August 17, 2017
On August 2, 2017, the President signed the Countering America’s Adversaries Through Sanctions Act (the “Act”), which strengthens current sanctions on Russia while also imposing new sanctions in response to Russia’s interference in the 2016 election and its increased aggression in Ukraine and Syria. The Act also imposes new sanctions on Iran and North Korea as a result of their recent missile tests and human rights abuses.
In addition to the imposition of new sanctions, the Act also requires additional reporting to Congress on matters related to the Russian, Iranian, and North Korean sanctions, and uniquely requires Congressional review of certain changes to the Russian sanctions by the Executive branch. The Congressional review requirement will likely make it more challenging to remove or change sanctions on Russia over time because Congress tends to move slower than the Executive Branch in responding to current events.
While the imposition of Congressional review is a distinctive aspect of the Act, this article focuses on the mandatory and discretionary sanctions created under the Act as the new sanctions will have the most immediate impact on companies. We first provide an overview of the new Russian sanctions, which compose the majority of the new sanctions, and then discuss the new sanctions on Iran and North Korea. As few U.S. companies are involved in transactions with a nexus to Iran or North Korea, the new Russia sanctions will likely have more of an impact on U.S. businesses, specifically the energy sector, than the new Iranian and North Korean sanctions.
The Act most expansively modifies the sanctions related to Russia, and the modification of Executive Order 13662 – Blocking Property of Additional Persons Contributing to the Situation in Ukraine – may have the most immediate impact on industry. The key changes include:
(1) that have the potential to produce oil; and
(2) that involve any person determined to be subject to the directive or the property or interests in property of such a person who has a controlling interest or a substantial non-controlling ownership interest in such a project defined as not less than a 33 percent interest (adding in persons with substantial but non-controlling ownership interests, i.e., 33% or more).
Notably the changes to Directive 4 do not include a reference to the requirement that the project has to be within Russia or in maritime area claimed by Russia. In addition, they leave an open question as to which projects will be considered “new.” As a result, the impact of these changes will not be realized until the Office of Foreign Assets Control (OFAC) promulgates regulations.
In addition, the Act authorizes sanctions with respect to the development of pipelines in the Russian Federation. The Act permits the President, in coordination with allies of the U.S., to impose sanctions if a person knowingly invests, sells, leases, or provides to the Russian Federation, for the construction of Russian energy export pipelines, goods, services, technology, information, or support:
Our European allies have raised concerns about this particular provision as it could target European entities who are involved in pipeline projects, such as the Nord Stream 2 pipeline passing through the Baltic Sea from Russia to Germany. This provision, however, is not mandatory and it provides that the President should act in coordination with our allies, as has been done with the earlier energy-related sanctions on Russia.
The Act also requires the imposition of sanctions with respect to persons involved in the following activities:
The Act provides for the following mandatory and discretionary Iran-related sanctions, many of which are extensions of the already existing non-nuclear Iran sanctions:
The Act expands mandatory North Korean sanctions designations to require the imposition of sanctions on persons who knowingly, directly or indirectly:
In addition, the Act allows the President to impose sanctions at his discretion on persons involved in a variety of commercial transactions benefiting the Government of North Korea, including textile purchases, acquisition of fishing rights, facilitation of the Government of North Korea’s online commercial activities, acquisition of food or agricultural products, and activities related to the exportation of workers from North Korea. The Act also authorizes sanctions on foreign persons involved in the forced labor and slavery of North Koreans outside of North Korea.
Vessels and Aircraft
Finally, the Act provides for new restrictions on vessels entering the United States. This includes a prohibition on the entry into the United States of certain vessels that are owned or operated by or on behalf of the Government of North Korea or any country that has not complied with the applicable UN Security Council resolutions on North Korea. The Act also authorizes enhanced screening of vessels and aircraft entering the United States that have transited North Korea or other sea ports or airports determined to be deficient in compliance with United Nations Security Council resolutions on North Korea.
Importantly these new sanctions will provide greater authority for the President to target foreign entities in countries such as China who continue to provide assistance to North Korea.
It may take some time to realize the full impact of these new sanctions as much depends on to what extent the discretionary sanctions will be implemented and how OFAC and other government agencies interpret the law. One thing that is certain, however, is that conducting business involving Russia will become more difficult as a result of the increase in sanctions and the added requirement for Congressional review of any changes.
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