On July 27, 2017, the US Congress passed the Countering America's Adversaries Through Sanctions Act (CAATSA), which calls for imposition of extraordinarily wide-ranging new sanctions measures on all three named countries. The CAATSA now awaits action by President Trump and is highly likely to become the law of the land in the coming days.
The sanctions applicable to each of Russia, Iran and North Korea are set out in separate titles within CAATSA. In this update, we discuss the major escalation of Russia-related sanctions contained in the Countering Russian Influence in Europe and Eurasia Act of 2017 (CRIA), Title II of CAATSA. Updates on the new Iran and North Korea sanctions will be provided in the coming days.
CRIA takes aim at the Russian energy and financial sectors, Russian state-owned entities in the railway, shipping, or metals or mining sectors, individuals and entities (together, persons) involved in privatization of Russian state-owned assets, persons that provide military support to Syria, persons that undermine cybersecurity, and persons that take steps to evade application of US sanctions or engage in corruption or human rights abuses. CRIA manifests a clear intent by Congress to strengthen its hand in US foreign policy, by requiring – not just authorizing – the President to impose many of the new sanctions, by substantially hamstringing the President's ability to terminate, waive or grant licenses related to Russian sanctions, and by mandating that the President and his staff provide Congress with a wide array of sanctions-related notifications and reports.
Potential penalties for violation of sanctions in CRIA are equally sweeping, and include asset freezes, denial of entry to the US and access to US banking, export/import restrictions, denying access to US financing and foreign exchange, and prohibiting acquisition of property in the US. In some cases, five or more such penalties are to be imposed on a particular sanctions target.
Of particular note are the extensive new "secondary sanctions", that is, sanctions that target persons in third-countries that do business with principal sanctions targets. Secondary sanctions were widely used against Iran – and presented massive compliance challenges to non-US persons in third countries engaged in international commerce – prior to implementation in January 2016 of the Joint Comprehensive Plan of Action. Well, secondary sanctions are back – and with a vengeance – this time focused on Russia.
A general overview of the new CRIA sanctions is provided below. As with all sanctions, they are highly nuanced, and contain a myriad of limitations and exceptions, thorough discussion of which is beyond the scope of this update.
Codification of Sanctions and New Constraints on the President
CRIA provides for codification of presidential Executive Orders 13660, 13661, 13662 and 13685 (concerning Ukraine/Crimea) and Executive Orders 13694 and 13757 (concerning malicious cyber-enabled activities) (the Russia-related Executive Orders). In doing so, substantial constraints will be imposed on the President's ability to waive, terminate, or license conduct prohibited under the Russia-related Executive Orders. Congress has also imposed such constraints on sanctions under the Ukraine Freedom Support Act (Ukraine Freedom Act) and the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act (the Ukraine Sovereignty Act), both enacted in 2014.
New Energy Sector Sanctions
CRIA expands and tightens sanctions applicable to the Russian energy sector, including:
- Modification of sectoral sanctions under Directive 2, which will prohibit US persons from participating in debt financing of designated Russian energy firms of longer than 60 days' maturity.
- Modification of sectoral sanctions under Directive 4, which will prohibit US persons from providing goods, services (except financial services) or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects anywhere in the world that have the potential to produce oil if a designated Russian energy firm or an entity it owns has a "controlling interest" or a "substantial non-controlling ownership interest" in the project.
- A requirement that the President impose sanctions on non-US persons determined to have knowingly made a significant investment in certain Russian crude oil projects.
- Authorization for the President – "in coordination with allies of the United States" – to impose sanctions on persons that knowingly make certain investments that contribute to the enhancement of Russia's ability to construct, modernize or repair energy export pipelines, or that provide certain goods, services, technology, information for construction of such pipelines, if the fair market value of such investments, goods, services, technology or information exceeds USD1 million or, during a 12-month period, USD5 million.The requirement that such sanctions be imposed "in coordination with" US allies was added after EU representatives complained that a prior version would have affected construction of the Nord Stream 2 pipeline that is intended to carry gas from Russia to Germany.
