One of the widest-ranging bills of the U.S. Congress’s legislative year, the National Defense Authorization Act for Fiscal Year 2021 (NDAA), is nearing the finish line as both the House and Senate overwhelmingly approved the bill last week. Now the NDAA is on its way to President Trump’s desk for his signature (or potential veto—more on that below). As with most NDAAs in recent years, Congress has included a host of sanctions and similar measures, with this year’s bill targeting Turkey’s purchase of a Russian air defense missile system, Russian energy export pipelines, and Chinese Military Companies and other activities in the United States.
Because its focus is to fund the U.S. military, the NDAA is considered a must-pass bill each year, allowing Congress to incorporate a number of priority national security-related measures that otherwise failed to become law. Therefore, while the NDAA is quite long (over 4,500 pages!), we’ve analyzed the bill’s sanctions provisions and summarized our key takeaways below, so that you don’t have to dig into it yourself; it is the holidays after all! (Our MoFo colleagues are also summarizing the bill’s beneficial ownership, procurement, and cybersecurity-related provisions, among others, so stay tuned for additional NDAA alerts).
- Turkey targeted – The NDAA requires sanctions on Turkey in response to its purchase of the Russian S-400 air defense missile system, a particularly noteworthy development given Turkey’s membership in NATO. Apparently in response to this provision’s inclusion in the NDAA, the Trump Administration announced sanctions against Turkey under CAATSA on December 14.
- Russian pipelines, again – In a recurring theme, the NDAA contains yet another provision expanding sanctions on two key Russia-led natural gas pipelines, Nord Stream 2 and TurkStream, beyond the sanctions imposed by last year’s NDAA.
- Several provisions confronting national security challenges posed by China – The NDAA’s focus on Chinese activity within the United States—as well as Chinese activity in the Indo-Pacific region and globally—highlights longstanding concerns within Congress on modern security threats posed by China and how best to confront them.
- Potential presidential veto – President Trump has threatened to veto the NDAA, but lawmakers from both chambers of Congress are confident they have the required votes to override a veto, should the president decide to use one.
Sanctions on Turkey
NDAA Section 1241 would compel the President, whether President Trump or President-elect Biden, to impose sanctions on Turkey within 30 days in response to its purchase of the Russian S-400 air defense missile system. These sanctions are not a big surprise; tensions regarding this issue have been brewing since 2017, when Turkey signed a deal with Russia to acquire the S-400 missile defense system, which the United States argues is designed to shoot down F-35 jets commonly used by NATO allies.
Even without the NDAA, President Trump possessed the authority to sanction Turkey for its purchase of the defense system under the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA). Specifically, Section 231 of CAATSA authorizes the President to impose sanctions against entities that engage in “a significant transaction” with the defense or intelligence sectors of the Russian Federation. Turkey’s S-400 acquisition plainly satisfies that definition, and congressional leaders have reiterated the position that CAATSA applies to the purchase.
Now, after seeing the Trump administration fail for years to respond to Turkey’s purchase of the S-400 system, the NDAA would require that at least five of twelve sanctions provided under CAATSA Section 235 be imposed on each person that knowingly engaged in the acquisition of the S-400 air defense system. The available sanctions under CAATSA Section 235 are varied, but include blocking sanctions, export restrictions, and restrictions blocking the sanctioned person’s access to U.S. financial institutions.
Apparently in response to Section 1241’s inclusion in the NDAA, the Trump administration announced on December 14 that it is imposing sanctions on Turkey’s Presidency of Defense Industries (SSB)—Turkey’s primary defense procurement institution—pursuant to Section 231 of CAATSA for knowingly engaging in a significant transaction with Russia by procuring the S-400 missile system. The specific sanctions include a ban on all U.S. export licenses and authorizations and a prohibition on certain loans or credits to SSB and full blocking sanctions and visa restrictions on Dr. Ismail Demir, its president, and three other SSB officers.
Sanctions on the Nord Stream 2 and TurkStream Pipeline Projects
In addition to sanctioning Turkey for its purchase of the S-400 system, the NDAA also takes aim at Russia by expanding existing sanctions on the Nord Stream 2 and TurkStream pipeline projects, which we detailed in our previous alerts here, here, and here. These pipelines originate in Russia and are intended to circumvent an existing pipeline through Ukraine to reach the rest of Europe, raising U.S. fears that Russia will increasingly dominate European energy security and continue to undermine Ukraine.
