On August 2, President Trump reluctantly signed the Countering America’s Adversaries through Sanctions Act (“the Act”). The stated purpose of the Act is to provide Congressional review of US economic sanctions and to counter aggression by the Governments of Iran, Russia and North Korea. A week earlier, the Act had passed both houses of Congress with veto-proof majorities. The Act consolidates three separate bills that Congress had considered relating to Russia, Iran and North Korea.
The Act is far-reaching, particularly with respect to Russia, and has the potential to impact many US (and foreign) companies. Among other things, it will increase due diligence obligations as persons and companies subject to US jurisdiction assess the risks of involvement with certain Russian entities and projects. The Act has also resulted in consternation among the trading partners of the United States in the EU (particularly Germany) and may result in further retaliation from Russia.
President Trump issued a separate “signing statement” criticizing a number of the Act’s provisions and indicating that he believes aspects of the Act impinge upon the constitutional power of the Executive Branch to conduct foreign affairs. The signing statement is available here. The White House also issued a separate public statement with similar commentary. The public statement is available here.
The Act is lengthy and complex. The full text is available here. Set forth below is a brief summary of the Act’s key provisions.
Many of the current sanctions against Russia are the result of Obama-era executive orders in the aftermath of Russia’s intervention in the Ukraine in 2014 (EOs 13660, 13661, 13662 and 13685) and apparent malicious cyber-activities ( EOs 13694 and 13757). Congress had expressed concern that President Trump might rescind those Executive Orders, so the Act effectively codifies them. The Act also sets forth a detailed Congressional reporting and review process should the President wish to terminate, waive or take a licensing action that significantly alters US foreign policy.
Although some US economic sanctions programs are “comprehensive,” e.g., Iran and Cuba, the United States’ approach to sanctioning Russia has been much more measured and targeted. Specifically, although a number of Russians and Russian entities have been added to OFAC’s “Specially Designated Nationals and Blocked Persons List” or “SDN List” since 2014 and are subject to wide-ranging restrictions, most of the Russia sanctions have simply restricted certain (rather than all) conduct regarding non-SDN entities enumerated in lists issued pursuant to four sectoral directives issued by the Treasury Department associated with the finance, energy and defense sectors. The Act, however, expands the directivebased sectoral sanctions (and imposes or provides for new sanctions related to entities in these and several additional sectors), as described below.
With respect to the financial services sector, under current sanctions US persons and persons within the US can transact in new equity or debt of less than 30 days maturity of “Directive 1” sectorally-sanctioned entities and entities that are owned or controlled 50% or more by one or more listed entity. The new provision states that US persons or persons within the US cannot engage in transactions in, or provide financing for, or engage in other dealings in new debt of longer than 14-day maturity or new equity of persons determined to be subject to the directive, their property or their interests in property. The 14-day debt limitation could impact the extension of payment terms. The Act gives the Secretary of the Treasury up to 60-days to modify Directive 1, whereupon there will be a 60-day grace period before the new restrictions become effective.
The Act also requires correspondent banking restrictions with respect to banks involved in Russian energy or defense projects unless the President determines it is not in the national interest. In addition, it requires sanctions against persons investing $10 million or more (or any combination of investments of $1 million or more which in aggregate during a 12- month period equal or exceed $10 million) to facilitate the Russian government’s privatization of state assets to unjustly benefit (1) Russian government officials or (2) close associates or family members of those officials.
The energy provisions are likely to attract the most attention. With respect to financing of energy transactions, under current sanctions US persons can transact in new debt of Russian entities on the “Directive 2” sectoral sanctions entities list (as well as entities that are owned or controlled 50% or more by one or more listed entity) of up to 90 days maturity. (Unlike Directive 1, equity is not restricted.) The new sanctions reduce the threshold to 60 days. This provision could impact financing for certain projects and, as with the Directive 1 changes, could impact the extension of payment terms. The Act gives the Secretary of the Treasury up to 60 days to modify Directive 2, whereupon there will be a 60-day grace period before this provision comes into effect.
