Two bills introduced in the House would strengthen trade sanctions against Iran by increasing US penalties against violators.

The House Foreign Affairs Committee marked up the “weaker” of the two bills, H.R. 957, in mid-February. The bill would close a “loophole” in the existing Iran sanctions by extending the sanctions to insurers and export credit agencies and by directing that US parent companies can be held liable when a foreign subsidiary in which the US company owns more than 50% of the equity violates the sanctions.

The “stronger” bill, H.R. 1400, has not yet been considered in any committee.

Five House committees share jurisdiction over the measures. Some version of the two bills is expected to be sent eventually to the full House.

The Senate must also act. Senator Chris Dodd (D-Connecticut), chairman of the Senate committee with jurisdiction over sanctions issues, said the subject will be on the agenda this year. He has not set a date for Senate action.

In the meantime, the US State Department is moving to remind companies of the financial and reputational risks of doing business in Iran. R. Nicolas Burns, the US undersecretary of State for political affairs, told the House Foreign Affairs Committee in March that Iran is one of the largest beneficiaries of official export credits and loan guarantees, with $22.3 billion in such help from OECD countries reported at the end of 2005. The US government is pressuring allies to reduce the official export credits they provide to Iran.

Stronger Sanctions

H.R. 957 would “expand and clarify” the entities against which sanctions may be imposed under the existing Iran Sanctions Act of 1996. Supporters of the bill want to make clear that foreign subsidiaries of US companies doing business with Iran may be subject to sanctions. However, this is already clear in the law as currently drafted. The greater significance of the bill is that it signals a new focus in Congress on enforcing the Iran Sanctions Act, including against foreign subsidiaries of US companies.

H.R. 1400 attributes to a US parent company the trade sanction violations of its foreign subsidiary. If a non-US entity violates US trade sanctions against Iran, then the bill permits penalties to be imposed on any US company owning, directly or indirectly, more than 50% of the equity interests in the foreign company violating the sanctions without the need to show direct participation in the sanctions violation by the parent company.

The existing Iran Sanctions Act curtails foreign business investments in and with Iran that are likely to aid development of that country’s natural resources or military capabilities. Some legislators believe that the law is not being vigorously enforced. As of the end of 2006, no foreign company had ever been subject to sanctions under the act.

The Iran Sanctions Act is distinct from the “Iranian transaction regulations” issued by the office of foreign assets control — called “OFAC” — in the US Treasury Department. The Iranian transaction regulations are very broad in scope, but apply only to US persons. They prohibit US persons from making a wide variety of investments in Iran, engaging in operations involving Iran, or exporting goods, services or technology to Iran, unless an exception permitting the transaction applies or unless a license is obtained from OFAC. Prohibited transactions are not limited to those involving petroleum resources or weapons. A US person is prohibited from exporting any goods to Iran, or to a middleman if the US person knows that the middleman will deliver the goods into Iran. Despite the stiff penalties for violating the regulation — criminal penalties of up to $500,000 per violation and 20 years in prison — many US companies use foreign subsidiaries and middlemen to supply goods into Iran, relying on an exception in the regulations for cases in which the US parent does not “facilitate” the transaction of its subsidiary. However, these regulations do not apply to foreign businesses; they only apply to “US persons” and, in some cases, to non-US persons acting within the United States.

Neither House bill would change the scope of the Iranian transaction regulations that apply to US persons directly (other than by allowing penalties to be imposed on US persons due to violations by their foreign subsidiaries). Both bills would widen the scope of the sanctions that may be imposed due to the activities of foreign investors and suppliers with Iran. Discussion and media reports surrounding the bills suggest that members of Congress may be especially concerned about Iranian petroleum transactions that are being contemplated by foreign affiliates of US companies.

Existing Sanctions

Originally enacted as the “Iran and Libya Sanctions Act of 1996,” the law prohibited an investment in Iran that met certain monetary thresholds and “directly and significantly” contributed to Iran’s development of its petroleum resources, although penalties against investors could be waived by the President. Investments in and exports to Libya were prohibited if they significantly and materially contributed to Libya’s access to weapons, aircraft or development of its petroleum resources. Sanctions relating to Libya were “mandatory,” not discretionary, although the President retained some authority to modify them.

