Non-U.S. Subsidiaries of U.S. Companies Now Prohibited From Engaging in Unlicensed Transactions With Iran

Today President Obama issued an Executive Order that contains the framework for implementing various provisions of the Iran Threat Reduction and Syria Human Rights Act of 2012. HR 1905 which has variously been referred to as ITRSHRA, ITRA or TRA, was passed by Congress on August 1, 2012 and signed into law by the President on August 10, 2012 (Public Law 112-158). 

[October 12, 2012 Update: The full text of Executive Order 13628 published in the Federal Register on October 12, 2012 is below. OFAC has indicated that it is referring to the Iran Threat Reduction and Syria Human Rights Act of 2012 as the "TRA".] 

 The provision of ITRA that has generated the most interest and will have the most significant impact on U.S. companies is section 218, which prohibits entities owned or controlled by a U.S. person and established or maintained outside the U.S. (i.e., non-U.S. subsidiaries) from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran, if the transaction is prohibited by any U.S. laws or regulations. In other words, ITRA prohibits non-U.S. subsidiaries from engaging in unlicensed transactions with Iran, even if no U.S. persons are involved in the transaction.

Section 4 of today's Executive Order implements the foreign subsidiary provision of ITRA and authorizes the imposition of penalties on U.S. parent companies that own or control the non-U.S. entity that engaged in the prohibited transaction. 

The Treasury Department has been delegated by the President to implement this provision and the Office of Foreign Assets Control (OFAC) will be responsible for implementing and enforcing this new aspect of the long-standing U.S. sanctions on Iran.

As a result of today's action, Iran now joins Cuba as the only U.S. sanctions programs that apply to non-U.S. subsidiaries of U.S. companies. 

In accordance with ITRA, the Executive Order states that penalties for violations of the subsidiary prohibition in will not apply if the U.S. person that owns or controls the entity divests or terminates its business with the entity not later than February 6, 2013.

In connection with the issuance of the Executive Order OFAC today issued three Frequently Asked Questions (FAQ) on its website (reprinted below) that provide additional guidance on OFAC's policy regarding the new prohibitions applicable to foreign subsidiaries of U.S. companies. 

Importantly, the Executive Order and FAQ 239 state that the U.S. parent liability prohibitions will not apply in cases where general or specific licenses have been issued by OFAC authorizing the foreign subsidiary to engage in the transaction. As a result, U.S. companies that export medicine and medical devices to Iran under licenses issued under the Trade Sanctions Reform Act should review their licenses to ensure that the licenses cover the activities by their foreign subsidiaries. 

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[OFAC Answers to] Questions Related to Section 4 of Executive Order Authorizing the Implementation of Certain Sanctions Set Forth in the Iran Threat Reduction and Syria Human Rights Act of 2012 and Additional Sanctions with Respect to Iran

238. What is the new prohibition on foreign subsidiaries of U.S. persons, and how does it work?

Section 4 of the Order prohibits an entity owned or controlled by a U.S. person and established or maintained outside the United States (a “foreign subsidiary”) from knowingly engaging in any transaction, directly or indirectly, with the Government of Iran or any person subject to the jurisdiction of the Government of Iran, if that transaction would be prohibited by certain Executive orders prohibiting trade and other dealings with, and investment in, Iran and blocking the Government of Iran and Iranian financial institutions, or any regulation issued pursuant to the foregoing, if the transaction were engaged in by a United States person or in the United States. Civil penalties for the foreign subsidiary’s violation shall be applied to the U.S. parent company to the same extent that they would apply to a U.S. person for the same conduct.

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239. Are foreign subsidiaries of U.S. companies covered under OFAC general licenses and/or permitted to apply for specific licenses from OFAC?

To the extent a transaction is exempt from the prohibitions of the Iranian Transactions Regulations, E.O. 13599, section 5 of E.O. 13622, or Section 12 of the Order, or is authorized by a general license issued pursuant to these authorities if engaged in by a U.S. person, it would not be prohibited for a foreign subsidiary (as defined above) to engage in the transaction, provided that it satisfies all the conditions and requirements of the exemption or general license. Similarly, if the transaction is one for which a U.S. person might apply for a specific license — for example, the exportation of medical devices to Iran — a foreign subsidiary or its U.S. parent may apply for a specific license for the foreign subsidiary to engage in the transaction. Note: Whether a U.S. parent company’s specific license covers transactions by its foreign subsidiary that are otherwise prohibited by section 4 of the Order will depend on the terms of that license and the scope of the authorized activities.

