Worldwide: Sanctions Round Up: Third Quarter 2017


The "Countering America's Adversaries Through Sanctions" Act

On August 2, 2017 President Trump signed into law the "Countering America's Adversaries Through Sanctions Act," which imposes new sanctions against Russia, North Korea, and Iran. The Act, which was largely passed in response to Russia's perceived meddling in the 2016 US presidential election, received nearly unanimous bipartisan support in the House and Senate. President Trump indicated his displeasure with the Act as he signed it into law, describing the new sanctions "seriously flawed" and even "unconstitutional" for encroaching on the power of the executive branch to determine foreign policy. As described below, the new sanctions targeting Russia— many of which purport to remove Presidential discretion—are expected to be the most consequential, and the President's implementation of those provisions will likely face intense scrutiny by US legislators in the coming months.

The Russia-related provisions of the new law are found in a subsection entitled the "Countering Russian Influence in Europe and Eurasia Act of 2017" (CRIEEA). The Act serves to codify existing US sanctions, expand existing restrictions on US persons doing business with Russia, and add a number of secondary sanctions targeting non-US persons' activity involving Russia. In large part, the provisions are identical to those in the bill initially proposed by the Senate earlier this summer (described in detail in our previous Sanctions Roundup). Below, we reiterate the most the most important aspects of the new sanctions as they appear in the final version of the Act:

Codification of Existing US Sanctions

By adopting existing sanctions against Russia into law, Congress removes the President's ability to lift those sanctions unilaterally. Specifically, the bill requires President Trump to submit a report to Congress requesting permission to remove any Russia-related sanctions, including the various Russia-related executive orders signed during the Obama Administration.

Sanctions Targeting Activity by US Persons

CRIEEA strengthens existing Russian "sectoral" sanctions (which apply to US persons) in multiple ways:

  • New sectors. Section 223 of the Act authorizes, but does not require, the Treasury Department to expand the sectoral sanctions to include any "state-owned entity operating in the railway or metals and mining" sectors of Russia. The existing sectoral sanctions already apply to Russia's energy, financial, and defense sectors, but the Trump Administration has not availed itself of the authority granted to it by this section to expand them.
  • Tightening of debt restrictions. Section 223 also tightens certain debt financing restrictions on SSI-listed entities. Specifically, OFAC Directive 1 (applying to Russian financial institutions) and Directive 2 (applying to Russian energy companies) are modified to restrict US persons from transacting in new debt having maturity periods for new debt to fourteen days (formerly 30 days) and 60 days (formerly 90 days), respectively, with designated entities. The Administration delayed implementing the changes mandated by section 223 until the last possible moment, thus delaying the effective date of the shortened maturity periods to new debt issued on or after November 28, 2017.
  • Expansion of prohibition on supplying Russian oil projects. Section 223 expands Directive 4 to prohibit US persons from providing goods, services (except for financial services), or technology in support of exploration or production for "new" deepwater, Arctic offshore, or shale projects involving an entity designated under Directive 4 that has the potential to produce oil anywhere in the world. Previously, this prohibition was geographically restricted to projects "within the Russian Federation." Furthermore, the CRIEEA expands the prohibition to apply to any entity 33% or more owned by a person designated under Directive 4 (formerly 50% or more).

