Last week, the U.S. House of Representatives and the Senate voted overwhelmingly to pass the Countering America’s Adversaries Through Sanctions Act (“CAATSA”). President Trump is expected to sign the bill. The legislation aims to expand existing sanctions on Iran, Russia and North Korea to “counter aggression” by those Governments. In one of the more controversial provisions, the legislation requires Congressional approval to terminate the Russian sanctions before the president can make changes.

I. Iran Sanctions
The bill’s Iran provisions are largely reflective of current law, and are likely to have little impact on those doing business with Iran. The bill continues to impose sanctions targeting Iran’s ballistic missile program, where the president can designate and target individuals who knowingly provide financial, material, technological or other support for the program. The president may designate any person knowingly engaging in an activity that supports Iran’s ballistic missile program and any other weapons of mass destruction program. These designations may include any person that is a successor entity, entities that own or control such persons, and entities that are owned or controlled by such persons. The provision also applies to any person that would form an entity to evade the sanctions, is acting for or on behalf of such person. This is not a significant change in the Iran sanctions, as the president already has executive authority to designate such individuals.

Although the IRGC was already the subject of significant sanctions under the Iranian Transactions & Sanctions Regulations (“ITSR”), the new legislation targets the IRGC as a terrorist organization. Although this has little practical impact, as the organization was subject to both primary and secondary sanctions (those that impact U.S. and non-U.S. persons), the designation further enforces these restrictions. The bill seeks to limit the president’s ability to remove such persons from the list by codifying the designations and requiring the president to impose blocking sanctions on the IRGC.

The president may impose sanctions against individuals involved in gross human rights abuses in Iran, which again is unlikely to impact most private companies.

In summary, there are no significant changes to the Iran sanctions program in the bill. U.S. persons remain prohibited from dealing with listed persons, such as the IRGC, and transactions that support Iran’s ballistic missile program and weapons of mass destruction. Non-U.S. persons are still prohibited from engaging in transactions with Specially Designated Nationals And Blocked Persons List (SDNs) subject to secondary sanctions, or risk facing penalties from the U.S. government. Changes in the U.S.-Iran sanctions program following the Joint Comprehensive Plan of Action JCPOA’s implementation also remain unaltered, such as General License H, and lifting secondary sanctions with regard to Iran’s financial, oil, energy, shipping, and automotive industries.

II. North Korea Sanctions
The bill imposes sanctions targeted at certain activities and is referred to as the “Korean Interdiction and Modernization of Sanctions Act (“KIMSA”). Under the bill, the president is required to impose sanctions on individuals engaged in the following activities:

• Acquiring significant amounts of gold, silver, titanium ore, vanadium ore, copper, nickel, zinc, or rare earth minerals from North Korea

• Providing significant amounts of rocket, aviation, or jet fuel to North Korea

• Providing goods or services to North Korean vessels sanctioned by the UN or the United States, or owned or controlled by a designated person

• Maintaining correspondent accounts with North Korean banks

The president may choose to implement certain discretionary sanctions. These sanctions target individuals involved in acquiring significant amounts of textiles, coal, iron, crude oil, food and agricultural products from North Korea, or facilitating significant transactions to North Korea.

Prohibition on Indirect Correspondent Accounts
Where U.S. banks have or obtain knowledge that a correspondent account has been established, maintained, administered, or managed for a foreign bank to provide significant financial services to an SDN designated under the North Korean sanctions program, the U.S. bank would be required to end the conduct. These SDNs are identified with the tags “[DPRK],” “[DPRK2],” or “[DPRK3].”

Shipping Sanctions
The bill prohibits certain foreign vessels identified by the Department of Homeland Security from entering or operating in the navigable waters of the United States, or to transfer cargo in any port of the United States; that is to say, foreign vessels of more than 300 gross tons, which are of foreign registry or are operated under the authority of a foreign country that are:

• Vessels owned or operated by or on behalf of the Government of North Korea or a North Korean person

• Vessels owned or operated by or on behalf of a foreign country where a seaport is located, where the president has identified the port’s operator in a report submitted under the North Korea Sanctions and Policy Enhancement Act of 2016, or

• Vessels owned or operated by or on behalf of any country identified by the president as a country failing to comply with UN Security Council resolutions
Non-U.S. and U.S. shipping companies will need to carefully review the ownership structure of vessels to ensure the vessel is not connected with North Korea or is not otherwise a “listed” vessel.

