New US Sanctions Expected for Russia, Iran and North Korea
On July 25 and 27, 2017, both houses of US Congress passed almost unanimously a lengthy bill expanding US sanctions on Russia, Iran and North Korea. President Trump was expected to sign the bill into law. It is titled the Countering America’s Adversaries Through Sanctions Act (“CAATSA”).
The provisions that are likely to have the greatest practical impact are those seeking to expand US capital markets and other “sectoral” sanctions targeting major Russian banks and oil and gas companies. The bill also introduces “secondary sanctions” for non-US persons engaged in certain types of transactions with Russia. However, it is far from clear that the Trump Administration will implement these sanctions.
In this summary we use the term “persons” to refer to both individuals and companies and other entities, and the term “US persons” to refer to US citizens and permanent residents, entities formed under US law, and any other person engaged in conduct within the United States.
Expanding and Locking in Russia Sanctions
Restrictions on lifting of sanctions
Under CAATSA, the Trump Administration will not be able to lift the Russia sanctions without first going through a Congressional review procedure. The statute also “codifies” almost all existing US sanctions executive orders focused on Russia, which means the President will not be able to lift sanctions imposed on any specific person without first submitting certain specified determinations or certifications to Congress.
Before the bill passed Congress, the White House indicated it was reluctantly prepared to accept these provisions, after a last-minute compromise reached with Congressional negotiators, that:
- increased the procedural hurdles for Congress to block a lifting of sanctions, and
- ruled out Congressional review of any “routine” US government license (authorization) of a specific transaction that “does not significantly alter United States foreign policy”.
The bill also authorizes the imposition of sectoral sanctions on companies in Russia’s railways, mining and metals sectors. However this already overlaps with existing sanctions authorities, and the Trump Administration is unlikely to choose to implement these sanctions.
Expanded sectoral sanctions
In 2014, the US and EU imposed “sectoral sanctions” on many of the largest Russian banks, oil and gas companies and dozens of their subsidiaries.
The bill directs the US Office of Foreign Assets Control (“OFAC”) to expand its Directives 1 and 2 under the sectoral sanctions. These Directives prohibit US person involvement in new financing for such Russian banks and oil and gas companies, and new share issuances by such banks. The bill directs that the Directives be broadened to cover new debt of such banks with a maturity longer than 14 days (currently only debt with a maturity over 30 days is covered), and new debt of such oil and gas companies with a maturity over 60 days (currently 90 days).
This could have a significant practical impact. OFAC interprets the prohibition on new debt to include the payment terms of any invoice for goods or services rendered to these covered companies. After the changes go into effect, there could be a US sanctions issue for any US person who is not paid within 14 or 60 days (rather than the current 30 or 90 days) by a covered company.
The bill also directs OFAC to expand its Directive 4, which prohibits US persons from providing goods, technology and non-financial services for exploration and production by certain targeted Russian oil and gas companies, and their subsidiaries, in Russian deepwater, arctic offshore and shale oil and gas fields. The bill directs that Directive 4 be broadened to cover new projects in deepwater, arctic offshore or shale oil and gas fields anywhere in the world (not just in or offshore Russia), if a company covered under Directive 4 has at least a 1/3 ownership interest.
New secondary sanctions
The bill establishes new secondary sanctions, giving the Trump Administration the option of penalizing non-US companies engaged in certain sensitive activities relating to Russia, even if the penalized company has no ties or contact with the United States. However, unless there is a change in Trump Administration policy on Russia, we think it is unlikely that there will be significant enforcement of these new sanctions.
Companies and banks involved in covered transactions may need to decide whether to avoid those transactions, on the basis that they could theoretically trigger US secondary sanctions penalties in future. As part of that decision-making process, companies should consider that such penalties are unlikely under present circumstances, and that they could become more likely if there is a change in the Russia-related policies of the US President and his Administration.
Under the new secondary sanctions President Trump will have the authority to penalize non-US persons engaging in the following activities:
- investing, or providing goods, technology or services, that directly and significantly contributes to Russian energy export pipelines, in each case with a value of $1 million or in smaller transactions with an aggregate value of $5 million in any 12-month period;
- investing or facilitating investment by others, with a value of $10 million, related to Russian privatization of state assets that unjustly enrich Russian government officials or their associates; or
- a significant transaction, more than 180 days after the bill becomes law, with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Russian government.
