information on the executive order, see our October 12, 2012, LawFlash, "Iranian Sanctions Extended by Executive Order," available here.