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It has now been two years since Iran-related sanctions relief took effect under the Joint Comprehensive Plan of Action.[1] While U.S. persons continue to be generally prohibited from engaging in Iran-related business, the JCPOA clearly expanded opportunities, from a sanctions perspective, for non-U.S. persons (including foreign subsidiaries of U.S. companies under General License H) to do business in that country.
The new sanctions landscape has implications for the reporting requirements of SEC-registered issuers. Since 2013, U.S.-registered issuers have been required to disclose certain Iran-related business activities in public filings with the SEC, and issuers have filed hundreds of such Iran Notices since the lifting of sanctions. We have surveyed the field of these filings to assess whether disclosure trends have been impacted by the still-changing landscape of U.S. sanctions policy toward Iran.
As we have described in prior publications, Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) requires SEC-registered issuers to disclose in their periodic reports filed under Section 13 of the Securities Exchange Act of 1934 specific information concerning business activities generally relating to Iran’s energy and financial sectors and Iran’s suppression of human rights, but also relating to any “transaction or dealing” with the Government of Iran—broadly defined to include any entity owned or controlled, directly or indirectly, by the Government of Iran, as well as any political subdivision, agency, or instrumentality thereof, and any person who acts or purports to act for on its behalf. Additionally, Section 219 requires issuers to report transactions with OFAC-designated global terrorists and weapons proliferators.
As expected, since the implementation of the JCPOA, there has been a notable increase in Section 219 disclosures by U.S. companies in Form 10-Ks. By our count, roughly half of Iran Notices appear in 10-Ks as opposed to 20-F filings.
Issuers Maintain Conservative Approach to Section 219 RequirementsWith little guidance issued by the SEC, issuers have struggled with how broadly to interpret the terms of Section 219—particularly, the terms “affiliate” and “Government of Iran”—as they determine which events trigger a reporting obligation. As reflected by the examples below, issuers have continued a pattern of taking a conservative approach to these terms.
“Affiliate”
Section 219 requires issuers to disclose certain conduct by the issuer “or any affiliate of the issuer” with respect to Iran. The SEC staff, in guidance published on December 4, 2012, suggested that the term “affiliate” in Section 219 is the same as defined in Exchange Act Rule 12b-2. Rule 12b-2 states that “[a]n ‘affiliate’ of, or a person ‘affiliated’ with, a specified person, is a person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified.” As we have noted in previous publications, issuers continue to lament the vague scope of this term as they reported the conduct of various affiliates, no matter how attenuated their corporate relationship may be.
For example, in its February 16, 2017 filing, Laredo Petroleum, Inc. (a U.S. company) stated clearly that neither it nor its affiliates knowingly engaged in any activities associated with Iran. However, “because the SEC defines the term ‘affiliate’ broadly,” Laredo disclosed information provided by Warburg Pincus, Laredo’s founding member and whose affiliates own 36.2% of Laredo’s common stock. According to the disclosure, the affiliates of Warburg Pincus beneficially own more than ten percent of the equity interests of another company, Santander Asset Management Investment Holdings Ltd. (SAMIH). Because SAMIH may be deemed to be under common control with Laredo due to the SEC’s broad interpretation of affiliate, Laredo disclosed that a SAMIH affiliate—Santander U.K. plc—held savings accounts for two SDNs during the year, even as it noted that SAMIH’s activity does not relate to any activity conducted by Laredo or Laredo’s affiliates.
Many issuers disclosed Iran activities of their major shareholders. For example, noting that the SEC “defines the term ‘affiliate’ broadly,” Century Aluminum Co. (a U.S. company) disclosed in 2017 the Iran activities of its largest stockholder (and affiliates thereof), “despite the fact that the Company has no control over” those entities. Similarly, Polymet Mining Corp. (a Canadian company) disclosed in 2016 that it was reporting information related to its largest shareholder, which, because of the SEC’s broad interpretation, “may be considered an affiliate of the Company despite the fact that the Company has no control over” that shareholder’s actions or the actions of its affiliates.