In the first of these new measures Congress apparently had the planned Nord Stream 2 pipelines in mind, which will transport natural gas from Russia to consumers in the EU. In a June 15 joint statement, Germany and Austria, which support the pipelines, said the new sanctions measure “introduces a completely new, very negative dimension into European-American relations” and “we can't accept the threat of illegal and extraterritorial sanctions against European companies”.
In addition, President Trump will have the authority to penalize non-US persons for the following types of transactions, though he is likely to waive or decline to exercise that authority:
- investments by non-US persons in any of the projects covered by Directive 4;
- significant transactions by non-US banks related to such investments, arms exports to Syria, or any withholding by Gazprom of significant natural gas supplies from NATO or certain Eastern European countries; and
- significant financial transactions by non-US banks on behalf of any Russian persons added to the SDN List under the Russia sanctions.
Expanded blocking sanctions
Finally, the bill expands existing sanctions authorities under which non-US persons engaged in certain activities can be blocked (meaning their assets can be frozen). For example, blocking can now be imposed for:
- a broader range of hacking activities on behalf of the Russian government;
- transactions seeking to evade the effect of Russia sanctions;
- human rights violations in territories occupied by Russia; and
- support to the Syrian government in acquiring significant weapons, ballistic or cruise missiles or weapons of mass destruction.
The practical impact for the private sector may be limited, so long as companies keep a close watch on any entities added to the US List of Specially Designated Nationals and Blocked Persons (“SDN List”).
Adjustments to Iran Sanctions
Most of the Iran sanctions provisions will have limited or no practical impact on the private sector, because they (i) largely overlap with existing sanctions measures, (ii) will likely be interpreted by the Trump Administration to not require any additional sanctions, or (iii) merely require the executive branch to carry out analysis or provide reports to Congress.
For example, the new sanctions relating to persons who materially contribute to Iranian missile programs, or for persons involved in the supply to or from Iran of major weapons systems, arguably do not greatly expand the Administration’s ability to sanctions such persons under existing authorities.
While the new human rights sanctions arguably expand existing authorities to target Iranian government officials and others engaged in gross violations of human rights against Iranians, this is unlikely to directly impact most private companies outside Iran.
The bill calls for the terrorist designation of the Iranian Revolutionary Guard Corps (IRGC) and its officials, agents and affiliates. There would be little practical impact for the private sector, as the IRGC and many related persons are already targeted under similar sanctions authorities.
Further limiting the practical impact on the private sector, the new sanctions expressly do not impact humanitarian transactions, including the sale of agricultural commodities, medicine and medical devices to Iran, and related payments and transportation.
North Korea
The bill amends a February 2016 statute that sought to expand US sanctions on North Korea, and codified (locked in) the existing sanctions. The current sanctions bill adds the following to the list of sanctionable activities:
- purchasing certain metals and minerals from North Korea, or selling to North Korea of rocket, aviation or jet fuel;
- supporting the operation and maintenance of vessels and aircraft covered by the sanctions, or insuring or registering North Korean government vessels; or
- maintaining a correspondent account for a North Korean financial institution (this has been prohibited for US banks since November 2016 under a separate “special measure” under US anti-money laundering law).
As with the 2016 statute, the bill seeks to require the President to implement these sanctions. However, the Trump Administration could react in the way the Obama Administration did in 2016, and decline to do so.
Under the bill, if a US bank learns that a correspondent account they maintain for a non-US bank is being used by the non-US bank to indirectly provide significant financial services to a person added to the SDN List pursuant to the 2016 statute, the US bank will be required to ensure that this conduct is terminated. The practical impact of this is not yet clear.
The bill prohibits the entry or operation in US waters of vessels included on a list to be developed by the Department of Homeland Security, of vessels over 300 gross tons owned or operated by the North Korean government, by any North Korean person, or by a country not complying with UN sanctions on North Korea. Potentially, 180 days after the publication of this list, the denial of entry will be extended to all vessels registered to any flag state that has registered any of the vessels on the list. This could have a broad impact, depending on how it is implemented.
