Iran sanctions law reporting causing confusion

Companies are scrambling to understand new provisions of sanctions law requiring disclosure of contracts, transactions and dealings with entities in Iran, lawyers say.

Those provisions took effect Feb. 6 under Section 219 of the Iran Threat Reduction and Syria Human Rights Act and cover U.S. and foreign companies that do business in the U.S. or are listed on U.S. stock exchanges.

Companies must detail activities and contacts by any of their affiliates, which include not just units and subsidiaries but individuals such as board members and senior executives. The task can be daunting for multinational companies that must track dealings of not only subsidiaries in which they hold majority ownership, but ones in which they hold a minority stake.

“There are requirements in the laws for SEC disclosures, but the unfortunate thing is Congress doesn’t appear to have consulted with [the Office of Foreign Assets Control] or the SEC before passing this legislation,” said Judith Lee, chairwoman of law firm Gibson Dunn & Crutcher’s international trade and regulation compliance practice group.

“Not only are the companies trying to figure out what is required, the agencies are too…For somebody like me who has worked in the sanctions area for many years, this is not the best way to go about passing legislation.”

Because Congress didn’t work closely with OFAC and the SEC, the agencies are still trying to figure out how to administer the rules, Lee said. Her firm is advising clients that have many internationally affiliated companies to canvass all their entities around the world and get information about whether those entities have any business with Iran. “We still don’t know to what extent the SEC is going to be vigorous in enforcing the requirement,” she said. “But Congress is expecting the SEC to be vigorous and will be critical of the agency if they’re not.”

The SEC declined to comment on to what extent it was consulted by lawmakers when the law was being drafted, and wouldn’t comment on whether it would be lenient in enforcing the provisions of the law while companies figure out what is required. A Department of Treasury official said the agency and Congress share the goal of “increasing pressure on Iran to comply with its international obligations.”

Greta Lichtenbaum, a partner at O’Melveny & Myers dealing with sanctions law regulations, said the reporting rules are very broad and open to interpretation. They are having a greater impact on non-U.S. companies, as U.S.-based companies already were prohibited from having dealings in Iran from previous U.S. sanctions laws.

“We are working together with many clients to make sure they are comfortable that not only are they reporting accurately if they have something to report, but also that they are doing the right kind of diligence on their affiliates to make sure they can properly reach a conclusion that they don’t have anything to report,” Lichtenbaum said.

The SEC is approaching this very carefully, and is mindful of the complexities of the reporting law, she said. Although it would be helpful to have more written guidance, Lichtenbaum said the agency is open to discussing how these new rules will work.

“After this first round of disclosures are made, perhaps they will be in a better position about what people should be doing in the future,” she said. “It’s hard for an agency when new statutory requirements come into play. They have to exercise care and look at the legislative intent, but they also don’t want to create unnecessary burdens for public companies.”

The SEC has provided some guidance on its website regarding Section 219 compliance, and a group of eight law firms, including Gibson Dunn and O’Melveny & Myers, sent out an advisory to clients on what they must do to comply.

Unless companies know for certain, or have a reason to believe, the information they are collecting from affiliates is incorrect, there is no provision of the law requiring them to verify the information, Lee said. “Affiliated companies—especially if not majority-owned—can be resistant, since they may be in countries where it is legal to do business in Iran,” she said. “They may not feel they need to disclose that information,” or may feel doing so would put them in violation of their own country’s laws.

By The Wall Street Journal


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