Global | Publication | August 8, 2017
On August 2, the President signed into law legislation imposing stiff sanctions on Russia, Iran, and North Korea. The Countering America’s Adversaries Through Sanctions Act (the “Act”), codifies and expands existing sanctions on Russia; targets additional sectors of the Russian economy and Russian persons involved in perpetuating human rights abuses, selling weapons to Syria, and other activities deemed to be detrimental to US national interests; limits the President’s ability to ease sanctions on Russia; and seeks to punish North Korea for its nuclear program and Iran for its ballistic missile program and sponsorship of terrorism. Key provisions of the Act are highlighted below. For more details on the impact of these sanctions on key sectors of the Russian economy, please refer to our previous briefings in August and July.
Title II, the Countering Russian Influence in Europe and Eurasia Act of 2017, contains a package of sanctions that relate to, among other things, cybersecurity, crude oil projects, financial institutions, corruption, human rights abuses, evasion of sanctions, transactions with Russian defense or intelligence sectors, export pipelines, privatization of state-owned assets by government officials, and arms transfers to Syria.
The statute codifies existing Russia sanctions imposed by the Obama administration under Executive Order (“E.O.”) Nos. 13660, 13661, 13662, 13685, 13694, and 13757.1 These sanctions will remain in effect and the President may only terminate them if he submits a notice to the appropriate congressional committees, subjecting the proposed action to congressional review and approval.2
The statute broadens Directives 1 and 2, issued by the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) pursuant to E.O. 13662, to make dealings in new debt,3 which have a US nexus and involve Russian banks and energy companies designated on the Sectoral Sanctions Identifications (“SSI”) List, more difficult by reducing the maturity period for such new debt.4 Within 60 days of enactment of the Act, the Treasury Secretary must modify Directive 1 to prohibit the conduct by US persons and within the United States of all dealings in new debt of longer than 14 days (rather than 30 days) maturity or new equity of persons determined to be subject to the directive, as well as their property and interests in property. Directive 2 also must be modified within 60 days to prohibit the conduct by US persons or persons within the United States of all dealings in new debt of longer than 60 days (rather than 90 days) maturity of persons determined to be subject to the directive, as well as their property and interests in property. Accordingly, the statute raises the bar for US persons to engage in debt financing and other extensions of credit involving Russian banks and energy companies designated on the SSI List (and entities owned 50 percent or more by one or more designated persons). We expect that these changes will apply prospectively.
Directive 4 also is expanded to prohibit the provision, exportation, or reexportation, directly or indirectly, by US persons or persons within the United States, of goods, services (except for financial services), or technology in support of exploration or production for new deepwater, Arctic offshore, or shale projects: (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.5
This modification is notable for a couple of reasons. First, Directive 4 previously focused on projects within Russia or Russian waters. As modified, Directive 4 applies to projects anywhere in the world. Second, Directive 4 previously applied to projects involving persons designated under the directive (or any entity 50 percent or more owned by one or more designated persons). As modified, the coverage of Directive 4 would be broadened to include projects in which a person subject to Directive 4 has an ownership interest of 33 percent or greater. Together, these changes make it more difficult for US persons to support projects that have the potential to produce oil involving designated Russian energy companies.
The Treasury Secretary is directed to make these changes within 60 days . It appears that the changes would be made applicable to new projects only, but it is not clear how OFAC will interpret “new.”
The statute requires the President to impose, on and after the date that is 180 days after the enactment of the Act, sanctions on persons that he determines knowingly engage 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, 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.6 The statute also instructs the President to issue, within 60 days of enactment of the Act, “regulations or other guidance to specify the persons that are part of, or operate for or on behalf of, the defense and intelligence sectors of the Government of the Russian Federation.”7
These sanctions have extraterritorial reach. Any person, whether US or non-US, can be subject to five or more specified sanctions8 for engaging in significant transactions with designated parties. The menu of sanctions includes, for example, denial of various forms of financial assistance (such as Export-Import Bank assistance and loans from US and international financial institutions), a ban on investments in debt or equity of the entity, restrictions on property transactions, export restrictions, procurement restrictions, and a visa ban and exclusion from the United States of corporate officers. All of these sanctions, furthermore, may be imposed on the “principal executive officer or officers of the sanctioned person, or on persons performing similar functions and with similar authorities as such officer or officers.”9 These sanctions may effectively isolate the designated parties from US and other markets or, at a minimum, significantly impair their ability to conduct business around the world.
