By Cydney Posner
This article from Compliance Week, "Are Your Third Parties Violating Sanctions Against Iran, Syria?" http://www.complianceweek.com/are-your-third-parties-violating-sanctions-against-iran-syria/article/315776/?DCMP=EMC-CW-TuesEditionPaid, discusses recent activity by the SEC to ferret out dealings with rogue states.
According to the article, the SEC's Office of Global Securities Risk has been reviewing potential sanctions violations involving public companies since 2003, "with a specific mandate to focus on assuring that company dealings with countries the United States identifies as state sponsors of terrorism (Iran, Sudan, Syria, North Korea, and Cuba) are properly reflected and disclosed in company filings." The Iran Threat Reduction and Syria Human Rights Act, passed by Congress last year, requires issuers to disclose, in an annual or quarterly report, if they or any affiliate has "knowingly" conducted specified types of transactions -- such as knowingly transferring any goods, services or technologies that could contribute to Iran's ability to acquire or develop weapons of mass destruction -- and to file a new EDGAR form, called IRANNOTICE. (Note that, apparently, there are exemptions allowing trade for pharmaceuticals, medical devices, and food exports.)
Recent SEC staff comment letters suggest an expanded role for the SEC in pursuing violations of country sanctions. One recent exchange of correspondence cited in the article required "an undisclosed company to evaluate whether a transaction involving the National Iranian Oil Company should have been disclosed. A vessel owned by the company and chartered to a third party loaded crude oil in Iran that was shipped to China. The undisclosed company admitted that the oil was loaded in Iran, but argued that since the ship was chartered to a third party and controlled by it, the company in question did not have to make the disclosures. The SEC pushed back and the issuer, without admitting prior knowledge, agreed to amend their annual report." Interestingly, many of the recent comment letters make clear that the staff is actively monitoring outside sources for indications of transactions. The article notes that these disclosures will help "put offending companies on the radar of the traditional sanction police: the Treasury Department's Office of Foreign Asset Control and the State Department. It is ‘another jurisdictional hook'…. When a company files a 13(r) disclosure, the SEC is required to report that filing to these agencies and the White House." Companies could also face investigations and sanctions, as well as reputational risk. Moreover, according to one commentator, "'U.S. sanctions related to Iran used to be focused primarily on U.S. companies and their activities…. Now they are expanded ‘to rope in their foreign affiliates and foreign subsidiaries.'" However, it is unclear how aggressively the SEC will pursue affiliates overseas. Commentators did not expect to see a lot of enforcement, but did suggest that one primary effect will be more public exposure. In addition, parent companies of U.S.-based subsidiaries could become implicated. According to one commentator quoted in the article, most U.S. public companies began to wind down their activities with Iran at least five years. <br> <br>The ostensible rationale for the SEC's activity "is that investors—especially large pension funds and institutional investors—consider these dealings with countries on the U.S. sanctions list to be material." Most SEC comment letters focus "on more traditional questions on issuer judgments of materiality, not an expressed disclosure obligation." However, one letter appeared to also involve the Office of Global Securities Risk, which specifically questioned whether the company had complied with the disclosure requirement.
States governments have also taken some steps, ranging from barring state pension funds from investing in companies that engage in activity in Iran to more direct pursuit of violations of sanctions, particularly in New York.