The NDAA, through Section 1242, expands existing sanctions on the two projects. Namely, it expands sanctions under the Protecting Europe’s Energy Security Act (PEESA)—passed as part of last year’s NDAA—to now include penalties on parties involved in a wider range of pipe-laying activities than previously authorized. Section 1242 now defines “pipe-laying activities” as “activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe.” Section 1242 further expands sanctions on the two projects by targeting foreign persons that support the expanded definition of pipe-laying activities, for example, by providing underwriting services, insurance, or reinsurance for vessels engaged in pipe-laying activities for the two pipelines; services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels for the two pipelines; or services for the testing, inspection, or certification necessary for, or associated with the operation of, the Nord Stream 2 pipeline.
The NDAA’s expansion of sanctions against the Nord Stream 2 and TurkStream projects comes in the wake of other recent sanctions efforts to curtail the progress of the two pipelines.
- In October 2020, the U.S. Department of State (“State”) moved to enhance the scope of sanctions applicable to the pipeline projects. Specifically, State published new guidance that expanded existing sanctions imposed by PEESA (which originally targeted the underwater vessels used for construction of Russian energy export pipelines such as the Nord Stream 2 and TurkStream pipeline projects) to also sanction companies providing services, facilities, or funding for “upgrades or installation of equipment” for vessels working on the projects.
- Just a few months earlier, in July 2020, State issued updated guidance regarding the applicability of secondary sanctions under Section 232 of CAATSA to foreign persons involved in the Nord Stream 2 or TurkStream projects. As detailed in a prior alert, Section 232 of CAATSA targets parties that (i) make investments that directly and significantly contribute to the enhancement of the ability of Russia to construct energy export pipelines; or (ii) sell, lease, or provide goods, services, technology, information, or support to the Russian Federation for the construction of Russian energy export pipelines. Earlier guidance from State had indicated that sanctions under Section 232 of CAATSA would be on projects initiated after August 2, 2017, thereby excluding Nord Stream 2 and TurkStream. With its July guidance, however, State removed the August 2, 2017 limitation, paving the way for additional sanctions on the two projects.
The previous sanctions against Nord Stream 2, including those imposed under the 2020 NDAA, have delayed the project considerably, although construction reportedly resumed on the project last week. The new set of sanctions seems likely to have a similar chilling impact on the project. As a result, stakeholders in Germany, including government representatives and parliamentarians, have raised concerns about the sanctions as threatening the sovereignty of Germany and Europe, and have discussed options for counter-measures. For example, the government of the German Federal State of Mecklenburg-Western Pomerania disclosed its plans to help businesses with the completion of the project by setting up a foundation designed to shield pipe-laying activities and related services. Similar to the creation of INSTEX (the EU payment channel for transactions with Iran that uses a barter scheme), the concept of a government-backed foundation shows that governments and businesses continue to be creative in their attempts to counter the broad effects of U.S. sanctions threats against the pipeline projects. EU businesses, however, have and should continue to thoroughly assess the risks that remain, even when using government-backed schemes apparently designed to protect them.
Measures Addressing China
Reporting on Chinese Military Companies
Section 1260H is among the numerous provisions included in the NDAA that are intended to deter China’s behavior, position the United States to compete strategically, and protect U.S. assets against infiltration. This NDAA provision will supplement the November 12, 2020 Executive Order that gave teeth to the so-called “Pentagon List,” a list of Chinese military-owned companies operating in the United States produced by the U.S. Department of Defense; that recent Executive Order prohibited U.S. persons from transacting in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to, such securities, with companies on or added to the Pentagon List by the Defense or Treasury Departments.
Section 1260H further builds on the Pentagon List, the Executive Order, and the previous requirements under the NDAA for Fiscal Year 1999 to publicly identify Chinese military companies. Namely, section 1260H clarifies and expands the definition of “Chinese military company” to include “military-civil fusion contributors,” i.e., entities that have any of several enumerated government linkages such as receiving “assistance, operational direction or policy guidance” from the Chinese government or military, and are engaged in providing commercial services, manufacturing, producing, or exporting. Annual reports must also be submitted by the Defense Department to the Committees on Armed Services of the House and Senate listing each such Chinese military company no later than April 15, 2021, and annually thereafter through December 31, 2030.
