Background on U.S. Trade Regulations and Export Laws
Many people say that U.S. foreign policy is a mess. While this point is clearly debatable, it seems clear that the U.S. laws, regulations, and executive orders attempting to implement U.S. foreign policy certainly are a mess. Nowhere is this "mess" more clearly evident in the U.S. regulatory scheme than with the U.S. export laws, which are a veritable maze of statutes, regulatory schemes, and inter- and intra-agency enforcement regimes. For U.S. companies selling in international markets, it is not always easy to figure out what is "right."
For example, the U.S. Department of Treasury, Office of Foreign Assets Control, implements trade regulations on embargoed and sanctioned countries; the sanctions also extend to certain classes of people such as drug traffickers, supporters of terrorism, blood diamond dealers, and even individuals associated with disruptive political regimes (such as, for example, those in Liberia, the Ivory Coast, or the former Yugoslavian republics). It is this self-same office that has pursued enforcement actions against filmmakers Oliver Stone and Michael Moore for their unauthorized travel to Cuba. Beyond the sanction regimes, the U.S. Department of State, Directorate of Defense Trade Controls, implements trade regulations relating to the sale of international arms, approving international arms sales involving U.S. technology. The U.S. Department of Treasury, Bureau of Alcohol, Tobacco and Firearms, regulates the import of certain arms and munitions to the U.S. Simultaneously, the U.S. Department of Commerce, Bureau of Industry and Security, implements trade regulations relating to sales of all other products (especially commercial or "dual use" products) sold in the international market. Notably, the regulatory purpose of these several agencies is completely separate from that of the U.S. Department of Homeland Security, Customs and Border Protection, which separately monitors the flow of products at the borders. One is little surprised to find that many companies find navigating this regulatory maze a very difficult chore.
One solution that many companies have pursued to manage their compliance with U.S. laws is to set up separate subsidiaries in foreign countries. This allows personnel to be more familiar with a specific country’s laws, while simultaneously lessening the risk of conflicting trade and tax laws in the international market. While some may criticize such companies for taking portions of their business off-shore, others see it as a practical solution to the impracticality (if not sheer impossibility) of perfect regulatory compliance under scores of different regulatory regimes. Many companies establish complicated corporate structures with a U.S. parent company creating separate foreign subsidiaries to do business in Europe, Africa, South America, Asia, and the Middle East. The corporate parent is able to expand into these foreign markets, while the foreign subsidiaries implement region-specific policies and procedures to ensure compliance with the law, operating (in many respects) as a foreign company, employing foreign persons, and manufacturing foreign products. This "foreign subsidiary" business model is common for many U.S.-based companies.
Jurisdictional Limits of U.S. Export Laws
Recognizing that the jurisdictional limits of U.S. laws can only reach so far, U.S. export laws apply for the most part only to "U.S. persons." In most circumstances, this applies only to U.S. companies (those incorporated within the U.S., including foreign branches), U.S. citizens (wherever situated, whether within the U.S. or abroad), and U.S. permanent residents (so called, "green card" holders). Generally, this definition does not include foreign companies (those incorporated abroad) that are subsidiaries of U.S. companies. This means (rightly so) that foreign companies, employing foreign persons, manufacturing foreign products, selling in foreign markets generally — but not always — do not need to worry about U.S. export laws. Even for countries such as Iran, foreign companies and foreign persons can do business selling foreign products in and with Iran without running afoul of U.S. laws. U.S. companies and U.S. persons, however, may not. In fact, any products manufactured in the U.S. or using U.S. technology or components (beyond a de minimis amount), may not be sold in Iran. Only foreign products sold by foreign companies through foreign persons lie beyond the scope of the current Iranian sanction regulations.