Goods Produced by Forced Labor
The bill prohibits importing significant goods, wares, articles, and merchandise produced by the labor of North Korean nationals or citizens. The prohibition applies unless U.S. Customs and Border Protection (CBP) determines that the items were not produced through convict labor, forced labor, or indentured labor.
U.S. persons are already prohibited under the North Korean Sanctions Regulations (“NKSR”) from engaging in these activities, so it is unlikely there will be any practical effect to U.S. businesses. The biggest impact is likely to be the further imposition of secondary sanctions on non-U.S. persons that continue to engage in business with North Korea.

III. Expansion of Russian Sanctions
Under the bill, the president would not be authorized to lift Russian sanctions without Congressional approval. The sanctions create expanded restrictions against Russia’s oil, gas, energy, and financial services sectors, particularly for secondary sanctions.

Secondary Sanctions
The United States will have greater powers to impose additional sanctions on both U.S. persons and non-U.S. persons that knowingly invest in, or sell, lease, or provide goods, services, technology, information, or support for the construction of Russia’s energy export pipelines. In coordination with its allies, the United States may impose sanctions against both U.S. persons and non-U.S. persons, where such goods, services, technology, information, or support have a fair market value of $1 million or more, or have an aggregate fair market value of $5 million or more in a 12-month period.

The Nord Stream 2 Pipeline
The addition of gas pipeline projects to those can be subject to U.S. secondary sanctions has been widely criticized by a number of allies who have invested in the Nord Stream 2. The Nord Stream 2 is a 760-mile pipeline owned by Gazprom, which runs through the Baltic Sea to Germany and has secured investments from numerous top European companies. The project has secured more than €9.5 billion ($11.1 billion) in funding, and has financial stakes from a series of top European companies. With the passage of this legislation, European companies will have to evaluate their options and the potential chilling effect of this legislation.

In addition, the bill contains anti-corruption provisions requiring the president to impose sanctions on individuals making significant investments benefitting Russian government officials, close associates, or their family members. Where a person invests $10 million or more, or facilitates such investment, in privatizing Russian state-owned assets that “unjustly benefit” Russian government officials, close associates, or family members, sanctions would apply.

Modifications to Directives 1-4
The proposed legislation will also drastically alter Directives 1 through 4 of the Sectoral Sanctions, which are administered and enforced by the Office of Foreign Assets Control (“OFAC”). The new legislation makes significant cuts to the maturity terms for dealings in new debt. The party receiving the loan will have a shorter timeframe to repay the principal or face value of the debt instrument. In addition, the legislation applies to “new” oil projects involving a 33 percent ownership interest of a Directive 4 entity. It appears that existing projects may be grandfathered under the new legislation. In previous client alerts, we summarized the increasingly restrictive Russian sanctions and implementation of Directives 1-4 on October 3, 2014.

Directives 1-4 would be modified as follow:
• Directive 1: Directive 1 would continue to target the financial services sector of the Russian economy and prohibit U.S. persons from the provision of financing for and other dealings in new debt of longer than 14 days maturity for persons identified on the Sectoral Sanctions Identifications (SSI) List under Directive 1.
     – Currently, Directive 1 prohibits dealings in new debt with a maturity of longer than 30 days for SSI-listed persons under Directive 1.

• Directive 2: Directive 2 would continue to target the energy sector of the Russian economy and prohibit U.S. persons from engaging in transactions, provision of financing for, and other dealings in new debt with a maturity of longer than 60 days for persons identified on the SSL List under Directive 2.
     – Currently, Directive 2 prohibits dealings in new debt with a maturity of longer than 90 days for SSI-listed persons under Directive 2.

• Directive 3: Directive 3 would continue to target the Russian defense and related material sector by prohibiting all transactions in, provision of financing for, and other dealings in new debt, of longer than 30 days for persons identified on the SSL List under Directive 3.

• Directive 4: Directive 4 would prohibit the provision, exportation, or reexportation, directly or indirectly, by a U.S. person or from the United States, of goods, services (except financial services), or technology in support of exploration or production for new deepwater, Arctic offshore, or shale projects:
     – That have the potential to produce oil, and
     – That involve any person subject to Directive 4 who has a controlling interest or substantial non-controlling ownership interest in such project of not less than 33 percent interest.