There are a number of other provisions relating to Russia, Iran and North Korea sanctions that are unlikely to be implemented, or are unlikely to have a practical impact on the private sector.
The provisions that are likely to have the greatest practical impact are those seeking to expand US capital markets and other “sectoral” sanctions targeting major Russian banks and oil and gas companies. The bill also introduces “secondary sanctions” for non-US persons engaged in certain types of transactions with Russia. However, it is far from clear that the Trump Administration will implement these sanctions.
In this summary we use the term “persons” to refer to both individuals and companies and other entities, and the term “US persons” to refer to US citizens and permanent residents, entities formed under US law, and any other person engaged in conduct within the United States.
Expanding and Locking in Russia Sanctions
Restrictions on lifting of sanctions
Under CAATSA, the Trump Administration will not be able to lift the Russia sanctions without first going through a Congressional review procedure. The statute also “codifies” almost all existing US sanctions executive orders focused on Russia, which means the President will not be able to lift sanctions imposed on any specific person without first submitting certain specified determinations or certifications to Congress.
Before the bill passed Congress, the White House indicated it was reluctantly prepared to accept these provisions, after a last-minute compromise reached with Congressional negotiators, that:
- increased the procedural hurdles for Congress to block a lifting of sanctions, and
- ruled out Congressional review of any “routine” US government license (authorization) of a specific transaction that “does not significantly alter United States foreign policy”.
The bill also authorizes the imposition of sectoral sanctions on companies in Russia’s railways, mining and metals sectors. However this already overlaps with existing sanctions authorities, and the Trump Administration is unlikely to choose to implement these sanctions.
Expanded sectoral sanctions
In 2014, the US and EU imposed “sectoral sanctions” on many of the largest Russian banks, oil and gas companies and dozens of their subsidiaries.
The bill directs the US Office of Foreign Assets Control (“OFAC”) to expand its Directives 1 and 2 under the sectoral sanctions. These Directives prohibit US person involvement in new financing for such Russian banks and oil and gas companies, and new share issuances by such banks. The bill directs that the Directives be broadened to cover new debt of such banks with a maturity longer than 14 days (currently only debt with a maturity over 30 days is covered), and new debt of such oil and gas companies with a maturity over 60 days (currently 90 days).
This could have a significant practical impact. OFAC interprets the prohibition on new debt to include the payment terms of any invoice for goods or services rendered to these covered companies. After the changes go into effect, there could be a US sanctions issue for any US person who is not paid within 14 or 60 days (rather than the current 30 or 90 days) by a covered company.
The bill also directs OFAC to expand its Directive 4, which prohibits US persons from providing goods, technology and non-financial services for exploration and production by certain targeted Russian oil and gas companies, and their subsidiaries, in Russian deepwater, arctic offshore and shale oil and gas fields. The bill directs that Directive 4 be broadened to cover new projects in deepwater, arctic offshore or shale oil and gas fields anywhere in the world (not just in or offshore Russia), if a company covered under Directive 4 has at least a 1/3 ownership interest.
New secondary sanctions
The bill establishes new secondary sanctions, giving the Trump Administration the option of penalizing non-US companies engaged in certain sensitive activities relating to Russia, even if the penalized company has no ties or contact with the United States. However, unless there is a change in Trump Administration policy on Russia, we think it is unlikely that there will be significant enforcement of these new sanctions.
Companies and banks involved in covered transactions may need to decide whether to avoid those transactions, on the basis that they could theoretically trigger US secondary sanctions penalties in future. As part of that decision-making process, companies should consider that such penalties are unlikely under present circumstances, and that they could become more likely if there is a change in the Russia-related policies of the US President and his Administration.
Under the new secondary sanctions President Trump will have the authority to penalize non-US persons engaging in the following activities:
- investing, or providing goods, technology or services, that directly and significantly contributes to Russian energy export pipelines, in each case with a value of $1 million or in smaller transactions with an aggregate value of $5 million in any 12-month period;
- investing or facilitating investment by others, with a value of $10 million, related to Russian privatization of state assets that unjustly enrich Russian government officials or their associates; or
- a significant transaction, more than 180 days after the bill becomes law, with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Russian government.