The jurisdictional limitation on foreign persons is not necessarily true for all enforcement regimes, however. For example, countries sanctioned under the World War I statute, the Trading with the Enemy Act, 50 USC App. 1-44, suffer from comprehensive and far-reaching sanctions programs. The Trading with the Enemy Act applies to all "persons subject to the jurisdiction of the United States," which is a slightly different concept than "U.S. persons"). The term ""persons subject to the jurisdiction of the United States" includes all foreign subsidiaries of U.S. companies, as well as all other U.S. companies. See, e.g., 31 CFR 500.329; 31 CFR 515.329. Currently, only Cuba and North Korea are sanctioned under this statute. The fact that the Cuba and North Korea sanctions apply even to foreign company subsidiaries of U.S. companies has made these two countries pariahs in the international economic market. However, as already noted, the broad scope of all U.S. sanctions does not currently reach as far with regard to other countries, including (for example) Iran.
Current Sanctions Against Iran
Current U.S. policy disfavors trade of any kind with Iran (the administration refers to this as "economic isolation," similar to that achieved with respect to Cuba and North Korea). Congress has passed several laws designed to isolate Iran economically and to limit Iran’s proliferation risk. See, e.g., Iran and Libya Sanctions Act of 1996, PL 104-172; Iran Nonproliferation Act of 2000, PL 106-178. But beyond this, the President has utilized the International Emergency Economic Powers Act (50 USC 1701-1706) (originally enacted in 1977) to enact broad economic sanctions against Iran, prohibiting (with very limited exceptions) all U.S. persons from doing business with persons in Iran or "facilitating" other persons in doing business with Iran. Notably, due in large part to the fact that the core-Iranian sanctions flow from the International Emergency Economic Powers Act (not the Trading with the Enemy Act), the Iranian sanctions reach only "U.S. persons," not "persons subject to the jurisdiction of the United States." See 31 CFR 560.201-560.209. This allows (in some circumstances) foreign subsidiaries of U.S. companies to do business in Iranian markets without running afoul of U.S. law.
Pending Legislation to Expand the Scope of Sanctions on Iran to apply to Foreign Subsidiaries of U.S. Companies
Currently, there are at least five bills pending in the 110th Congress (two of which have already been passed by the House) that would expressly extend the jurisdictional scope of the Iranian sanctions to all subsidiaries of U.S. companies. Leaving aside for a moment whether such legislation is even necessary (especially in light of the fact that 50 USC 1702(a) already authorizes regulation of "persons subject to the jurisdiction of the United States"), the pending legislation highlights the inherent risks associated with doing business in Iran, given the United States’ historic and current attitudes toward Iranian isolation. Just because foreign subsidiaries of U.S. companies may have been able to conduct business with Iranian persons under certain circumstances over the past 30 years does not necessarily mean that such opportunities will continue. If any of the following bills are enacted, U.S. parent companies may find that their ability to conduct business in and around Iran has changed in an instant.
1. H.R. 1400, the "Iran Counter-Proliferation Act of 2007," was introduced in the House on March 8, 2007 by Rep. Tom Lantos (D-California), Chairman of the House Foreign Affairs Committee, with the express purpose of exerting economic pressure on Iran to limit its nuclear proliferation activities. The bill prohibits "an entity" from engaging in acts outside the U.S. that, if committed by a U.S. person or in the U.S., would be otherwise prohibited. An "entity" is defined broadly as a partnership, corporation, etc., without regard to where it is incorporated. This definition implicates broadly all non-U.S. companies (including subsidiaries, whether wholly owned or not). The bill also imposes penalties on the parent company of such an entity if the entity was created or availed of for the purpose of engaging in prohibited trade activities. The circumstances under which the parent company might be liable are unclear, as the legislative history thus far is inconsistent — portions of the accompanying House Report (H.R. 110-294) seem to indicate that the bill section is specifically targeted toward companies that create foreign subsidiaries to evade the law, which would seem to indicate that a more narrow interpretation of section is appropriate; other statements in the House Report seem to indicate that a broad interpretation is preferred and that parents should be subject to broad liability for the actions of its foreign subsidiaries. The bill was amended in committee to apply only to contracts in the future, and not to contracts entered into prior to May 22, 2007. This bill was approved by the whole House on September 25, 2007 and referred to the Senate, where it has currently been referred to committee.
