Export controls and sanctions: New US sanctions package signed into law

President Trump signs into law new US sanctions measures on Iran, North Korea and Russia

On 2 August, President Trump signed into law the Countering America's Adversities Through Sanctions Act 2017 (CAATSA). This incorporates a wide range of new US sanctions measures in respect of Iran, North Korea and Russia and represents a significant development in the use of sanctions by the United States. The measures were adopted reluctantly by President Trump because of his concerns around new powers effectively allowing Congress to supervise and veto sanctions decisions taken by the White House. The new measures have potentially wide effects on both US and non-US companies, especially for those in the energy sector carrying out business activities in Russia or involved in oil and gas projects or joint ventures where Russian entities hold a significant interest.

Russia

In brief

In relation to Russia, CAATSA brings into law existing US sanctions measures on Russia. These previously took the form of several Executive Orders adopted by the Obama administration in response to Russia's activities in Ukraine, its annexation of Crimea, its military intervention in Syria and its interference in the 2016 US presidential election by way of cyber-attacks. The existing measures impose restrictions on certain listed Russian entities and individuals. They also include prohibitions on certain financial activity and investments, exports of military, dual-use and oil and gas exports to Russia and participation in certain oil and gas projects in Russia.

CAATSA significantly expands the scope of these sanctions, particularly in relation to energy sector projects. The new measures add to an already complex EU and US sanctions picture when it comes to Russia and have potentially wide application for companies operating in Russia or involved in investments, projects, transactions or joint ventures with Russian entities.

Codification of existing US sanctions measures

The new legislation is significant in that it brings into law a number of existing Executive Orders adopted by the previous Obama administration – including one relating to Russia's aggression in Ukraine, one relating to Russia's annexation of Crimea and two relating to malicious cyber activities. This is significant because the President is now no longer able to unilaterally terminate these sanctions. Instead, to do so will require the passing of new legislation by Congress.

This development provides certainty as to US foreign policy on Russia (which was until now somewhat subject to unilateral political decisions taken by President Trump) and represents a hardened stance in respect of recent actions by Moscow. The legislation also sets out a specific 30-day Congressional approval process that must be followed in cases where a President seeks to remove specific sanctions measures. This creates unprecedented Congressional oversight of Presidential determinations on sanctions and OFAC licensing decisions.

New measures on Russia's oil and gas sector

Further, CAATSA expands existing US sanctions on Russia's energy sector. The existing sanctions prohibit the supply of goods or services for next-generation oil exploration projects located within Russian territory (including Arctic offshore, deepwater and shale oil projects) and the EU has previously implemented broadly equivalent measures.

CAATSA expands these energy sector restrictions in three significant ways:

• Participation in next-generation oil projects with Russian partners. CAATSA expands the scope of existing sanctions measures to include not only projects located in Russian territory but also projects outside Russia where a designated Russian entity or individual holds a controlling interest or a substantial non-controlling interest (defined as 33% or more). This effectively means that designated Russian companies will be denied access to goods, expertise and technology relating to advanced drilling techniques being developed by US partners.
• Investment in next-generation oil projects in Russia. The President is now required to impose sanctions on persons that make significant investments in next-generation Russian oil projects. These "secondary sanctions" are likely to discourage companies around the world (including non-US companies) from investing in Arctic offshore, deepwater and shale oil projects in Russia. Companies that violate this prohibition will be at risk of being designated as a sanctions target under US sanctions, in which case they would effectively be prevented from doing business in or with the US and from accessing the US financial system. We note that the legislation includes an exception allowing sanctions not to be imposed in cases where "the president determines that it is not in the national interest of the United States to do so", potentially allowing scope for certain projects involving US or European interests to be carved out.

• Pipeline development in Russia. New measures have been introduced in relation to pipeline projects. The President may, in coordination with allies, choose to impose sanctions on those who supply goods, services, technology, information or support relating to the development of pipelines in Russia. This would include any items or support that could directly and significantly facilitate the maintenance or expansion of the construction, modernisation or repair of energy export pipelines by Russia. De minimis provisions apply, and this measure only applies to a single investment or supply with a fair market value of $1 million or more, or aggregate investments or supplies over a 12-month period with a fair market value of $5 million or more. This measure is likely to have a significant impact on those companies currently involved in the proposed Nord Stream II gas pipeline project that would connect Russia to Germany via the Baltic Sea. However, the reference to "in coordination with allies" suggests that further discussions will take place between nation states and stakeholders to determine whether particular projects fall within scope of this provision.

