International Law Advisory - Senate Considers Legislation that Would Extend IEEPA Sanctions to Subsidiaries of US Companies

The US Senate yesterday voted on legislation intended to discourage business activities with countries designated as state sponsors of terror.     

The Senate voted by a count of 47-51 to reject S.Amdt. 1351, introduced by Senator Frank Lautenberg (D-NJ) on July 21, 2005 .  The proposed amendment to the pending National Defense Authorization Act for Fiscal Year 2006 (S. 1042) would have: (1) extended the sanctions imposed under the International Emergency Economic Powers Act (IEEPA) to subsidiaries of US companies; (2) imposed new disclosure obligations on US issuers with minor interests in foreign companies doing business in IEEPA sanctioned countries; and (3) required OFAC reporting of enforcement actions to Congress.  A virtually identical piece of legislation, S. 1428, was also introduced by Senator Lautenberg last week, and has been assigned to the Senate Committee on Banking, Housing, and Urban Affairs, where no action has taken place.

The Senate voted by a large margin of 98-0 to pass S.Amdt. 1377, introduced by Senator Susan Collins (R-ME) on July 21, 2005 as an amendment to the National Defense Authorization Act.  The amendment was introduced as an alternative to Senator Lautenberg ’s proposed amendment.  Instead of extending IEEPA sanctions to foreign subsidiaries of US persons and corporations, it would provide for the imposition of penalties on US companies for evasion, avoidance, facilitation, or approval of actions by foreign subsidiaries that would otherwise be prohibited by IEEPA. 

S. 1428 and S.Amdt. 1351

Although S.Amdt. 1351 was rejected yesterday by the Senate as an amendment to the National Defense Authorization Act, the virtually identical S. 1428 remains before the Senate’s Committee on Banking, Housing, and Urban Affairs.  The bill would make the following changes to US economic sanctions regimes:

• Foreign-based subsidiaries and affiliates that are owned or controlled by US persons would be made subject to IEEPA sanctions and prohibitions.  In addition, such non-US subsidiaries and affiliates would be prohibited from dealing with state sponsors of terrorism, as designated by the Secretary of State, with which US entities are prohibited from engaging in transactions. [1]
  
• Under the proposed legislation, a foreign entity is controlled in fact by a US entity if the US entity owns or controls, by vote or value, at least 50 percent of the capital structure of the foreign entity, or if the US entity controls the day-to-day operations of the foreign entity
• S. 1428 grants US entities 90 days to divest or terminate business with the relevant government or foreign person (S.Amdt. 1351 would have allowed a 1 year period for divestment).  The same period of time is permitted for divestiture in the event that sanctions are imposed by the President under IEEPA or TWEA in the future.
• The Securities and Exchange Commission (“SEC”) would be required to issue regulations requiring any person subject to annual reporting requirements to disclose the nature and value of any ownership stake of at least 10 percent in a foreign entity that is engaging in a transaction that would otherwise be prohibited if that foreign entity had been subject to US jurisdiction.  

We do not anticipate that the Senate will pass S. 1428, in light of the Senate’s rejection of the identical amendment to the National Defense Authorization Act.  However, the margin of defeat for the amendment was narrow, and efforts to expand the scope of US sanctions programs will likely persist in the Congress. 

S.Amdt. 1377

S.Amdt. 1377, passed yesterday by the Senate, was introduced by Senator Collins as an alternative to Senator Lautenberg ’s amendment.  S.Amdt. 1377 would not automatically extend IEEPA sanctions as envisaged under S. Amdt . 1351 and S. 1428.  Instead, the amendment is focused on preventing US companies from evading or avoiding current IEEPA provisions through the establishment and US-based support of foreign subsidiaries, and on increasing penalties for violations of such provisions.  Specifically, the amendment, if finally enacted as part of the National Defense Authorization Act for Fiscal Year 2006, would:

• Prohibit US entities from taking action to evade or avoid IEEPA sanctions.
• Prohibit US entities from “approving, facilitating, or financing” actions by foreign subsidiaries that would violate IEEPA sanctions if those same actions were undertaken by the US entity itself.
• Increase maximum penalties per violation under IEEPA from $10,000 to $250,000 for a civil violation, and from $50,000 to $500,000 for a willful violation.
  
• Provide the President with explicit subpoena authority to obtain records related to transactions covered by the Act.
  

According to Senator Collins ’ testimony on the floor of the Senate, the amendment was developed with the support of the Bush administration.  It is possible, but appears unlikely, that the National Defense Authorization Act to which S.Amdt. 1377 is attached will be voted on by the Senate later this week. 

We will continue to keep you apprised of sanctions and export controls developments.  If you have any questions, please feel free to contact Ed Krauland at 202.429.8083 or Meredith Rathbone at 202.429.6437.

[1]The exact scope of the provision’s intended application to non-US entities of IEEPA sanctions and restrictions related to state sponsors of terrorism is not clear from the face of the legislation.