On September 20, 2018, US President Donald Trump issued a new executive order (EO) that delegates the implementation of certain sanctions under the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA) and Ukraine Freedom Support Act of 2014 (UFSA) to the Department of Treasury and other US government agencies and departments.
On the same day, the Department of State added 33 new parties to its List of Specified Persons (LSP), which identifies individuals and entities operating in the Russian defense and intelligence sectors. In a simultaneous action, the Department of State imposed secondary sanctions under Section 231 of CAATSA against a Chinese military agency, Equipment Development Department (EDD), and its director, Li Shangfu, for the purchase of fighter aircraft and missile-system related equipment from a Russian entity on the LSP.
Implementation of certain Russia-related sanctions under the executive order
The EO authorizes the Department of Treasury to implement the CAATSA and UFSA sanctions described below, and directs Treasury and other US government agencies and departments to "take all appropriate measures within their authority to ensure the full implementation of those sanctions.1 The EO does not, however, create or expand any sanctions; rather, it instructs agencies to implement existing sanctions.
Section 235 of CAATSA lists twelve sanctions2 that the Departments of Treasury and State must select from when imposing secondary sanctions under the following sections of CAATSA:
- Section 224(a)(2) (activities of Russia that undermine cybersecurity),
- Section 231(a) (transactions with the Russian defense and intelligence sectors),
- Section 232(a) (development of pipelines in Russia), and
- Section 233(a) (investment in or facilitation of privatization of state-owned assets by Russia).
Additionally, Section 4(c) UFSA provides a list of nine sanctions3 that the Departments of Treasury and State must select from when imposing sanctions on persons under Sections 4(a) and (b) of the UFSA (sanctions on Russian defense and energy sectors).
The EO authorizes the Department of Treasury to implement certain sanctions from the Section 235 list, such as blocking the property of sanctioned persons, or prohibiting US financial institutions from making loans or providing credits over $10 million in a 12-month period to a sanctioned person. The new EO also authorizes the Department of Treasury to implement certain sanctions from the list in UFSA Section 4(c), such as blocking the property of sanctioned persons, or prohibiting US Persons4 from dealing in certain debt or equity of sanctioned persons.
Additionally, the EO instructs other US agencies and departments (e.g., the Export-Import Bank, the Board of Governors of the Federal Reserve System, etc.,) to implement other sanctions within their respective jurisdictions.These include the denial of export licenses, banking restrictions and visa bans.
The EO also contains implementing and penalties provisions that enable the Department of Treasury's Office of Foreign Assets Control (OFAC) to "promulgate regulations and issue administrative subpoenas, licenses, and the full range of civil enforcement actions with respect to sanctions violations."5 OFAC has announced that regulations to implement sanctions are forthcoming.6
Department of State Expands List of Specified Persons and Imposes Secondary Sanctions on Chinese Entity under CAATSA Section 231
On September 20, 2018, the Department of State took two concurrent actions under Section 231 of CAATSA, which was enacted on August 2, 2017. First, the Department of State added 33 additional parties to the LSP for being a part of, or operating for or on behalf of, the defense or intelligence sectors of the Government of Russia. Section 231 of CAATSA requires the imposition of five or more of the twelve sanctions listed in Section 235 of CAATSA on anyone determined to have knowingly engaged in a significant transaction on or after August 2, 2017 with parties on the LSP.
Persons identified on the LSP are not subject to sanctions solely by virtue of being included on the LSP. However, because significant transactions with persons on the LSP can result in sanctions, the Department of State has indicated that the LSP may function as "something of a signal to avoid engagement7 with persons on the LSP.
Second, the Department of State imposed sanctions under Section 231 on the Chinese military entity, EDD, and its director, Li Shangfu, for engaging in significant transactions with Rosoboronexport (ROE), which is Russia's main arms export entity. ROE is identified on the CAATSA Section 231 LSP for operating in the defense sector of the Government of Russia. This is the first time since CAATSA's enactment that the Department of State has sanctioned any individual or entity under Section 231.
The transactions between EDD and ROE involve the delivery from Russia to China of twin Sukhoi fighter aircraft (Su-35) in December 2017 and an initial batch of S-400 (aka SA-21) surface-to-air-missile system-related equipment in 2018. Both transactions resulted from pre-August 2, 2017 deals negotiated between EDD and ROE, but occurred after CAATSA came into force.