Hilton Worldwide Holdings, Inc. (a U.S. company), also noted the SEC’s broad interpretation of the term “affiliate,” stating that it may be deemed to be a controlled affiliate of the Blackstone Group. Because affiliates of the Blackstone Group may be deemed to be Hilton’s affiliates, Hilton Worldwide reported last year the Iran-related activity of Blackstone affiliate Travelport Worldwide Ltd. This is in addition to Hilton disclosing its own reportable activity under Section 219, which included the stay at a Hilton property by an Iranian governmental delegation.
“Dealings” with the “Government of Iran”
Similarly, there is continued lack of clarity as to the specific types of entities encompassed by the “Government of Iran,” and what activities constitute reportable “dealings or transactions.” Here again, issuers largely take a conservative approach.
Transactions with Iranian joint ventures frequently prompted disclosures, even when the ownership of the venture was less than clear. For example, ArcelorMittal S.A., (a Luxembourg company) reported the business conducted in Iran of its European business segment. In disclosing the sale of steel products to an Iranian joint venture, ArcelorMittal stated that it relied not on SEC guidance, but on “press reports and other publicly available information,” which suggested that these “companies may have links to the Iranian Government.”
In a complex disclosure related to a joint venture, BHP Billiton (an Australian company) disclosed the activity of its wholly owned affiliate BHP Great Britain Ltd. (BHP GB). BHP GB, together with British Petroleum (BP) and two other oil and gas companies, holds a percentage interest in the Bruce oil and gas platform that provides transportation and processing services to the Rhum gas field. BHP Billiton noted that the Rhum field is owned under an unincorporated joint arrangement between BP and the Iranian Oil Company Ltd., whose indirect owner—the National Iranian Oil Company—is owned by the Government of Iran. BHP also noted that the Bruce-Rhum agreement to which its affiliate is a party is an activity authorized pursuant to an OFAC-issued license.
Nomura Holdings, Inc. (Japan) disclosed that its indirect wholly owned subsidiary “interacted with a multilateral development financial institution that supports the economic development of its member countries, largely in Africa, the Middle East and Southeast Asia, in connection with a potential financing transaction for the client of the institution.” The company noted that the Government of Iran holds a minority ownership interest in this institution, but that it had no basis to believe that the Government of Iran controls the institution.
Likewise, several issuers deemed Iranian port activities to constitute dealings with the Government of Iran. For example, in its 2016 filing, NewLead Holdings disclosed that one of its transport ships called at Bandar Imam Khomeini (BIK) port of Iran on two occasions to discharge shipments. Similarly, Safe Bulkers, Inc. (a Monaco company) disclosed the three port calls in Iran and provided the names of each Iranian port, the name of each vessel, the content of its cargo, as well as the gross rate charged by the port. While it asserted that this practice did not violate sanctions, Safe Bulkers stated that its policy is for its vessels to avoid port calls in Iran unless the charterer provides information certifying that its cargo is licensed by OFAC.
In another example of abundance of caution, Reynolds Group Holdings Ltd. (a U.S. company) disclosed in 2016 that a UAE joint venture (of which it owned 50%) sold milk carton sleeves to an Iranian dairy company that was “majority-owned by a pension fund for certain civil servants in Iran and therefore may be indirectly controlled by the Government of Iran.” Unilever N.V. (a Dutch company) disclosed in 2016 that its non-U.S. subsidiary, among other relevant transactions, “advertised our products on television networks that are owned by the Government of Iran or affiliated entities,” and further noted that “[i]ncome, payroll and other taxes, duties and fees (including for utilities) were payable to the Government of Iran and affiliated entities in connection with our operations” in the country.
Certain issuers have taken the position that even inadvertent transshipments through Iran trigger a reporting obligation. For example, in 2016 Honeywell disclosed that its non-U.S. subsidiary “inadvertently made four ground shipments of low value, non-U.S. items from Turkey to Uzbekistan from December 2013 to March 2014 that transited through Iran en route to Uzbekistan,” with a combined total value of approximately $48,000. The vendor proposed the transport route for the shipment through Iran, which was inadvertently approved by non-U.S. Honeywell employees. Honeywell noted that its subsidiary did not pay, directly or indirectly, any duties or taxes to the Government of Iran, as the goods were shipped pursuant to a treaty system allowing for the bypass of customs in transiting countries. Nonetheless, Honeywell voluntarily disclosed the transshipments to OFAC and reported the activity in its 10-K.