• Previously, Directive 4 only applied to exports and re-exports that were in support of exploration or production for deepwater, Arctic offshore, or shale projects with potential to produce oil in the Russian Federation. The proposed legislation would expand Directive 4 to prohibit exports involving persons with ownership interests of 33 percent or greater, which would significantly expand the scope of restricted exports involving new oil projects. Prior to involvement in oil projects, U.S. persons will need to carefully review the interests of all parties to identify any Russian entities that would trigger sanctions. The due diligence process should also entail a review of the “chain of ownership” to determine whether an entity is indirectly owned by a Russian entity listed in Directive 4.

• It is possible that existing deepwater, Arctic offshore, and shale projects will be “grandfathered” under Directive 4, meaning that projects involving interests of 33 percent or greater that took place before the law’s enactment would not be prohibited. The legislation has not yet defined the scope of “new” projects, however, leaving the risk that non-U.S. companies could face liability for involvement in deepwater exploration projects where a Russian party has an interest exceeding 33 percent or greater.
 
U.S. companies will still need to conduct due diligence in assessing whether transactions trigger the impact of Directives 1–4 under the new regulations. The terms of debt instruments will need to be closely reviewed prior to signing a loan agreement. In addition, a U.S. person may trigger sanctions where debts are not paid in full before the applicable term limits, such as the new 14-day limit, when the new law takes effect.

Blocking Provisions
The legislation contains blocking provisions, which grant the president power to the extent necessary to freeze assets of the following individuals:

• Cybersecurity: Individuals who knowingly undermine cybersecurity against a person, democratic institution, or government (such as hacking) on behalf of the Russian Government

• Human Rights Abuses: Individuals who are responsible for commissioning serious human rights abuses in any territory “forcibly occupied” or controlled by the Russian Government

Russia Retaliates
In a move likely to escalate the growing tensions between the two superpowers, on Sunday, July 30, President Putin of Russia confirmed that staff at U.S. diplomatic missions in Russia would have to be cut by 755 people, and that Russia would seize two U.S. diplomatic properties in response to CAATSA.

The European Union’s Response
The European Commission has expressed significant concern regarding the United States’ expansion of sanctions against Russia and the recent proposed legislation. According to the New York Times, Brussels should be prepared to act “within days” if the sanctions are adopted “without E.U. concerns being taken into account,” according to a publication paper drafted by the European Commission and dated July 19, 2017. The position paper addresses existing pipelines from Russia, Ukraine, and around the Caspian Sea. The bill has sparked controversy and disquiet in the European community. EU Chief Executive Jean-Claude Juncker also stated that the U.S. bill could have “unintended unilateral effects” on the EU’s energy security, and that “America first cannot mean that Europe’s interests come last.” Foreign Ministry spokesman Martin Schafer stated that it “would be unacceptable for the United States to use possible sanctions as an instrument to serve the interests of US industry policies.”

Conclusion
The proposed revisions to the U.S.-Russia sanctions program would significantly expand restrictions against non-U.S. companies. Any non-U.S. company with a 33 percent or greater interest involved in an oil project and designated pursuant to Directive 4 will become prohibited from dealing, directly or indirectly, with U.S. persons in support of the project. The president will also have greater authority to impose sanctions against entities that make significant investments in Russia’s energy export pipelines. The other remaining Iran and North Korea sanctions provisions are either unlikely to be implemented or unlikely to have a noticeable impact on U.S. industry because of the comprehensive sanctions programs already in place.
Non-U.S. companies will need to conduct heightened due diligence prior to making significant investments in the Russian economy or pipeline projects. U.S. companies will also need to enhance due diligence review for involvement in Russian oil projects and financial transactions involving debt instruments. The terms of these transactions and interests of all parties should be carefully reviewed to ensure compliance with the new sanctions.
The possibility of further degeneration in the relationship between the United States and Russia also suggests that careful and on-going monitoring of developments would be warranted, as does the possibility that the EU might actually retaliate against CAATSA.

 
The information above has been provided by REED SMITH LLP.

---

 The Member Alert is published by The Swedish Club as a service to members. While the information is believed to be correct, the Club cannot assume responsibility for its completeness or accuracy.