2. H.R. 957, an amendment to the "Iran Sanctions Act of 1996," was introduced in the House on February 8, 2007 by Rep. Ileana Ros-Lehtinen (R-Florida). This is a "one-issue" bill and is designed solely to expand the scope of the Iranian sanction regulations to include foreign subsidiaries of U.S. companies. The language of H.R. 957 is virtually identical to that of H.R. 1400, expanding the definition of a "person" to include "any foreign subsidiary." The bill was approved by the whole House on July 31, 2007 and referred to the Senate, where it currently sits in committee.
3. S. 1234, the "Stop Business with Terrorists Act of 2007," was introduced in the Senate on April 26, 2007, by Senators Frank Lautenberg (D-New Jersey) and Hillary Clinton (D-New York). This bill imposes liability on parent companies for the unauthorized acts of its subsidiaries, whether foreign or U.S. In introducing the bill, Senator Lautenberg summarized the impact as follows:
My bill is simple. It closes a loophole in the law that allows American companies to do business with our enemies. Our current sanctions laws prohibit United States companies from doing business directly with Iran, but the law contains a loophole. It enables an American company to create a foreign-based subsidiary that can do business with that prohibited country. As long as this loophole is in place, our sanctions laws have no teeth. My bill will close this loophole once and for all and will cut off a major source of revenue for terrorists. It will require foreign subsidiaries that are majority controlled by a U.S. parent company to follow U.S. sanctions laws. For those companies that would need to divest from such a situation, they would have 90 days to do so.
This bill was promptly referred to committee, where no additional action has been taken.
4. H.R. 3390, the "Iran Counter Proliferation Act of 2007," was introduced in the House on August 3, 2007 by Rep. Darrell Issa (R-California). The bill’s stated purpose is to prevent Iranian nuclear proliferation, but it also expands the scope of the Iranian sanctions generally. In particular, it imposes the same types of liability on the parent companies for its foreign subsidiaries as discussed above, as well as offering companies 90 days to divest or terminate a foreign subsidiary. After being introduced, the bill was referred to several different committees, where no additional action has been taken.
5. S. 970, the "Iran Counter Proliferation Act of 2007," was introduced in the Senate on March 22, 2007 by Senator Gordon Smith (R-Oregon). This bill is virtually identical to H.R. 3390, although it does contain a few additional provisions (especially those targeting Russian complicity with Iran). With regard to the liability of parent companies, the text of the bill is the same as H.R. 3390, as are the consequences. This bill was also referred to committee with no further action taken to date.
Potential Impact on U.S. Companies
For the last few decades, Congress has enacted legislation outlining what is and what is not appropriate with regard to Iran. For U.S. persons, there is very little commerce or interaction that is approved; for foreign persons, the U.S. Government has preferred to push a policy agenda, instead of expanding the jurisdictional reach of U.S. sanctions. For the last few decades, companies have come to rely on this rule of law in doing business with Iran. While this rule may well create a "loophole," as Senator Lautenberg has described it, the fact remains that U.S. policies have permitted access to these markets (albeit indirect access), provided no U.S. products or technology are being sold and no U.S. persons are involved in or otherwise expressly "facilitate" the Iranian transactions. Given the sheer number of bills pushing this issue and the bi-partisan support for the general principle, U.S. companies should be warned that doing business with Iran may soon become as problematic as doing business with Cuba.
Regardless, if any of the threatened legislation discussed above were to pass, it would clearly have a disruptive effect, placing U.S. companies instantly at risk for any and all actions of their foreign subsidiaries in doing business Iran. While the "90-day divestiture" window advanced by some may allow a little breathing room for U.S. companies suddenly saddled with liability for having a subsidiary doing business with Iran, it seems that such a window is far too short to "close the deal" and completely shut down or spin off a corporate entity. Still, U.S. companies should be aware that if the scope of the Iranian sanctions is expanded to include foreign subsidiaries, and if any of those foreign subsidiaries are doing business in or around Iran, there are significant business problems looming on the horizon.