Recent Executive Order Extends Civil Penalties Against U.S. Parent Companies for Foreign Subsidiary Violations of Iranian Trade Sanctions

Earlier this month, President Obama signed Executive Order 13628 (EO 13628), which increases the risk of civil penalties against U.S. parent companies based on transactions undertaken by their foreign subsidiaries.

Section 4 of EO 13628 creates the most significant impact on U.S. companies and their foreign subsidiaries. Section 4(a) prohibits any “entity owned or controlled by a United States person and established or maintained outside the United States may knowingly engage 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 U.S. laws or regulations.

Significantly, Section 4(b) permits civil penalties to be imposed against U.S. companies that own or control the foreign entity that engages in the prohibited transaction, while Section 4(c) creates a window of opportunity for U.S. parent companies to divest and avoid civil penalties if the parent “divests or terminates its business with the [foreign] entity not later than February 6, 2013.”

Notably, the Executive Order’s penalty provision does not apply to U.S. companies that have an existing OFAC license to export medicine or medical devices to Iran under the Trade Sanctions Reform Act, a so-called “TSRA license.” However, companies should review all TSRA licenses to confirm activities by their foreign subsidiaries are covered and ensure there is no compliance risk in light of EO 13628.

This new development marks the first time that U.S. sanctions against Iran have been extended to cover the activities of U.S.-owned or controlled foreign subsidiaries. Only U.S. sanctions against Cuba have similar extraterritorial reach to U.S.-owned or controlled foreign subsidiaries.

Ahead of the President signing EO 13628, OFAC posted three new FAQs on its website, entitled 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,

Regardless of the November 6 Election Day outcome, it seems unlikely that a change in administration would cause a change in U.S. policy regarding sanctions against Iran. Therefore, U.S. companies and foreign businesses owned or controlled by U.S. persons

(individuals and entities) should be reviewing how EO 13628 may impact their business activities, be planning for a change in those practices, and reviewing export controls and economic sanctions compliance policies and procedures to account for this latest development.

For questions and assistance regarding EO 13628 and other export controls and economic sanctions issues, please contact Jon P. Yormick, Attorney and Counsellor at Law, [email protected].


Upcoming Presentations in Buffalo and Cleveland Focus on U.S. Export Controls

In September, Jon Yormick will speak on U.S. export controls and offer guidance on compliance measures organizations must take in this era of investigations, enforcement, and increased penalties.

On September 19 in Buffalo, Jon will address the American Immigration Lawyers Association Upstate New York Chapter at its dinner meeting, “What Upstate NY Immigration Lawyers Should Know About Export Controls.” His presentation will focus on the I-129 Part 6 Certification requirements and the role of immigration counsel in export controls compliance. Jon will discuss specific issues regarding compliance with the deemed export rule, including dual/third-country nationals, TN and B-1 visa, and staffing company concerns. He will be joined by Jim Trubits of Mohawk Global Advisory Services. The meeting will be held at the Protocol Restaurant and be videotaped for Lawline CLE.

Two days later, on September 21, Jon will speak at the Ohio Aerospace Institute’s Industry Roundtable meeting on “Busting Myths of DDTC Registration.” He will debunk misconceptions and misunderstanding about registration and provide guidance on what aerospace, defense, technology companies and universities need to know about registering with the Department of State, Directorate of Defense Trade Controls (DDTC) for items and technical data on the U.S. Munitions List and provide an update on Export Control Reform (ECR).


DoD Issues Final Rule for Contractors Regarding Export Controls

The Department of Defense (DoD) has issued its final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to include a clause concerning contractor obligations under the ITAR and the EAR. The final rule requires that a single clause regarding export controls be used in all solicitations and contracts, regardless of whether the contract involves export-controlled items. In addition, flowdowns are mandated at all contracting tiers.

Under the rule, “Export-controlled items” means items subject to the Export Administration Regulations (EAR) or the International Traffic in Arms Regulations (ITAR) and includes commodities, software and technology. The required clause under DFARS states “The Contractor shall comply with all applicable laws and regulations regarding export-controlled items…” The clause reiterates that compliance with export control laws and regulations exists independent of the DFARS clause.

The DoD rule does not impose new or additional obligations on contractors and simplifies contractual requirements. The flowdown requirement should serve to remind prime contractors and subcontractors of their respective export compliance obligations, including in situations involving technical data, technology or software source code governed by the “deemed export” rule where such information is released to a foreign national (who is not a “green card” holder), even if the release occurs in the U.S.

Freight Forwarder’s Entity List Violation: $70,000 Civil Penalty

The Bureau of Industry and Security (BIS) has issued a civil penalty against a New York freight forwarder for aiding and abetting an export-related violation involving a party on the Entity List.

According to the terms of the settlement, the company will pay a $70,000 civil penalty for 3 alleged violations occurring in 2006.  The forwarder allegedly arranged for the export of scrap metal to a company in Karachi, Pakistan that is on the Entity List. The total value of the shipments was less than $100,000.  The scrap metal was classified as EAR99.  The Entity List set out the applicable license review policy for the consignee to be a “presumption of approval for EAR99 items.”  However, it appears that the shipments were exported without an export license.  The aiding and abetting penalty is based on strict liability, so intent is not a requirement that BIS must show.

The Entity List was created in 1997 and is modified by BIS from time to time.  The Entity List includes research institutions, governmental agencies, private companies, and other parties whose activities are contrary to U.S. national security or foreign policy interests.  Many entities are involved in activities related to nuclear research, development, and proliferation.  The entities are located in countries ranging from Canada, Germany, Ireland, Israel, Hong Kong, and the UK to China, India, Iran, Malaysia, Russia, Syria, and the UAE.

The case is notable because it applied the increased penalty level under the International Emergency Powers Enhancement Act of 2007, with maximum penalties of $250,000 per violation (or twice the transaction value), even though the violations occurred prior to enactment of the enhanced penalties.

This case also shows how BIS continues to actively pursue enforcement of the Export Administration Regulations (EAR) against all parties involved in transactions that violate the export control laws and regulations, including freight forwarders, clearly demonstrating the need for all parties involved with exports to understand and comply with those laws and regulations.

For questions and assistance regarding export controls compliance, penalties, investigations, and self-disclosures, please contact Jon P. Yormick, Managing Attorney, at [email protected] or toll free in Canada and the U.S. at +1.866.967.6425.

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