Export Controls for Hong Kong
In an effort to shore up the United States’ strategic position in the East Asia region and simultaneously deter China’s approach to Hong Kong, Section 1252 of the NDAA, among other provisions, extends and modifies the existing prohibition on the commercial export of covered defense articles and services and covered munitions items to the Hong Kong Police Force. Notably, Congress amended the title of the referenced legislation (Public Law 116–77; 133 Stat. 1173) to prohibit the commercial export not only of covered munitions but also of crime control items to the Hong Kong Police Force. This amendment did not alter the substantive definition of “covered munitions and crime control items,” which includes tear gas, pepper spray, rubber bullets, pepper balls, handcuffs, stun guns, shackles, tasers, and water cannons, among other items.
The change has limited practical impact, as Executive Order 13936 on Hong Kong Normalization this past July effectively ended the export of defense articles and services to Hong Kong as distinct from China. However, the section reflects continuing bipartisan focus on Hong Kong, and the re-titling of the section heading seems to draw attention to Chinese efforts to control crowds using such items and to implicitly criticize such behavior in the context of protests in Hong Kong.
Protecting the Innovation Base
The NDAA includes several provisions that attempt to protect federal investments in defense-sensitive intellectual property, technology, and data from being acquired by China through multiple mechanisms, and to protect national security researchers from foreign influence and security threats.
Section 1299C requires the Secretary of Defense, in consultation with other U.S. government officials and academia, to develop an initiative to protect intellectual property, key personnel, and critical technologies relevant to national security at academic institutions. This section builds on legislation in the Fiscal Year 2019 NDAA, creates a U.S. government liaison to academic institutions on these matters, and among other things requires:
- Engagement with senior academic officials on espionage risks to academic institutions;
- Development of a list of foreign programs of national security concern that seek to recruit talent from U.S. academic institutions; and
- Development of a list of Chinese and Russian academic institutions that are of concern because of their connections to military and intelligence services, or their history of inappropriate technology transfer and theft of intellectual property, or efforts to recruit foreign academics in the United States.
As with the Pentagon List, these lists may be predicates for further action.
Another NDAA provision, Section 1062, limits funding for U.S. universities with Confucius Institutes, which are Chinese government-sponsored educational partnerships between Chinese colleges and universities and higher education institutes around the world. These institutes are quite ubiquitous; there are more than 300 Confucius Institutes in more than 140 countries, and they are widespread throughout the American higher education system (according to the U.S. Department of State, there are 75 active Confucius Institutes at U.S. colleges and universities). Confucius Institutes have been the subject of Congressional concerns for several years as vehicles for Chinese government influence on academic institutions, academics, and students.
Section 1062 prohibits post-secondary educational institutions with Confucius Institutes from being eligible to receive federal funds from the Department of Defense other than those provided directly to students, without a waiver from the Secretary of Defense, in consultation with the National Academies of Sciences, Engineering, and Medicine. The NDAA conferees note their expectation that the waiver process will require that the institution taken steps to safeguard academic freedom at the institution, prohibit the application of foreign laws at the institution, and grant managerial authority of the Confucius Institute to the institution.
These measures seem designed to safeguard the integrity of academic institutions generally, and defense-funded research activities specifically, from undue influence and intrusion by the Chinese government through Confucius Institutes.
Additionally, Section 223 of the NDAA requires the disclosure by recipients of federal research and development awards of all current and pending foreign and domestic external funding sources. This section responds to concerns about and cases of academics conducting federally funded research receiving undisclosed funding from foreign sources, such as China’s 1000 Talents program.
Recipients must also agree to update their disclosure at the request of the distributing agency prior to the award being issued, as well as at any subsequent time during the award term. Failure to comply with Section 223 can result in rejection of the application, suspension or termination of an award already made by the agency to an individual or entity, or a number of other actions, including further investigation to determine if any criminal or civil laws were violated. Notice to the relevant individual or entity is required by any federal research agency that plans to take any such action, and the individual or entity must be provided with an opportunity and process to contest the proposed agency action. In-kind contributions are included in the definition of “current and pending research support” that would need to be disclosed in the context of the federal research agency awards supporting research and development activities referenced in this section.
Such efforts to shine a light onto external funding sources seem intended to reveal and curb potential sources of foreign influence that could pose a threat to U.S. investments in defense-sensitive research and development efforts, either by China or other actors.
While the final version of the NDAA for Fiscal Year 2021 passed the House and Senate with veto-proof majorities, President Trump has dangled the possibility that he may nonetheless veto the critical bill. The main areas of disagreement between the President and Congress are a provision within the NDAA to rename military bases named after Confederate generals and the non-inclusion of a provision to repeal a liability shield for social media companies. Despite the looming veto threat, both the House and Senate passed the NDAA with veto-proof majorities. Therefore, it looks like it is only a matter of time until the sanctions discussed in this alert come into effect.