The main potential sanctions against investors and suppliers under the act are denial of assistance from the Export-Import Bank, denial of US export licenses, and denial of credit from any US financial institution.

The sanctions were enacted for an original five-year period, which was extended for five additional years in 2001. Last year, the sanctions were extended again through 2011, but Libya was removed from the sanctions statute. Sanctions concerning Libya were dropped in September 2004 by Presidential executive order due to a finding that the country was committed to eliminating its weapons of mass destruction programs and its missile technology control regime.

The “Iran Freedom Support Act of 2006” amended the Iran sanctions in two principal ways. Congress narrowed the President’s ability to waive sanctions against persons who violate them. The statute was also broadened to cover not only investment that aided Iran’s development of petroleum resources, but also the supply of goods, services, technology or other items that would “contribute materially” to Iran’s ability to acquire or develop chemical, biological or nuclear weapons or significant numbers or advanced types of conventional weapons.

The Iran sanctions as currently in force may be imposed on any “person” that “has, with actual knowledge, . . . made an investment of $40,000,000 or more . . . that directly and significantly contributed to the enhancement of Iran’s ability to develop petroleum resources of Iran.” The sanctions may also be imposed on any person that has “exported, transferred, or otherwise provided to Iran any goods, services, technology, or other items knowing that the provision of such goods, services, technology, or other items would contribute materially” to Iran’s ability to acquire or develop chemical, biological, or nuclear weapons or related technologies, or significant conventional weapons.

House Bills

Both bills would make two changes in key definitions in the Iran Sanctions Act of 1996. First, they would expand the definition of a “person” to whom sanctions apply expressly to include a “financial institution, insurer, underwriter, guarantor, any other business organization, including any foreign subsidiary of the foregoing.” The statute already defines “person” broadly to include an individual and “a corporation, business organization, partnership, society, trust, any other nongovernmental entity, organization, or group, and any governmental entity operating as a business enterprise,” including any successor of any of these. Second, the bills would expand the definition of petroleum resources to include not only petroleum and natural gas resources, but also petroleum by-products and liquefied natural gas.

H.R. 1400 was introduced in early March with 60 cosponsors (36 Democrats and 24 Republicans) and is a broader, more significant piece of Iran-focused legislation than H.R. 957.

Under H.R. 1400, a US parent company would be held accountable for any trade sanctions violations of its controlled foreign subsidiaries, with “control” defined as beneficial ownership of a greater-than-50% interest. The bill would also increase the import and export sanctions against Iran, expand the definitions of “petroleum resources” and foreign “persons” that are prohibited from engaging with Iran, direct the President to report every six months to appropriate Congressional committees on investment activity that could contribute to Iran’s development of petroleum resources, and restrict nuclear cooperation with countries assisting Iran’s nuclear program. The bill would also reduce US contributions to World Bank programs by the percentage of World Bank funds provided to entities in Iran or to projects located in Iran.

H.R. 1400 also contains a provision denying amortization of geological and geophysical expenditures to US taxpayers that are part of affiliated groups with a foreign parent company, if any member of the group has been subject to US trade sanctions.

If enacted, the measure would permit sanctions to be imposed on US parent companies who do not possess actual knowledge of the investments or exports of their affiliates and are not otherwise engaged in prohibited activities. US parent companies would be “strictly liable” for the trade sanctions violations of their controlled foreign subsidiaries.

In its efforts to broaden the role of diplomacy and economic incentives in influencing Iranian policy, Congress may also take a look at the loopholes in the OFAC regulations that prohibit the activities of US persons in and with Iran.

The companion to the sanctions bills in the Senate is S. 527. It would amend the “Iran, North Korea and Syria Nonproliferation Act” to allow penalties for act violations to be imposed on subsidiaries and on any upstream entity owning more than 50% of (or having de facto control of) a person who violates the act.