The five sanctions imposed on EDD are:
- A denial of export licenses;
- A prohibition on foreign exchange transactions under US jurisdiction;
- A prohibition on all transactions within the US financial system;
- Blocking of all property and interests in property within the US; and
- The imposition of sanctions on EDD's director, Li Shangfu, which include a prohibition on foreign exchange transactions under US jurisdiction, a prohibition on transactions with the US financial system, blocking of all property and interests in property in the US, and a visa ban.
OFAC added EDD and Li Shangfu to its List of Specially Designated Nationals. As a result of these designations, all property and interests in property of EDD and Li Shangfu in the US are blocked, and US Persons are prohibited from engaging in transactions or dealings with them.
The Department of State has characterized sanctions against EDD as a "significant step8 and encouraged "all persons to avoid engaging in transactions with entities on the LSP that may risk sanctions, including high-value, major transactions for sophisticated weapons systems."9 In a special press briefing, the Department of State clarified that, for purposes of Section 231, the US is not targeting activities such as "simply the provision of spare parts and maintenance," but focusing efforts on "transactions that involve significant qualitative changes in the nature of military equipment shipped abroad."10 Since US enforcement under Section 231 is ongoing,11 any individuals or entities transacting with companies in the Russian defense or intelligence sectors should monitor changes to the LSP and, among other things, exercise caution especially when engaging in transactions with parties on the LSP.
1 Text of Executive Order Authorizing the Implementation of Certain Sanctions Set Forth in the Countering America's Adversaries Through Sanctions Act (Sept. 20, 2018), https://www.whitehouse.gov/presidential-actions/executive-order-authorizing-implementation-certain-sanctions-set-forth-countering-americas-adversaries-sanctions-act/.
2 The twelve sanctions measures in Section 235 of CAATSA are: (1) prohibition on Export-Import Bank assistance for exports to sanctioned persons; (2) export sanctions; (3) restrictions on loans from US financial institutions; (4) restrictions on loans from international financial institutions to which the US is a party; (5) certain financial prohibitions if the sanctioned person is a financial institution; (6) procurement sanctions; (7) prohibitions on transactions in foreign exchange under US jurisdiction; (8) restrictions on banking transactions; (9) restrictions on property transactions; (10) ban on investment in equity or debt of sanctioned person; (11) exclusion from the US of corporate officers of sanctioned entities; and (12) sanctions on principal executive officers of sanctioned entities. Countering America's Adversaries Through Sanctions Act, H.R. 3364, 115th Cong. § 225 (2017) (enacted).
3 The nine sanctions measures in Section 4(c) of the UFSA are: (1) prohibition on Export-Import Bank assistance; (2) procurement sanctions; (3) prohibition on arms exports; (4) prohibition on dual-use item exports; (5) restrictions on property transactions; (6) restrictions on banking transactions; (7) prohibition on investment in equity or debt of sanctioned person; (8) exclusion from the United States or revocation of US visas; and (9) sanctions on principal executive officer of sanctioned person. Ukraine Freedom and Support Act, P.L. 113-272 §4(c) (2014) (enacted).
4 The term "US Person" means any US citizen, permanent resident alien, entity organized under the laws of the US or any jurisdiction within the US (including foreign branches), or any person in the US. 31 CFR §589.312.
5 FAQ #627,US Department of Treasury (Sept. 20, 2018), https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#627.
7 Previewing Sanctions Under Section 231 of the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA), US Department of State (Sept. 20, 2018), https://www.state.gov/r/pa/prs/ps/2018/09/286083.htm.
8 Previewing Sanctions Under Section 231 of the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA), US Department of State (Sept. 20, 2018), https://www.state.gov/r/pa/prs/ps/2018/09/286083.htm.
9 CAATSA Section 231: "Addition of 33 Entities and Individuals to the List of Specified Persons and Imposition of Sanctions on the Equipment Development Department", US Department of State (Sept. 20, 2018), https://www.state.gov/r/pa/prs/ps/2018/09/286077.htm.
10 Previewing Sanctions Under Section 231 of the Countering America's Adversaries Through Sanctions Act of 2017 (CAATSA), US Department of State (Sept. 20, 2018), https://www.state.gov/r/pa/prs/ps/2018/09/286083.htm.
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