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240. Is there a wind-down or safe harbor provision in Section 4 of the Order? 

Consistent with Section 218(d) of the TRA, Subsection 4(c) of the Order provides that civil penalties shall not apply if the U.S. person divests or terminates its business with the foreign subsidiary (as defined above) not later than February 6, 2013.


Executive Order 13628 (10.9.12)

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Free Antiboycott, Export Controls, Sanctions and FCPA Compliance Training Programs Now Available From Lawline

Lawline, a leading provider of continuing legal education (CLE) programs, has opened up their entire library of online training courses so that anyone can view the courses for free. 

Included in Lawline's course catalog are four one-hour international trade compliance programs presented by international trade attorney Doug Jacobson on the following topics:

• An Introduction to U.S. Antiboycott Laws and Compliance 

• An Introduction to U.S. Export Controls and Sanctions 

• International Traffic in Arms Regulations (ITAR): What You Need to Know 

• The U.S. Foreign Corrupt Practices Act: Compliance and Enforcement

These four programs, which are highly rated by those that have seen them, can be accessed here. The entire Lawline catalog of courses can be accessed here. 

Only attorneys wanting to obtain CLE credit will have to pay a fee to Lawline. CLE credit is available to attorneys that are members of the bars of numerous states, including Texas, California and New York. 

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AAEI to Present Export Control Reform Webinar With BIS Undersecretary Hirschhorn on October 11, 2012

The American Association of Exporters and Importers (AAEI) will be hosting a webinar on the pending Export Control Reform effort on October 11, 2012 at 2 pm Eastern time. 

The speakers will include  Under Secretary for Industry and Security Eric L. Hirschhorn and Director of the Bureau of Industry and Security's Office of Exporter Services, Bernie Kritzer. 

The webinar, which is open to the public, will provide details and other important information on the current status of the export control reform initiatvie. Questions will also be taken from participants.  

The webinar fee is $25 for AAEI members and $35 for non-AAEI members. The webinar registration link can be found here. 

More information on the President's Export Control Reform can be found at Export.gov/ecr.

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Final Rule Adding 164 Parties to BIS Entity List Will Take Effect on October 9, 2012

The final rule mentioned in our previous post adding 164 parties to the Bureau of Industry and Security's Entity List will be published in the Federal Register on Tuesday, October 9, 2012 and will become effective on that date. The Federal Register notice is available below. 


The parties being added to Entity List are the 164 foreign persons and companies who were identified during a U.S. Government investigation as assisting a network of companies and individuals (namely Arc Electronics in Houston) involved in the procurement and delivery of electronic products subject to the Export Administration Regulations (EAR) and International Traffic in Arms Regulations (ITAR) to Russia in violation of the EAR and ITAR (a list of the part numbers of the products allegedly shipped to Russia can be found on pages 20-23 of the indictment. It is interesting to note that the indictment only mentions one part number subject to the ITAR).  


The practical impact of the publication of this final rule is that effective October 9, 2012 nothing "subject to the EAR" can be exported, reexported or transferred to any of the named parties starting on October 9, 2012 unless the items were already "en route aboard a carrier to a port of export or reexport." This is because the Entity List imposes a licensing policy of “presumption of denial” on all 164 parties. 

While the U.S. Government's Consolidated Restricted Party List was updated late last week to add all 164 names some commercial restricted party screening providers will not update their lists until this notice is published on Tuesday.

BIS Entity List Additions (10.8.2012)

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U.S. Indicts U.S. and Russian Companies and Individuals Involved in Russian Military Procurement Network and Adds 164 Parties to BIS Entity List

As a result of an investigation involving an alleged Russian military procurement network, the U.S. Department of Justice announced today that it had unsealed an indictment against two companies and 11 individuals located in the U.S. and Russia and executed a number of search warrants at various residences, businesses and banks in the U.S. 

In a coordinated action, the Commerce Department's Bureau of Industry and Security (BIS) also issued a final rule (PDF) amending the Export Administration Regulations (EAR) to add 164 foreign persons and companies to the Entity List who allegedly received, transshipped or facilitated the exports of the items to Russia.