In the first of these new measures Congress apparently had the planned Nord Stream 2 pipelines in mind, which will transport natural gas from Russia to consumers in the EU. In a June 15 joint statement, Germany and Austria, which support the pipelines, said the new sanctions measure “introduces a completely new, very negative dimension into European-American relations” and “we can't accept the threat of illegal and extraterritorial sanctions against European companies”.
In addition, President Trump will have the authority to penalize non-US persons for the following types of transactions, though he is likely to waive or decline to exercise that authority:
- investments by non-US persons in any of the projects covered by Directive 4;
- significant transactions by non-US banks related to such investments, arms exports to Syria, or any withholding by Gazprom of significant natural gas supplies from NATO or certain Eastern European countries; and
- significant financial transactions by non-US banks on behalf of any Russian persons added to the SDN List under the Russia sanctions.
Expanded blocking sanctions
Finally, the bill expands existing sanctions authorities under which non-US persons engaged in certain activities can be blocked (meaning their assets can be frozen). For example, blocking can now be imposed for:
- a broader range of hacking activities on behalf of the Russian government;
- transactions seeking to evade the effect of Russia sanctions;
- human rights violations in territories occupied by Russia; and
- support to the Syrian government in acquiring significant weapons, ballistic or cruise missiles or weapons of mass destruction.
The practical impact for the private sector may be limited, so long as companies keep a close watch on any entities added to the US List of Specially Designated Nationals and Blocked Persons (“SDN List”).
Adjustments to Iran Sanctions
Most of the Iran sanctions provisions will have limited or no practical impact on the private sector, because they (i) largely overlap with existing sanctions measures, (ii) will likely be interpreted by the Trump Administration to not require any additional sanctions, or (iii) merely require the executive branch to carry out analysis or provide reports to Congress.
For example, the new sanctions relating to persons who materially contribute to Iranian missile programs, or for persons involved in the supply to or from Iran of major weapons systems, arguably do not greatly expand the Administration’s ability to sanctions such persons under existing authorities.
While the new human rights sanctions arguably expand existing authorities to target Iranian government officials and others engaged in gross violations of human rights against Iranians, this is unlikely to directly impact most private companies outside Iran.
The bill calls for the terrorist designation of the Iranian Revolutionary Guard Corps (IRGC) and its officials, agents and affiliates. There would be little practical impact for the private sector, as the IRGC and many related persons are already targeted under similar sanctions authorities.
Further limiting the practical impact on the private sector, the new sanctions expressly do not impact humanitarian transactions, including the sale of agricultural commodities, medicine and medical devices to Iran, and related payments and transportation.
North Korea
The bill amends a February 2016 statute that sought to expand US sanctions on North Korea, and codified (locked in) the existing sanctions. The current sanctions bill adds the following to the list of sanctionable activities:
- purchasing certain metals and minerals from North Korea, or selling to North Korea of rocket, aviation or jet fuel;
- supporting the operation and maintenance of vessels and aircraft covered by the sanctions, or insuring or registering North Korean government vessels; or
- maintaining a correspondent account for a North Korean financial institution (this has been prohibited for US banks since November 2016 under a separate “special measure” under US anti-money laundering law).
As with the 2016 statute, the bill seeks to require the President to implement these sanctions. However, the Trump Administration could react in the way the Obama Administration did in 2016, and decline to do so.
Under the bill, if a US bank learns that a correspondent account they maintain for a non-US bank is being used by the non-US bank to indirectly provide significant financial services to a person added to the SDN List pursuant to the 2016 statute, the US bank will be required to ensure that this conduct is terminated. The practical impact of this is not yet clear.
The bill prohibits the entry or operation in US waters of vessels included on a list to be developed by the Department of Homeland Security, of vessels over 300 gross tons owned or operated by the North Korean government, by any North Korean person, or by a country not complying with UN sanctions on North Korea. Potentially, 180 days after the publication of this list, the denial of entry will be extended to all vessels registered to any flag state that has registered any of the vessels on the list. This could have a broad impact, depending on how it is implemented.
There are a number of other provisions relating to Russia, Iran and North Korea sanctions that are unlikely to be implemented, or are unlikely to have a practical impact on the private sector.
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