The statute also permits the President to delay the imposition of sanctions on persons identified pursuant to these authorities if the President certifies to Congress that such persons are “substantially reducing the number of significant transactions”10 with the Russian intelligence or defense sectors. This appears to provide companies with a wind-down period so they can terminate existing contracts and other relationships with parties that become designated.11
The statute authorizes the President to impose sanctions with respect to a person the President determines (1) knowingly makes an “investment” that directly and significantly contributes to enhancing Russia’s ability to construct energy export pipelines, or (2) sells, leases, or provides to Russia, for the construction of Russian energy export pipelines, goods, services, technology, information, or support – any of which has a fair market value of $1 million or more, or that, during a 12-month period, have an aggregate fair market value of $5 million or more – that could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy pipelines by Russia.12 The President’s decision should be made in coordination with US allies. It remains to be seen how the President will elect to wield this authority and the impact that coordination with US allies will have on the President’s decision.
The statute also amends section 4(b)(1) of the Ukraine Freedom Support Act of 201413 by requiring (rather than authorizing) the President to impose (unless he determines that it is contrary to the US national interest), on or after the date that is 30 days after enactment of the Act, three or more specified sanctions14 on non-US persons determined by the President to have knowingly made a significant investment in a special Russian crude oil project.15
The statute amends section 5 of the Ukraine Freedom Support Act of 201416 by requiring (rather than authorizing) the President to impose secondary sanctions (unless he determines that it is contrary to the US national interest), on or after the date that is 30 days after enactment of the Act, on Russian and other non-US financial institutions that knowingly facilitate: (1) significant defense- and energy-related transactions (e.g., transfer of defense articles into Syria or development of special Russian crude oil projects) or (2) significant financial transactions on behalf of Specially Designated Nationals and Blocked Persons (“SDNs”). Non-US financial institutions determined to be knowingly facilitating any such transactions may be subject to prohibitions or strict conditions on the opening or maintenance in the United States of a correspondent or payable-through account.17
Importantly, the statute limits the President’s authority to waive or lift sanctions related to Russia. Before granting a waiver, terminating sanctions on a person or entity, or granting a license “that significantly alters United States foreign policy” on Russia, the President would have to submit a report to Congress describing the proposed action and the basis for it. The report would need to address whether the action is intended to change the direction of US policy toward Russia, as well as the anticipated effects on diplomacy and national security. Congress could then block the President’s effort to ease or terminate the sanctions.
Title I, the Countering Iran’s Destabilizing Activities Act of 2017, contains sanctions targeting persons that support terrorism, sell weapons to Iran, support its ballistic missile program, or abuse internationally recognized human rights.
It imposes sanctions on any person who contributes materially to Iran’s ballistic missile program or weapons of mass destruction programs, 18 or participates in the sale or transfer of military equipment to Iran. In addition, while the US government previously has taken action against the Iranian Revolutionary Guard Corps (“IRGC”), the statute for the first time targets the IRGC for its support for terrorism. It requires the President to impose blocking sanctions with respect to the IRGC and non-US persons that are officials, agents, or affiliates of the IRGC.19 The statute also calls for additional sanctions on any person determined to be responsible for torture and other violations of internationally recognized human rights.20
Further, the statute expands enforcement of the US arms embargo against Iran,21 requires the President to review the applicability of sanctions relating to Iran’s support for terrorism and its ballistic missile program to persons on the SDN List and to either impose such sanctions with respect to that person or exercise the prescribed waiver authority,22 and authorizes the President to temporarily waive the imposition or continuation of sanctions under specified circumstances.23
Title III, the Korean Interdiction and Modernization of Sanctions Act, expands the sanctions related to North Korea in an effort to punish the country for its nuclear and ballistic-missile programs, target human rights abuses by the North Korean government, and limit North Korea’s access to the US market.
