On October 27, 2017, the U.S. State Department released guidance containing a list of persons that are part of, or operating on behalf of, the Russian defense or intelligence sectors, as required by Section 231 of the Countering America's Adversaries Through Sanctions Act (CAATSA). CAATSA requires the U.S. government to impose certain menu-based sanctions on persons that knowingly engage in a significant transaction with a person listed in the Section 231 Guidance. While the term “significant transaction” is not defined and will be interpreted based on the totality of the circumstances, the State Department indicated that it will first focus on major transactions of a defense or intelligence nature. Notably, these sanctions will apply not only to U.S. persons, but to persons worldwide who engage in significant transactions with listed persons. The sanctions themselves contain a grace period and will be issued no earlier than January 29, 2018.
The target list includes prominent Russian defense state-owned and private companies – such as Kalashnikov, Rosoboronexport, and Rostec – and Russian governmental intelligence agencies, such as the FSB, GRU, and SVR. This action does not impose any additional sanctions against these listed persons, although some of them may be subject to OFAC sanctions under other authorizations. The State Department also released FAQs offering additional clarity as to the effect of the Section 231 Guidance and transactions that may trigger sanctions under CAATSA. Beginning January 29, 2018, persons who knowingly engage in a “significant transaction” with a listed person will be subject to mandatory sanctions. The FAQs state that the State Department will use a “totality of the facts and circumstances” approach and consider multiple factors to determine whether a person engaged in a “significant transaction.” These factors include, but are not limited to, the significance of the transaction to U.S. national security and foreign policy interests, in particular whether it has a significant adverse effect on such interests; the nature and magnitude of the transaction; and the relation or significance of the transaction to the defense or intelligence sector of the Russian government. Initially, the State Department will focus on significant transactions of a defense or intelligence nature with persons named in the Section 231 Guidance. If a transaction has purely civilian end-uses and/or end-users and does not involve entities in the intelligence sector, the FAQs state that these factors will “weigh heavily” against a determination that such a transaction is significant for purposes of Section 231.
In a press briefing on the new sanctions, a senior State Department official stated that the scope and size of the transaction and the type of items transferred will also be considered. The current information indicates that companies that transact non-military business with listed persons that is not hostile to U.S. interests are not currently at risk of CAATSA sanctions. However, the FAQs note that this interpretation of “significant transaction” is only an initial one, and the factors the State Department considers may change in the future. We caution companies against doing business of any sort with listed persons without a careful analysis of the risk involved.
Persons who the U.S. government determines have knowingly engaged in significant transactions with listed persons will be subject to at least five of the twelve menu-based sanctions contained in Section 235 of CAATSA. These sanctions vary in severity, and some sanctions are more suited to U.S. persons, while others are more suited to non-U.S. persons. The twelve Section 235 sanctions include the following:
- Revocation of Export-Import Bank assistance for exports;
- Restrictions on export licenses;
- Prohibition on U.S. financial institutions’ making loans or providing credits totaling more than $10 million over a 12-month period;
- Use of the voice and vote of the United States to oppose loans from international financial institutions;
- If the sanctioned person is a financial institution, prohibition on designation as a primary dealer in U.S. government debt instruments or service as a repository for U.S. government funds;
- Prohibition on U.S. government procurement transactions;
- Prohibition on foreign exchange transactions in which the sanctioned person has an interest;
- Prohibition on transfers of credit or payments between financial institutions within the jurisdiction of the United States;
- Prohibition on acquiring, dealing in, or otherwise transacting in property within the jurisdiction of the United States;
- Prohibition on U.S. persons’ investment in or purchase of significant amounts of debt or equity of the sanctioned person;
- Visa bans for corporate officers, principals, and controlling shareholders; and
- Application of any of the above sanctions on the principal executive officers or officers of the sanctioned person.
In light of this new sanctions program, both U.S. and non-U.S. companies should review their business dealings with Russian persons to determine if any of their contractual counterparties are listed in the Section 231 Guidance. If so, they should further evaluate whether the dealings may be considered “significant transactions,” given the broad and potentially changing interpretation of that term. Companies that deal with Russia and Ukraine generally should evaluate the potential risk to their business of dealing with listed persons and update any related compliance policies and procedures.