In a similar vein, some issuers reported even rejected transactions under the theory that they could be considered “dealing” with the Government of Iran. For example, last year Dell Technologies, Inc. (a U.S. company) reported that “the Embassy of the Government of Iran located in the Republic of Ireland placed an order for Dell desktop computers” and other equipment. Notably, Dell “did not accept the order,” but the Embassy “deposited prepaid funds in the amount of its purchase order in a local bank for our account.” Dell reported that the funds remain blocked at the local bank.
No Materiality Threshold
Section 219 contains no exception for de minimis transactions, as demonstrated by multiple examples. For example, Food retailer Royal Ahold Delhaize (a Dutch company) disclosed that in 2016 its subsidiary bol.com sold to two separate individuals a book on the Dutch language. The books were delivered to the Iranian Embassy in the Netherlands, for a net revenue of just €67.
When disclosing transactions of nominal value, some companies elected not to provide information on associated profits or revenues. For example, MasterCard, Inc. (a U.S. company) disclosed that it processed transactions related to Iranian Embassies in certain European countries, as well as transactions for Iran Air, which accepted MasterCard payments in Austria, France, Malaysia and Qatar. MasterCard provided no more detail, and did not disclose net revenues or profits associated with the processed transactions, only describing the transactions as “de minimis.”
Through disclosures, issuers have explicitly noted the current atmosphere of regulatory uncertainty. For example, Star Bulk Carriers, Inc. (a Greek company) noted that sanctions regimes instituted by various jurisdictions prohibit “a wide scope of conduct, target numerous countries and individuals, are frequently updated or changed and have vague application in many situations.” Consequently, “there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations.”
Many other issuers have likewise stated that they cannot provide assurance of future compliance with all applicable sanctions laws. For example, Mitsubishi UFJ Financial Group (a Japanese company) described the variance of sanctions laws across major jurisdictions as increasing the “costs and resources necessary to design and implement an appropriate global compliance program.” Specifically, Mitsubishi UJF reported that it altered its compliance program to accommodate a series of measures implemented by the Japanese government related to Iran. In doing so, however, Mitsubishi UJF expressed concern in its disclosure that “there remains a risk of potential U.S. regulatory actions against us…if U.S. regulators perceive the modified policies and procedures not to be in compliance with applicable regulations.”
Other companies are alerting investors to the potential for snap-back of nuclear-related sanctions. Capital Product Partners LP (a Greek company) noted that, although sanctions relief was granted as part of the JCPOA, “[a]ctivities permissible under the JCPOA have not actually been repealed or permanently terminated under U.S. law,” and that “the United States has the ability to re-impose sanctions against Iran if Iran does not comply with its obligations under the nuclear agreement.”
Despite this uncertainty, disclosures from both U.S. and non-U.S. issuers reveal that many companies are exploring new opportunities since the easing of sanctions two years ago. For their part, many U.S. issuers are taking advantage of OFAC’s General License H, which authorizes certain Iran-related transactions by foreign entities owned or controlled by U.S. persons. For example, Arthur J. Gallagher & Co. (a U.S. company) reported that its U.K. subsidiary acted as an insurance broker and advised clients about obtaining insurance coverage for activities related to Iran’s oil, gas and petroleum industries. The U.K. subsidiary then assisted clients in obtaining insurance, reinsurance and retrocession coverage for a variety of oil-related activities. The company pointed out that these activities were conducted pursuant to General License H and stated that it intends to continue acting as an insurance broker in connection with these coverages. Similarly, Eaton Corp. PLC (a U.S. company) also stated that its subsidiaries intend to continue to do business in Iran under General License H, noting, however, that it has no assets or employees in Iran. Validus Holdings Ltd. (a U.S. company) has non-U.S. subsidiaries that are now conducting shipping operations in and out of Iran, including the shipment of “crude oil from Iran to another country and transporting refined petroleum products to Iran.”
