Pursuant to Section 231(a) of the Countering America's Adversaries Through Sanctions Act ("CAATSA" or "the Act"),[1] beginning January 29, 2018, President Trump is required to impose five or more of the Act's laundry list of sanctions, found in Section 235, on persons that the President has determined to have knowingly engaged in a "significant transaction" with a person that is part of, or operating for or on behalf of, the defense or intelligence sectors of the Russian government. This article reviews the extraterritorial impact of the Act on non-U.S. persons, and provides some guidance regarding how to best prepare for these new developments.
The continuing development of these sanctions is particularly important for non-U.S. companies because CAATSA and subsequent enforcement measures make it progressively more difficult for foreign companies to conduct business in the three targeted countries, particularly Russia. As briefly discussed below, in many respects, the Act's establishment of secondary sanctions will impact non-U.S. persons more than U.S. persons who are already for the most part restricted from conducting business in these regions.
With respect to Iran, CAATSA codifies existing sanctions against the Islamic Revolutionary Guard Corps ("IRGC") and the Quds Force ("IRGC-QF") by granting the President authority to add additional persons to the Specially Designated Nationals ("SDN") list and forcing the President to impose sanctions on any "person who knowingly violates the arms embargo against Iran." With respect to North Korea, CAATSA expands the list of activities and persons for which sanctions can be applied, including activities related to precious metals and aviation, as well as companies that provide insurance services for North Korean vessels or deal with North Korean financial institutions. The Iran and North Korean sanctions will not impact American companies much since American businesses are for the most part already restricted from doing business in these countries. However, the Trump administration will likely aggressively enforce these new extraterritorial measures as seen, for example, in OFAC's recent designation of Chinese individuals and entities for facilitating transactions on behalf of North Korea even when these transactions did not involve U.S. persons or otherwise appeared to be subject to U.S. jurisdiction. Thus, companies in China, Russia, and other countries that still trade or conduct transactions with Iran or North Korea should closely monitor these new developments.
Finally, with respect to Russia, CAATSA codifies existing sectoral sanctions, including those related to the railway, mining, and financial sectors, as well as projects in which Russian persons subject to Directive 4 under Executive Order 13662 have a thirty-three percent interest, such as deep water, Artic offshore, and shale projects that produce oil. The Act's Russian sanctions will impact non-U.S. companies who provide support to Russian energy export pipeline projects or who engage in significant transactions with persons in the Russian defense and intelligence sectors. The applicable part of CAATSA states that "the President shall impose five or more of the sanctions described in Section 235 of the Act with respect to a person that knowingly, on or after [August 2, 2017], 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." On October 27, 2017, the Department of State ("the Department") published a list pursuant to Section 231(d) of the Act ("Section 231(d) List"), which lists individuals and entities that are involved in Russian defense and intelligence sectors. Notably, inclusion in this list does not mean that these companies will be listed as Specially Designated Nationals ("SDN"), which would require the freezing of assets. Also, because the listed individuals are not SDNs, the government will not be applying OFAC's "50% rule" requiring companies to check the ownership of subsidiaries and affiliates of Section 231(d) listed persons.
To prepare for enforcement of sanctions under the Act, Companies conducting business in Russia should consult the Department's public guidance concerning Section 231(d) ("the Guidance"). First, the Department will sanction any person who knowingly engages in business with any of the persons listed on the Section 231(d) List. Additionally, the Guidance states that the Department will determine whether a transaction is "significant" by considering the totality of the circumstances surrounding the transaction and weighing various factors. Relevant factors include the significance of the transaction to national security and foreign policy interests, and whether it has a significant adverse effect on those interests; the nature and magnitude of the transactions; and the relation and significance of the transaction to the defense or intelligence sector of the Russian government. These factors comprise a "flexible standard" that includes weighing the scope, magnitude, and size of the transaction, as well as the types of items transferred and national security and foreign policy interests at stake. Transactions that are solely for a civilian end user or civilian use (and do not involved intelligence entities listed in the Section 231(d)) will not be subject to sanctions.
Both U.S. and particularly non-U.S. companies must pay close attention to the implementation of CAATSA and any sanctions that follow for persons that violate it. The Russian-related sanctions of Section 231 in particular have broad extraterritorial reach. Even after the publication of the Guidance, how and to whom these sanctions will be applied is unclear. There is no clear definition of a "significant transaction," and the Department has provided few practical examples of the type of conduct that would trigger sanctions under the Act.
In preparation of the January 29, 2018 implementation of Section 231, companies, both in the U.S. and abroad, should review their contracts and supply chains to determine whether they conduct any business with persons listed on the Section 231(d) List. If the transactions are considered significant, you must cease such transactions or face potential Section 235 sanctions. As the January 29, 2018 date approaches, we will continue monitoring any new developments regarding the planned enforcement of CAATSA, as well as what this will mean for persons doing business with Section 231(d)-listed persons. In the event that you have transactions with a 231(d)-listed individual or entity and wish to determine if these transactions are significant, please feel free to contact us.
Footnote
[1] On August 2, 2017, President Trump signed the Countering America's Adversaries Through Sanctions Act, which codifies existing U.S. sanctions against Iran, North Korea, and Russia.
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