On April 24, 2024, President Biden signed H.R. 815, otherwise known as the National Security Act of 2024. The bill provides emergency appropriations for Ukraine, Israel, Taiwan, humanitarian purposes in Gaza, and various governmental agencies, and calls for the divestment of TikTok.
Biden provided commentary on the appropriations earmarked for each country and what the National Security Act did not accomplish (i.e., border security). He did not, however, address the many regulatory changes buried in the legislation, notably the sweeping changes made to U.S. sanctions regulations and an unprecedented move toward the confiscation of certain blocked Russian assets.
The National Security Act combines several discrete bills into one piece of legislation.
Doubling of Statute of Limitations for Sanctions Violations
The 21st Century Peace Through Strength Act doubles the existing five-year statute of limitations (SOL) to 10 years for civil and criminal sanctions violations by amending Section 206 of the International Emergency Economic Powers Act (IEEPA) and Section 16 of the Trading with the Enemy Act. Put another way, this change will double the amount of time that the government has to investigate sanctions violations and could result in cases with much larger penalties and bigger fines for companies of all sizes for almost all economic sanctions programs administered by the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC).
The SOL for sanctions violations has historically been five years, a timeline that generally aligns with the SOL for export control violations, as well as most federal laws that are in effect today. This expanded lookback period will substantially expand companies’ exposure for past conduct and impose substantial burdens on companies for basic transactional recordkeeping, due diligence for M&A and lending transactions, and the ability to accurately recount 10 years of activity when certain information may no longer be available in the near term for voluntary self-disclosures. It also raises serious concerns about companies’ reliance on the longstanding five-year SOL in assessing internal and counterparty compliance risk and whether such assessments may now be considered incomplete.
As IEEPA is also the underlying authority for many administrative regulations and countless Executive Orders, the following programs may also be impacted by this SOL expansion:
- The Department of Commerce (DOC) Securing the Information and Communications Technology and Services Supply Chain program.
- The Department of Justice (DOJ) National Security Division’s Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern program.
- The outbound investment program being established by the Department of the Treasury.
- Certain Department of Energy initiatives.
We expect that these agencies will amend the respective regulations to reflect this change and encourage all agencies to release guidance for industry on how to manage the SOL expansion in the near term and to apply it prospectively so as to not upset pending matters or parties’ own assessments and activities undertaken in reliance on the prior SOL, as it is not clear if OFAC, DOJ, DOC, or other agencies will seek to retroactively apply the SOL to activities that occurred before 2019.
Repurposing Russian Assets
The Rebuilding Economic Prosperity and Opportunity for Ukrainians Act (REPO Act) authorizes the President to seize, confiscate, transfer, or vest any Russian aggressor state sovereign assets subject to the jurisdiction of the United States. Before seizing any assets, the President will be required to issue a certification to Congress. Once seized, the assets will be placed in the “Ukraine Support Fund” for the ultimate benefit of supporting reconstruction and economic or humanitarian support to Ukraine.
Under Section 104 of the REPO Act, the Administration is prohibited from unblocking or releasing Russian sovereign assets that were blocked or effectively immobilized by the Department of the Treasury before a certain date identified in Section 104(j). Unfortunately, there is no date appearing in that section or nearby sections, raising questions as to the applicability of the REPO Act.
Section 104(a)(1) states: “Not later than 90 days after the date of the enactment of this Act, the President shall, by means of such instructions or regulations as the President may prescribe, require any financial institution at which Russian sovereign assets are located, and that knows or should know of such assets, to provide notice of such assets … to the Secretary of the Treasury.”
Presumably, the reporting obligations will apply only to blocked funds, which, of course, are already reported to OFAC, leaving the possibility that OFAC will issue instructions or regulations largely building on existing reporting as to blocked funds, perhaps with additional measures requiring banks to separately identify which funds are “Russian sovereign assets.”
While industry awaits the issuance of regulations or instructions as to any private sector responsibilities under the law, the Administration has been focused on trying to coordinate with G7 allies to get them to take similar measures. It is “necessary and urgent for our international coalition to unlock the value of immobilized Russian sovereign assets to support Ukraine’s continued resilience and reconstruction,” said Secretary of the Treasury Janet Yellen in heralding the passage of the law. Indeed, the vast majority of Russian sovereign assets are blocked outside U.S. jurisdiction. But there is likely to be an ongoing debate among G7 nations as to the legality and prudence of such seizures. Meanwhile, the risk of retaliatory confiscation of Western assets by Russia continues to increase.
Sanctions on Iranian Petroleum
The Stop Harboring Iranian Petroleum Act (SHIP Act) imposes sanctions on foreign persons that own or operate foreign ports, vessels, and refineries that process, transport, refine, or otherwise deal in petroleum and petroleum products exported from Iran. In particular, for vessels, the SHIP Act includes sanctions on entities involved in ship-to-ship transfers of Iranian oil. The SHIP Act directs the President to determine and impose such sanctions within 180 days of its date of enactment (i.e., by October 21, 2024).