Many non-U.S. companies likewise disclosed new or proposed ventures in Iran. While some of these ventures have been highly noted in the press (e.g., Total S.A.’s massive planned development of Iranian gas fields), many smaller ventures are also underway. Canon, Inc. (a Japanese company) disclosed transactions relating to copier leases and service contracts with various Iranian Embassies, and further stated that it “intends to study the possible restart of business with certain Iran counterparties, considering recent changes in the international situation and economic situations relating to Iran.” Nomura Holdings, Inc. (a Japanese company) obliquely disclosed that its subsidiaries had “engaged in discussions on business development” with the Government of Iran, but “may engage in similar activities in future periods.”
There is no uniform approach to complying with the disclosure requirements of Section 219. Each issuer’s decision whether—and how much—to report depends on a variety of factors, including the nature and risk profile of their respective lines of business. Below, we highlight representative disclosures from various industries:
Financial Institutions and Financial Services
The tendency by U.S. and non-U.S. financial institutions to take a risk-averse posture to Section 219 is unsurprising considering that these institutions are, in general, subject to increased regulatory scrutiny. Accordingly, U.S. financial institutions routinely disclose transactions with SDNs, irrespective of the monetary amount involved. Other specific disclosures include:
Pharmaceuticals/Medical Devices
Many non-U.S. pharmaceutical companies reiterated their commitment to providing life-saving medicine and medical equipment to Iran, regardless of the end-user. Most companies continued to assert their goal of providing healthcare products to patients around the world, despite any geopolitical or economic issues in those countries.
Several U.S. issuers also reported notable activity:
Non-Medical Consumer Goods
The fact that many of these well-known consumer goods companies have complex global affiliate relationships did not prevent them from disclosing even minor operations in Iran.
Hospitality/Airlines Industry
Extractive Industries/Natural Resources
Unsurprisingly, issuers in extractive industries file robust disclosures, relying heavily on OFAC-issued specific licenses where applicable.
Telecommunications/Technology/Software
The complicated nature of telecommunications filings has been thoroughly outlined in previous publications: the overlap of affiliated companies, numerous activities disclosed by a single issuer, various services and equipment provided to Iran-related entities, Iranian Embassy-specific services and the myriad roaming agreements.
Shipping and Logistics
From an enforcement perspective, the SEC appears to have signaled relatively low interest in policing Section 219 since its inception. To our knowledge, the SEC has yet to bring an enforcement action against an issuer for violations of its Section 219 reporting obligations. Moreover, neither the current nor former Presidential Administration has publicly “initiate[d] an investigation into the possible imposition of sanctions” with respect to an issuer or its affiliate disclosing Iran-related business, as envisaged by Section 219.
While federal authorities have thus far shown limited willingness to take a heavy enforcement approach in this area, state governments may be paying closer attention. Thirty states and the District of Columbia have enacted their own divestment legislation or policies, which generally prohibit the investment of state-managed funds (e.g., public pension funds) in any entity determined to be doing business in Iran and other sanctioned countries. Importantly, these state divestiture laws often do not track federal sanctions from either a legal or policy standpoint. Accordingly, conduct that is permissible under U.S. sanctions programs often runs afoul of stricter state divestiture statutes. This is especially so since the lifting of Iran-nuclear sanctions; anecdotally, we can report an uptick in the number of state governments notifying companies that their reported Iran business activities preclude them from receiving the investment of state funds. Often, these state agencies base their initial findings on disclosures made pursuant to Section 219. Consequently, some issuers may find themselves weighing the benefits of Iran ventures with the potential costs of divestiture by certain U.S. states.
It is clear that issuers are maintaining a conservative approach to Section 219, even while relaxed U.S. sanctions requirements allow for new commercial opportunities in Iran. In light of the SEC’s expansive reading of the law, issuers continue to err on the side of reporting even attenuated relationships with Iran.
If you have any questions, concerning section 219 disclosures, please contact your regular Shearman capital markets partner or one of the authors of this note.
[1] Under the JCPOA, the EU and U.N. lifted most sanctions against Iran, while the United States committed to waiving nuclear-related secondary sanctions aimed at activity by non-U.S. persons. Importantly, the U.S. Office of Foreign Assets Control (OFAC) also issued General License H, which authorizes certain Iran-related transactions by foreign entities owned or controlled by U.S. persons.
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