On 2 August 2017, the President signed into law the Countering America’s Adversaries Through Sanctions Act (CAATSA), a bill that he called "seriously flawed" in a statement about CAATSA issued at the same time he signed the bill.
As discussed in our prior blog posts here, here, and here, CAATSA calls for the imposition of certain additional sanctions targeting Iran, Russia, and North Korea. The timing and implementation of many of these sanctions remains uncertain. While some provisions in CAATSA require the President to implement the sanctions within a prescribed period of time (e.g., the modifications to Directives 1 and 2 under US Sectoral Sanctions will take effect 60 days after the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) modifies them), others do not and will require implementing action by the Executive Branch (e.g., designation of parties targeted under CAATSA). In addition, it remains to be seen whether or how the President will implement CAATSA’s discretionary provisions, including sanctions targeting Russian energy export pipelines.
The principal Russian sanctions provisions are as follows:
- Restrictions on President’s Authority to Relax Sanctions. Efforts by the President to relax, suspend, or terminate the Russia-related sanctions currently in effect will be subject to mandatory review by Congress.
- Codification of Existing Russia Sanctions. CAATSA will codify the Russia-related sanctions currently in effect under Executive Orders 13660, 13661, 13662, 13685, 13694, and 13757, including sanctions against parties designated pursuant to those Executive Orders to date (i.e., those currently designated to the Specially Designated Nationals and Blocked Persons List (SDN List) or under the sectoral sanctions).
- Tightening of Existing Sectoral Sanctions. CAATSA will modify the Russian sectoral sanctions implemented by OFAC pursuant to Executive Order 13662. This includes:
- Directive 1 will be modified to prohibit dealings by US Persons in new debt of longer than 14 days maturity (down from 30 days) of Russian financial institutions designated pursuant to this directive.
- Directive 2 will be modified to prohibit dealings by US Persons in new debt of longer than 60 days maturity (down from 90 days) of Russian energy companies designated pursuant to this directive.
- Directive 4 will be expanded to prohibit the provision by US Persons of goods, non-financial services, or technology in support of exploration or production for “new” deepwater, Arctic offshore, or shale projects that have the potential to produce oil anywhere in the world (i.e., no longer limited to Russia) and in which a Directive 4 entity has a 33 percent or greater ownership interest.
- Imposition of Additional/New Secondary Sanctions. This includes:
- Secondary Sanctions that Apply to Non-US Persons.
- Mandatory sanctions on non-US persons that knowingly make significant investments in "special Russian crude oil projects" (projects intended to extract crude oil from the exclusive economic zone of Russia in waters more than 500 feet deep, Russian Arctic offshore locations, or shale formations located in Russia).
- Mandatory correspondent banking restrictions on non-US financial institutions that knowingly engage in significant financial transactions involving activities related to the sale of defense articles to Syria or "special Russian crude oil projects" or knowingly facilitate significant transactions with SDNs.
- Mandatory sanctions on Russian government officials and their close associates and family members for acts of "significant corruption" in Russia or elsewhere.
- Mandatory sanctions for non-US persons involved in serious human rights abuses in any territory forcibly occupied or otherwise controlled by the Russian government.
- Mandatory sanctions on non-US persons that export or transfer to Syria significant financial, material, or technological support that contributes materially to the Syrian government’s ability to acquire weapons and other defense articles.
- Secondary Sanctions that Apply to US and Non-US Persons. Notably, a novel aspect of some of these secondary sanctions provisions is that they may apply to activities by US Persons that are not necessarily prohibited under US law. In other words, assuming no violations of other US laws, companies that engage in some of the activities described below will not necessarily be liable for civil or criminal penalties under US law, but may nonetheless be at risk for the imposition of secondary sanctions.
- Mandatory sanctions with respect to any person that knowingly engages in activities that undermine cybersecurity "against any person, including a democratic institution, or government" on behalf of the Russian government.
- Mandatory sanctions on foreign sanctions evaders, i.e., persons facilitating significant deceptive or structured transactions (related to currency reporting) for or on behalf of any person subject to the Russia-related sanctions or any child, spouse, parent, or sibling of a sanctioned person.
- Mandatory sanctions on parties knowingly engaging in significant transactions with the intelligence or defense sectors of the Russian government, including persons acting for the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation (GRU) or the Federal Security Service of the Russian Federation (FSB). CAATSA authorizes the President to delay the imposition of such sanctions, however, if certain conditions are met. CAATSA does not define “significant transactions,” but it is likely to be interpreted by the US Government to take into account both qualitative and quantitative considerations.