Mandatory Sanctions Targeting Non-US Persons' Activity

  • Investments in special Russian crude oil projects. Section 225 requires the President to impose secondary sanctions on non-US persons who make "a significant investment in a special Russian crude oil project," defined as "a project intended to extract crude oil from the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (B) Russian Arctic offshore locations; or (C) shale formations located in the Russian Federation." Notably, however, the statute does not define what qualifies as a "significant investment," and OFAC has yet to release such guidance. Section 225 contains an exception to imposing the sanctions if the President determines that it is not in the national interest of the US to do so. As of this date, the President has not identified any non-US person subject to these secondary sanctions, nor has he invoked the national interest exception to shield such persons.
  • Foreign financial institutions. Section 226 requires the President to terminate or restrict access to US correspondent and payable-through accounts for foreign financial institutions that "knowingly" engage in significant financial transactions (1) on behalf of Russian persons designated on OFAC's SDN list under the Ukraine-related authorities or certain other sanctioned persons; or (2) in connection with significant investments in a Russian deepwater, Arctic offshore, or shale oil project. Like section 225, section 226 contains an exception to imposing the sanctions if the President determines that it is not in the national interest of the US to do so. As with section 225, the President has not identified any foreign financial institutions that are subject to these secondary sanctions, nor has he invoked to the national interest exception to shield any such institutions.
  • Non-US sanctions "evaders." Section 228 requires the President to impose blocking sanctions (i.e., designation on OFAC's SDN list) on a "foreign person" that the President determines "knowingly" (1) materially violates, attempts to violate, conspires to violate, or causes a violation of any Russia sanctions provision; or (2) facilitates a significant transaction or transactions, including deceptive or structured transactions, for or on behalf of any person subject to Russia sanctions or their immediate family members. The President has not added any Russian or other foreign persons to the SDN list since the passage of CRIEEA.

Discretionary Sanctions

Russian energy-export pipelines. Section 232 establishes new secondary sanctions relating to Russian energy-export pipelines. Specifically, section 232 grants the President permission—but does not require him—to impose various export and financial sanctions on any person who provides assistance for the building, maintenance, or expansion of energy pipelines by the Russian Federation. Sanctionable assistance is broadly defined to include any investment that "directly and significantly contributes to the enhancement of the ability of the Russian Federation to construct energy export pipelines," as well as the supply of any 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." The monetary threshold for sanctionable assistance is USD 1 million per transaction or an aggregate fair market value of USD 5 million over a twelve-month period. To date, the President has not exercised his discretion under this section.

Other Provisions

  • Cyber activity—new mandatory blocking sanctions on any person the President determines to be "knowingly engage[d] in significant activities undermining cybersecurity against any person, including a democratic institution, or government, on behalf of the Government of the Russian Federation."
  • Privatization of state-owned assets—new mandatory sanctions against any person the President determines to have knowingly made an investment of $10 million or more, or facilitates such investment, if the investment directly and significantly contributes to the ability of the Russian Federation to privatize state-owned assets in a manner that unjustly benefits government officials or their family members.
  • Defense and intelligence sectors—new mandatory sanctions against any person the President determines knowingly "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 Government of the Russian Federation."
  • New mandatory sanctions against corrupt actors, sanctions-evaders, and human rights abusers.

Despite receiving broad political support in the US, the measure prompted a backlash from some European states, especially in regard to its apparent targeting of the Nord Stream 2 project (the offshore natural gas pipeline that would double energy exports from Russia to Germany, expected to begin construction next year), which critics considered an attempt to promote US liquefied natural gas exports. Austria and Germany have been especially critical of the measure, with Germany's economic minister quoted as recommending the EU to pursue "countermeasures" should the US decide to impose discretionary sanctions on EU firms investing in the gas pipeline project. Apparently in response to EU lobbying, the US Congress revised the bill's language to say that the President may, "in coordination with allies of the United States," impose the energy-pipeline sanctions. It is unclear what, if any, legal restriction this language would actually impose on the President's discretion, but it indicates that the Congress, and presumably the President, are well aware of the contentious nature of this particular sanctions target.

Trump Administration Slow to Implement CRIEEA Provisions

Two months after signing the Act, some members of Congress are worried that the President is being too slow to begin enforcing many of its provisions. On September 29, Senators John McCain and Ben Cardin expressed their concern in a letter to the President reminding the Administration that "critical deadlines are approaching" relating to various aspects of implementing and enforcing the law. Later that day, the White House issued a presidential memorandum purporting to take the first step toward implementation by designating different agencies to start the process putting the law into effect. Also on September 29, the Treasury Department modified Directives 1 and 2 of the Russia sectoral sanctions (meeting the required October 1 deadline).

The chart below indicates various effective dates and deadlines related to the new sanctions. As noted, the Administration has yet to issue guidance on individuals linked to Russian defense and intelligence operations, which it is required to provide by October 1. The President has also not yet imposed any restrictive measures under the Act's purportedly "mandatory" sanctions provisions described above, many of which have been effective since August 2.

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Danforth Newcomb
Barnabas W.B. Reynolds
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