The Indictment

According to the indictment, the defendants were allegedly involved in: 

a surreptitious and systematic conspiracy to obtain advanced, technologically cutting-edge microelectronics from manufacturers and suppliers located within the United States and to export those high-tech goods to Russia, while carefully evading the government licensing system set up to control such exports. The microelectronics shipped to Russia included analog-to-digital converters, static random access memory chips, microcontrollers, and microprocessors” that were subject to the jurisdiction of the Export Administration Regulations (EAR) or International Traffic in Arms Regulations (ITAR).

The Justice Department also stated that the defendants:

allegedly exported many of these high-tech goods, frequently through intermediary procurement firms, to Russian end users, including Russian military and intelligence agencies. To induce manufacturers and suppliers to sell them these high-tech goods, and to evade applicable export controls, the defendants often provided false end user information in connection with the purchase of the goods, concealed the fact that they were exporters, and falsely classified the goods they exported on export records submitted to the Department of Commerce. For example, in order to obtain microelectronics containing controlled, sensitive technologies, Arc claimed to American suppliers that, rather than exporting goods to Russia, it merely manufactured benign products such as traffic lights. Arc also falsely claimed to be a traffic light manufacturer on its website. In fact, Arc manufactured no goods and operated exclusively as an exporter.

In addition to the 11 individuals named in the announcement, the two companies that were indicted are:

• Arc Electronics, Inc., Houston, Texas
• Apex System, L.L.C., Moscow, Russia

Addition of 164 Parties to BIS Entity List

The 164 parties that will be added to the Entity List are located in Belize, Canada, Cyprus, Estonia, Finland, Germany, Greece, Hong Kong, Kazakhstan, Russia (119 of the 164), Sweden, United Kingdom and British Virgin Islands. (There are actually 165 entries added, one of which is an alternate address for one party). 

The Entity List, found at Supplement No. 4 to Part 744 of the EAR, includes the names of non-U.S. businesses, research institutions, government organizations and individuals that have been identified as being involved in activities that merit additional scrutiny and licensing requirements. The entries on the Entity List specify the license requirements and license review policy that are applicable to shipments to each listed entity. In some cases, a license will be required to ship items classified as EAR99 to the customer, even when a license would not normally be required. In other cases, all items subject to the Export Administration Regulations will require a license. The export license review policy also varies from entity to entity. In some cases, there is a presumption of approval or denial and, in other cases, the license will be reviewed by BIS on a case-by-case basis. Exporters, freight forwarders and other parties that are involved in shipping items to parties on the Entity List without the required export license are subject to civil penalties of up to $250,000 per violation or twice the value of the underlying transaction.

In this case, the Entity List license requirement for 164 parties is “presumption of denial” and applies to “all items subject to the EAR.” As a result, an export license issued by BIS is required before any item subject to the EAR can be exported, reexported or transferred to these persons or companies, and establishes a presumption that no such license will be granted. In addition, no License Exceptions contained in the EAR can be used for exports, reexports or transfers to any of the 164 named parties.

The export license requirement will go into effect upon publication of the Entity List changes in the Federal Register, which should take place early next week. 

While the Entity List announcement contains a "saving clause" authorizing shipments of items to these parties that were en route aboard a carrier to a port of export or reexport, on the date of publication of the notice in the Federal Register, U.S. exporters and non-U.S. exporters of U.S. origin items should review the names to be added to the Entity List to ensure that there are no pending transactions with any of these parties that may be ready to be shipped. 

While restricted party screening software vendors will update their restricted party screening list databases to include these 164 new names, some software vendors will not update their databases until the notice is published in the Federal Register next week.

Finally, while Arc Electronics in Houston, Texas is not included on the Entity List since it is located in the U.S., it is recommended that Arc Electronics and the other named U.S. defendants not included on the Entity List be considered as restricted parties for export compliance purposes pending the outcome of the court proceedings (although it is my understanding that Arc Electronics was shut down today and could be added to the Denied Persons List in the future).  

Request by Law Enforcement for Assistance

In an unusual development, the press release includes the following request by the law enforcement agencies involved in this matter:

As a result of this case, there may be victims and witnesses who need to contact the agencies involved in the investigation. If your business has been approached by one of the defendants, or by someone trying to obtain export-protected, sensitive technology who appeared not to be legitimate, please report that information to businessoutreach@leo.gov. The information will remain confidential and will be handled by the appropriate authorities.

The leo.gov website is the FBI's Law Enforcement Online (LEO) system that is used to support investigations and other law enforcement communication-related activities. 

Exporters should consider consulting with qualified export controls counsel before submitting information via the LEO website.

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