- Discretionary sanctions related to Russian energy export pipelines, targeting parties that (i) knowingly make an investment that directly and significantly contributes to the enhancement of the ability of Russia to construct energy export pipelines, or (ii) sell, lease, or provide to Russia goods, services, technology, information, or support that could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy pipelines, and where the investment or transaction has a fair market value of $1,000,000 or more, or that, during a 12-month period, has an aggregate fair market value of $5,000,000 or more. These sanctions are to be imposed (if at all) "in coordination with allies of the United States."
- Mandatory sanctions related to investments in, or facilitation of investments in, the privatization of Russia’s state-owned assets for $10,000,000 or more (or any combination of investments of not less than $1,000,000 each, which in the aggregate equals or exceeds $10,000,000 in any 12-month period), if the investment contributes to Russia’s ability to privatize state-owned assets in a manner that unjustly benefits Russian government officials or their close associates or family members.
- Secondary Sanctions that Apply to Non-US Persons.
We summarized the key Iranian and North Korean sanctions in our prior blog posts, which remain current and are reproduced for reference below:
- Mandatory blocking sanctions on any person that knowingly contributes to Iran’s ballistic missile program, who are officials, agents or affiliates of the Islamic Revolutionary Guard Corps, or who knowingly supply or support the supply of arms, combat vehicles, etc., to Iran or provide related technical training or services to Iran.
- Designation of persons responsible for human rights violations in Iran.
North Korea-Related Provisions
- Requires the President to designate to the SDN List persons that engage in certain North Korea-related activities that are prohibited under UN Security Council resolutions.
- Provides the President with discretionary authority to designate persons to the SDN
List that engage in certain activities involving North Korea, including:
- Purchasing significant types or amounts of textiles from the Government of North Korea,
- Selling or transferring significant amounts of crude oil, petroleum products, liquefied natural gas, or other natural gas resources to the Government of North Korea,
- Conducting significant transactions in North Korea’s transportation, mining, energy, and financial services industries,
- Engaging in certain other North Korea-related activities prohibited under UN Security Council resolutions.
- Prohibits US financial institutions from maintaining, administering, or managing indirect correspondent accounts that benefit any parties designated under this legislation. However, US financial institutions are authorized to process transfers of funds to or from North Korea if the transfer is authorized by an OFAC specific or general license and does not involve debiting or crediting a North Korean account.
- Imposes shipping sanctions against North Korea that include a prohibition on the entry of certain foreign vessels over 300 gross tons in navigable waters of the United States. These prohibitions apply to:
- Vessels owned or operated by or on behalf of the Government of North Korea or a North Korean person, and
- Vessels owned or operated by or on behalf of a foreign country in which a sea port is identified as having failed to implement or comply with certain UN Security Council resolutions targeting North Korea. Such sea ports will be identified in reports submitted by the President to Congress identifying the operators of such foreign sea ports. CAATSA specifically requires the reports to include findings related to certain sea ports in China, Iran, Russia, and Syria.
- Prohibits the importation of any significant goods, wares, articles, and merchandise manufactured by the labor of North Korean nationals unless a finding by U.S. Customs and Border Protection establishes that they are not the products of convict labor, forced labor, or indentured labor.
On 2 August 2017, the European Commission released an official statement in response to CAATSA. In the statement, Commission President Jean-Claude Juncker notes that "a significant proportion of the intended sanctions against Russia have been dropped," and welcomes the fact that "US Congress has now also committed to only apply sanctions after the country’s allies are consulted." The statement also notes that the European Commission will be prepared to defend the EU’s economic interests if US sanctions specifically disadvantage EU companies dealing with Russia in the energy sector. On July 26, 2017, the Commission had released a statement noting that it was prepared to act in response "within a matter of days." While retaliation may be less likely now in the absence of further steps from the United States, speculation regarding the retaliatory measures the EU could take has included:
- Adding CAATSA to the EU "blocking statute" (Council Regulation 2271/96): this regulation protects EU persons from the extra-territorial application of certain legislation (e.g. US sanctions against Cuba), obliging EU persons not to comply with those sanctions and to report details to the European Commission where their interests are affected;
- Introducing retaliatory measures against US businesses;
- Working to secure diplomatic commitments from the US Government that certain energy companies and projects will not be targeted; and
- Taking the matter up with the World Trade Organisation.
The Russian Government has announced that it is not planning to respond to these US sanctions beyond what has already been decided and announced (i.e., request to downsize the number of US diplomats and support staff in Russia up to the number of Russian diplomats/staff in the United States; prohibition for the US Embassy in Moscow to use a local country house and a local warehouse).
The foregoing is intended only to provide a general summary of recent developments regarding the expansion of US sanctions targeting Iran, Russia, and North Korea. If you have any questions about how these changes might affect your company or if you require advice on any specific transactions or plans, please contact one of the members of Baker & McKenzie’s International Trade Practice Group.
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