In addition, US persons (and persons within the US) are currently banned from providing goods, services or technology (but not financing) in support of deepwater, Artic offshore and shale projects that have the potential to produce oil. However, the restrictions are limited to Russian territory/waters. Under the new sanctions, the restrictions would impact new projects worldwide when an entity on the “Directive 4” sectoral sanctions list (or any entity that is owned or controlled 50% or more by one or more listed entity) that has a controlling or substantial non-controlling interest in such a project, defined as not less than a 33 percent interest. (This provision represents a partial rollback of the Senate’s version, which had been more expansive.) The restrictions apply not only to US persons, but also to persons in the United States. The restrictions could therefore impact European energy companies with US operations. The Act gives the Secretary of the Treasury up to 90-days to modify Directive 4, whereupon there will be a 90-day grace period before this provision comes into effect. Accordingly, persons and companies that work with or otherwise support Directive 4 entities (or their projects) will need to carefully assess the impact of these sanctions and consider implementing heightened due diligence measures.
The Act also requires the President to impose sanctions for “significant” investments in “special Russian crude oil projects,” which means crude deepwater, Arctic offshore, or shale oil projects in Russian territory/waters, unless the President determines it is not in the national interest to do so. In addition, the Act provides for (but does not mandate) secondary sanctions for investments or the provision of goods, services, technology, information or support (over certain dollar thresholds) associated with energy export pipelines. The sanctions call for US coordination with allied countries regarding imposition of such sanctions; nonetheless, there will be concern among European energy companies and governments. The “investment” aspect of this section is described as: “an investment that directly and significantly contributes to the enhancement of the ability of the Russian Federation to construct energy export pipelines.” The “good, services” etc. aspect of this section is described as: anything “that could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy export pipelines by the Russian Federation.”
The Act calls for secondary sanctions to be imposed against persons the President determines knowingly, on or after enactment, engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Russian government, including the Main Intelligence Agency of the General Staff of the Armed Forces of the Russian Federation or the Federal Security Service of the Russian Federation. There is a 180-day grace period, and the President may also delay imposition of sanctions another 180 days if a person is substantially reducing the number of problematic transactions. The Act also provides for secondary sanctions related to persons involved with the provision of defense articles to Syria including blocking provisions and the denial or revocation of visas. There is no change to the current restriction on new debt of companies in the Russian defense sector listed on the “Directive 3” sectoral sanctions list (or any entity that is owned or controlled 50% or more by one or more listed entity).
The Act provides for the imposition of sectoral sanctions under EO 13662 against state-owned entities operating in the railway, metals and mining sectors. It also provides for secondary sanctions against persons involved in malicious cyber activity or facilitating Russian corruption as well as sanctions with respect to certain transactions with foreign sanctions evaders and serious human rights abusers in Russia. Specifically, the cyber provision calls for designation of anyone the President determines knowingly engages in significant activities undermining cybersecurity against any person, including a democratic institution, or government on behalf of the Russian government, or is owned or controlled by, or acts or purports to act for or on behalf of, directly or indirectly such a person. Finally, the Act commissions various reports, including on the activities of Russian oligarchs, media organizations, influence on elections in Europe and Eurasia, the possibility of expanding sanctions to include sovereign debt and derivative products, illicit finance, among others.
Note that there is an exception to the sanctions to allow Russian entities to supply NASA and its contractors and subcontractors with respect to space launch activities for NASA or any other non-Department of Defense Customer.