The statute amends the North Korea Sanctions and Policy Enhancement Act of 201624 to increase the President’s authority to impose sanctions on persons who violate U.N. Security Council resolutions regarding North Korea. For example, it expands the category of persons subject to mandatory and discretionary designations (and mandatory and discretionary asset blocking).25 It also mandates that US financial institutions that have or obtain knowledge that a correspondent account is being used by a non-US financial institution to provide significant financial services indirectly to designated persons is no longer used to provide such services.26 There is an exception to this prohibition that allows a US financial institution to process transfers of funds to or from North Korea, or for the direct or indirect benefit of any designated person if the transfer arises from and is ordinarily incident and necessary to give effect to an underlying authorized transaction, and does not involve debiting or crediting a North Korean account.
In addition, the State Department is required to submit a determination, within 90 days of enactment of the Act, regarding whether North Korea meets the criteria for designation as a state sponsor of terrorism.27
3 “Debt” is defined to include: (1) bonds; (2) loans; (3) extensions of credit; (4) loan guarantees; (5) letters of credit; (6) drafts; (7) bankers acceptances; (8) discount notes; or (9) commercial paper.
8 H.R. 3364, sec. 235. These sanctions include: (1) denial of Export-Import Bank assistance; (2) export restrictions; (3) denial of loans from US financial institutions; (4) denial of loans from international financial institutions; (5) specified prohibitions applicable to financial institutions; (6) denial of government contracts; (7) prohibition of foreign exchange transactions; (8) prohibition of transfers of credit or payments through the United States; (9) prohibition of property transactions; (10) ban on investment in equity or debt; (11) exclusion of corporate officers; and (12) sanctions on principal executive officers.
11 The President also may waive the initial application of sanctions provided that the appropriate written determination and certification are provided to Congress. H.R. 3364, 231(b).
14 The sanctions include: (1) denial of Export-Import Bank assistance; (2) procurement sanctions; (3) arms export prohibition; (4) dual-use export prohibition; (5) prohibition on property transactions; (6) prohibition on banking transactions; (7) prohibition on investment in equity or debt of sanctioned person; (8) exclusion from the United States and revocation of visa or other documentation; and (9) sanctions on principal executive officers. 22 U.S.C. § 8923(c).
15 H.R. 3364, sec. 225. Special Russian crude oil projects are projects intended to extract crude oil from (1) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (2) Russian Arctic offshore locations; or (3) shale formations located in the Russian Federation. See 22 U.S.C. § 8921.
17 The statute includes a host of other provisions related to Russia, including measures: (1) requiring sanctions on any person that knowingly makes or facilitates a significant investment in Russia’s ability to privatize state-owned assets unjustly benefiting Russian government officials or their associates, sec. 233; requiring the President to impose sanctions on a non-US person who knowingly exports, transfers, or otherwise provides to Syria significant financial, material, or technological support, sec. 234; authorizing the Treasury Secretary to determine that state-owned entities operating in the Russian railway or metals and mining sectors may be subject to blocking sanctions pursuant to Executive Order 13662, sec. 223; requiring the President to impose sanctions against any person who knowingly engages in “significant activities undermining cybersecurity,” sec. 224; amending section 9 of the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014, 22 U.S.C. § 8908(a), to require (rather than authorize) the President to impose sanctions with respect to significant corruption in the Russian Federation, sec. 227; and amending the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014, 22 U.S.C. § 8901 et seq., by requiring sanctions to be imposed related to transactions with persons that evade Russia sanctions and transactions with persons responsible for human rights abuses, sec. 228.
27 The statute also requires the President to determine whether certain specified Korean entities should be designated, sec. 311(d), prohibits a non-US government that provides to or receives from North Korea a defense article or service from receiving certain types of US assistance, sec. 313, requires enhanced security screening procedures and/or seizure or forfeiture with respect to certain vessels, aircraft, conveyances, or operators of sea ports or airports, sec. 314, requires the President to impose US property-based sanctions on non-US persons that employ North Korean forced laborers, id., creates a rebuttable presumption of denial of US entry with respect to goods made with North Korean labor, sec. 321(b), and adds prohibitions on US entry and operation of certain vessels, sec. 315.
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The US Supreme Court has ruled that a “pure omission” under Item 303 of Securities and Exchange Commission Regulation S–K cannot give rise to a private action for securities fraud under Section 10(b) and Rule 10b-5(b) of the Securities Exchange Act of 1934.
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