New measures on cybercrime, corruption and dealings with Russia's intelligence and military

The President is now required to impose sanctions on persons who knowingly engage in "significant" activities undermining cybersecurity, as well as any person who knowingly materially assists, sponsors or provides support for or goods or services to those persons.

CAATSA also introduces a new measure prohibiting "significant" transactions with a person that is part of, or operates for or on behalf of, the defence or intelligence sectors of the Russian government (namely the Main Intelligence Agency of the General Staff of the Armed Forces or the Federal Security Service). The key terms here are not defined, but OFAC has previously published guidance on the factors it may consider when determining whether a transaction is "significant". While this provision is primarily intended to deter companies from dealing with or supplying to the intelligence units within the Russian government, depending on how the Treasury Department seeks to implement this provision, it could potentially allow the imposition of secondary sanctions against any company (including non-US companies) that buys substantial arms from Russia.

The President is also required to impose sanctions on persons making an investment of $10 million or more that contributes to Russia's ability to privatise state-owned assets in a manner that unjustly benefits Russian government officials or their close associates or family members, as well as in relation to cases of significant corruption, foreign sanctions evaders and serious human rights abusers in Russia.

Impact on European companies

The new US measures may have a significant impact on certain European energy companies involved in projects in Russia or with Russian entities, as well as on the supply of oil and gas from Russia to Europe. It is not yet clear how the EU will respond to the new sanctions measures, though EU President Jean-Claude Juncker has expressed concern that they could have "unintended unilateral effects" on the EU 's energy security.

The EU currently has in place a sanctions programme relating to Russia that is in many ways similar to that adopted by the US. EU measures apply to nationals of EU Member States (wherever located), companies incorporated in an EU Member State and to any person carrying out business activities in the EU.

In addition to compliance with EU sanctions, European companies should be mindful of the potentially wide extra-territorial effect of US sanctions. Companies and individuals found to have violated US sanctions may face not only substantial financial penalties, but also criminal prosecution, extradition proceedings and the risk of being designated as a sanctions target in the US. This could cut off the company's access to the US financial system and restrict its ability to conduct business in the US or with US partners.

The existing EU sanctions programme on Russia includes the following key measures:

• Designated person controls, including travel bans, asset freezes and prohibitions on dealings with certain listed entities and individuals.
• Restrictions on financial dealings with certain named entities operating in the Russian financial and defence industries. These restrict those entities' access to European capital markets and their ability to engage in transactions relating to transferable securities and money market instruments.
• Military export restrictions that apply to military items and dual-use items intended for a military end-user or for military end-use in Russia.
• Oil and gas export restrictions that apply to certain goods, technologies and services suitable for next-generation oil projects in Russia (Arctic offshore, deepwater and shale oil).

Iran

CAATSA provides for a number of new sanctions measures against Iran. These fall outside the scope of the Joint Comprehensive Plan of Action agreed upon in 2015 in respect of Iran's nuclear programme, though it is yet to be seen how the Iranian government will respond to this development.

The President is now required to impose sanctions on persons who materially contribute to Iran's ballistic missile programme. Currently the President has discretion to impose such sanctions by way of Executive Order. This extends to the potential imposition of secondary sanctions on non-US persons found to have violated this measure. The Act also provides additional powers to designate as sanctions targets any individuals or entities involved in human rights violations in Iran, those associated with the Iran's Revolutionary Guard Corps or those involved in the supply of arms to Iran.

North Korea

On North Korea, CAATSA incorporates provisions passed in May to expand existing sanctions measures. The new measures are intended to make it even more difficult for North Korea to continue to develop its long-range nuclear weapons programme. Some of the measures are drafted more widely in order to apply pressure on third countries (such as China) that continue to engage in trade with North Korea.

The measures include additional controls on the purchase or acquisition of food or agricultural products as well as precious metals and other natural resources from North Korea, the supply of aviation fuel, crude oil and petroleum products to North Korea and further controls on banking and financial services (including in relation to insurance and indirect correspondent accounts), transportation services and online commercial services being made available to North Korea. The legislation also prevents North Korean vessels (and notably those owned by countries that refuse to comply with UN resolutions against Pyongyang) from operating in American waters or operating at US ports. Similarly, goods produced by North Korea's forced labour workforce are prohibited from entering the United States.

How we can help

This is a complex and fast-changing area with potentially significant civil and criminal penalties for non-compliance. Our Corporate Crime team is well-placed to advise on these new developments. For further support, please contact our Head of Corporate Crime, Nichola Peters or Matt Butter.