New Sanctions Targeting Financial Institutions
CRIA tightens sanctions applicable to financial institutions, including by:
- Modification of sectoral sanctions under Directive 1, which will prohibit US persons from participating in debt financing of designated Russian financial institutions of longer than 14 days' maturity.
- Requiring the President to impose sanctions on foreign financial institutions determined to have knowingly engaged in significant transactions involving the sale, transfer or brokering sales or transfers by Russian entities of defense articles to Syria.
New Sanctions Concerning Russian State-owned Entities
The following new sanctions provisions target dealings with Russian state-owned entities.
- Authorization is provided for sectoral sanctions to be expanded to encompass state-owned entities in the railway or metals and mining sectors of the Russian economy.
- The President will be required to impose sanctions on persons determined to have knowingly made or facilitating the making of an investment of USD10 million or more that directly and significantly contributes to Russian's ability to privatize state-owned assets in a manner that unjustly benefits government officials or their family members or close associates.
Additional New Syria-Related Sanctions
CRIA also requires the President to impose sanctions on persons that knowingly provide significant financial, material, or technological support that contributes materially to the ability of Syria to acquire or develop chemical, biological or nuclear weapons, ballistic or cruise missile capabilities, or destabilizing numbers and types of advanced conventional weapons.
New Cybersecurity Sanctions
CRIA also requires the President to impose sanctions upon persons that knowingly:
- Engage in significant activities that undermine cybersecurity taken on behalf of the Russian government or persons that are owned or controlled by or act for or on behalf of such person, or who knowingly provides support or financial services for such person.
- Engage in significant transactions 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, 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.
Additional New Designation Sanctions
CRIA also contains provisions requiring the President to impose sanctions on:
- Russian government officials and their family members and close associates determined to be responsible for or directing acts of significant corruption related to government contracts or the extraction of natural resources, bribery, or the facilitation or transfer of proceeds of corruption to foreign jurisdictions, and those who support the foregoing.
- Foreign persons determined to knowingly materially violate, attempt to violate, conspire to violate or cause a violation of the Russia-related Executive Orders or the Ukraine Freedom Act, or who facilitate significant deceptive or structured transactions for on behalf of persons subject to Russia-related sanctions or a child, spouse, parent or sibling of such person.
- Foreign persons determined to be responsible for, complicit in, or responsible for ordering, controlling, or otherwise directing the commission of serious human rights abuses in any territory forcibly occupied or otherwise controlled by Russia, or who materially assists, is owned or controlled by, or acts on behalf of such persons.
The sanctions referred to in the two preceding bullet points will be imposed by amending the Ukraine Sovereignty Act, which already requires the President to impose sanctions on persons determined to be responsible for violence, or undermining the peace, security, stability, sovereignty or territorial integrity of Ukraine, or to have been complicit in or responsible for significant corruption in Russia.
Notice and Report Requirements
The President and his staff are required to submit to Congress, at varying intervals, notifications and reports concerning proposed waivers or terminations of Russia-related sanctions, proposed licensing actions that significantly alter US foreign policy with respect to Russia, activities of senior Russian political figures, oligarchs and parastatal entities, potential effects of further expanding sanctions under Directive 1 to include dealing in sovereign debt and derivative products, interagency efforts in the US to combat illicit Russia-related financing, programs to implement protections against cyberattacks, media organizations controlled and funded by Russia, Russia's influence on elections in Europe and Eurasia, and plans to increase energy security in Ukraine, among others.
CRIA is a complicated sanctions act that will present substantial new compliance challenges to entities that have dealings with Russia.
CAATSA (including CRIA) will become law if the President signs it or takes no action on it in the next 10 days. Alternatively, the President might exercise his veto power, but, given that CAATSA passed by votes of 419-3 in the House and 98-2 in the Senate, it seems highly unlikely that any such veto would survive a Congressional effort to override it.