Range of Secondary Sanctions Associated with Russia
Secondary sanctions target persons and entities otherwise outside US jurisdiction. Various sections of the Act call provide for variety of secondary sanctions, including asset blocking and visa restrictions. The Act’s sections that address cybersecurity (section 224), defense/intelligence (section 231), pipelines (section 232) and privatization (section 233) provide for twelve possible secondary sanctions. The President is required to impose five or more of the twelve specified sanctions. The range of options includes:
1. Denial of Ex-Im Bank Financing
2. Denial of US Export Privileges
3. Restriction on Loans or Provision of Credits from US Financial Institutions
4. Restrictions on Loans from International Financial Institutions
5. Restrictions on Financial Institutions, Including Prohibition on Designation as Primary Dealer or Repository of Government Funds
6. US Procurement Sanctions
7. Foreign Exchange Restrictions (in US jurisdiction)
8. Banking Transactions Restrictions
9. Property Transactions Restrictions (asset blocking)
10. Restrictions on Investing in the Equity and Debt of Sanctioned Persons
11. Exclusions on Corporate Officers (travel prohibitions)
12. Restrictions on Principal Executive Officers (imposition of secondary sanctions on such persons)
The United States has a number of obligations under the Joint Comprehensive Plan of Action (“JCPOA” or “Iran Deal”) and recently (and reportedly reluctantly) certified that Iran is in compliance. Accordingly, although the Act focuses on various threats posed by Iran, the US position is that the sanctions are not inconsistent with the JCPOA, notwithstanding President Trump’s stated aversion to the Iran Deal. As of this writing, the Iranian government is taking a different position and has stated that new sanctions violate the United States’ obligation under the JCPOA.
The Act imposes sanctions (blocking of property and a denial of visas for persons who are aliens) against any person who knowingly engages in activities that materially contribute to the Iranian government’s development of ballistic missiles/WMDs. The Act also applies terrorism sanctions against the entirety of the Iranian Revolutionary Guard Corps (IRGC) and persons that are officials, agents or affiliates of the IRGC. (Previously, the leadership of the IRGC and the IRGC’s Quds Force, were formally designated as supporting terrorism.) In addition, the Act calls for sanctions against persons who commit human rights abuses on behalf of the Iranian government.
The Act contains a number of additional Iran-related provisions, including, inter alia, sanctions related to enforcement of the UN arms embargo (where sanctions include blocking of property and denials of visas for persons who are aliens), a review of the applicability of sanctions relating to Iran’s support for terrorism and its ballistic missile program, and a report on coordination of sanctions between the United State and European Union. The Act grants the President waiver authority regarding certain provisions, subject to congressional reporting. There are also certain exceptions to the sanctions for national security and humanitarian purposes.
As a practical matter, the Iran portion of the Act changes little for US businesses, except increasing the number of entities outside the US that may be subject to US sanctions with which they are restricted from interacting. That is because, subject to certain exceptions and specific/general licenses, US persons and entities they own or control cannot conduct business in or related to Iran. (Note that as a result of OFAC’s General License H issued incident to the JCPOA, entities owned or controlled by a US person and established or maintained outside the United States (such foreign subsidiaries) may be able to conduct certain business though there are many limitations to the license.) Therefore, the main impact of the new sanctions is the possibility that new, non-US entities will be subject to and/or designated by the various sanctions called for by the Act.
The Act also has a number of provisions regarding North Korea, which this weekend also became subject to additional, wide-ranging multilateral UN sanctions (after a unanimous vote of 15-0 at the Security Council), including a ban on North Korean coal and iron exports, which could impact a third of North Korea’s export economy. Among other things, the Act sanctions those that use North Korean labor (and excludes most products of such labor from the United States) and imposes sanctions impacting vessels that call on North Korean ports. Other sanctions target those that provide rocket, aviation or jet fuel to North Korea, banks that maintain correspondent accounts with any North Korean financial institution, entities that insure or register vessels owned or controlled by the North Korean government and entities that purchase various minerals and natural resources from North Korea. The Act also contains prohibitions on certain indirect correspondent accounts applicable to US financial institutions. In addition, it places limitations on foreign assistance to noncompliant governments if they provide defense articles or defense services (as opposed to the former restriction on lethal military equipment) to the North Korean government. It also mandates that the President determine whether to add North Korea back to the US State Department’s State Sponsor of Terror list. In addition, it also calls for a report on cooperation between North Korea and Iran. Although China (and Russia) voted with the United States at the UN Security Council, the most likely impact of the US’ sanctions is the possibility that Chinese entities will be subject to designation under the Act.
The sanctions environment will continue to evolve as the United States, Russia, Iran, North Korea and global businesses continue to digest the Act and follow-on measure and designations and the EU, Russia, Iran and North Korea potentially respond.