The SHIP Act also requires the Energy Information Administration to submit, within 120 days of its date of enactment (i.e., by August 22, 2024) and annually thereafter, a report to Congress describing Iran’s growing exports of petroleum and petroleum products. Similarly, the SHIP Act directs the Secretary of State to submit, by August 22, 2024, a written strategy to assess the option to expand sanctions designations targeting the involvement of the People’s Republic of China in the exports of Iranian-origin petroleum and petroleum products.
Iran-China Energy Sanctions
The Iran-China Energy Sanctions Act of 2023 expands the secondary sanctions regime against Iran to cover all transactions between Chinese financial institutions and sanctioned Iranian banks used to purchase petroleum and petroleum products. It also requires the President to determine annually whether Chinese financial institutions have engaged in sanctionable conduct.
Sanctions Targeting Fentanyl Trafficking
The National Security Act directs the President to impose sanctions on any foreign person who “is knowingly involved in the significant trafficking of fentanyl, fentanyl precursors, or other related opioids, including such trafficking by a transnational criminal organization; or is otherwise knowingly involved in significant activities of a transnational criminal organization relating to the trafficking of fentanyl, fentanyl precursors, or other related opioids.” For these sanctions, “trafficking” is given the meaning of “opioid trafficking” as defined in Section 7203(8) of the Fentanyl Sanctions Act, or illicit activity to “produce, manufacture, distribute, sell, or knowingly finance or transport” fentanyl or other synthetic opioids. The National Security Act also enables OFAC to impose sanctions on financial institutions where there is a primary money laundering concern in connection with opioid trafficking.
Other Sanctions on Iran, Hamas, and Syria
The Fight and Combat Rampant Iranian Missile Exports Act directs the President to determine and impose sanctions on any foreign person who knowingly engages in supplying, selling, transferring, supporting, or otherwise participating in the development of Iranian missiles and unmanned combat aerial vehicles (i.e., drones).
The Hamas and Other Palestinian Terrorist Groups International Financing Prevention Act directs the President to determine and impose sanctions, within 180 days of enactment (i.e., by October 21, 2024), on any foreign person who (1) knowingly supports or otherwise sponsors goods and services that enable acts of terrorism; and (2) engages, directly or indirectly, in significant transactions with a senior member of Hamas or other foreign terrorist organizations.
The Strengthening Tools to Counter the Use of Human Shields Act extends the President’s authority to impose sanctions on foreign persons using human shields and requires the President to impose such sanctions on each foreign person determined to be a member of Palestine Islamic Jihad and who orders, controls, or otherwise directs the use of human shields. It also allows the President to impose sanctions on any foreign person who (1) engages in (or attempts to engage in) or materially assists with malicious cyber activities that are reasonably likely to result in a significant threat to national security; and (2) has used violence or has attempted or threatened to use violence against any current or former official of the U.S. government.
The Illicit Captagon Trafficking Suppression Act of 2023 authorizes the President to determine and impose sanctions on any foreign person who engages in the illicit production and proliferation of Captagon. Congress has found that the criminal networks that traffic Captagon, a narcotic, are associated with the regime of Syrian President Bashar al-Assad and Hizballah.
Export Controls on Foreign-Origin Goods
The No Technology for Terror Act imposes new export controls on certain foreign-produced items destined for Iran. Specifically, foreign-produced items will now be subject to the Export Administration Regulations (EAR) if (1) it is the direct product of an Export Control Classification Number in product group D or E of Category 3, 4, 5, 6, 7, 8, or 9 of the Commerce Control List (CCL); and (2) there is knowledge that the foreign-produced item is destined for Iran or will be incorporated into or used in the production of any part, component, or equipment subject to the EAR and produced in or destined for Iran. Part 734.9 of the EAR, a section of the regulations that has dramatically expanded in recent years, houses the various iterations of the Foreign Direct Product Rule (FDPR) 734.9(j) that already covers certain foreign-produced items destined for Iran when there is knowledge that the item will be incorporated into unmanned aerial vehicles by Iranian drone manufacturers. As this latest expansion of the FDPR is much broader than what is currently reflected in the EAR, we imagine that Part 734.9(j) will be replaced.
Foreign manufacturers that sell to end users in Iran should review their supply chain for U.S.-origin technology or software enumerated on the CCL in those above-mentioned categories that is used in the production or development of any product, because a license may not be required to export that foreign item to Iran. These requirements will take effect 90 days from the enactment of the National Security Act. We expect the Bureau of Industry and Security to amend the EAR to incorporate these requirements over the coming weeks.
TikTok – Sell or Ban?
Under the Protecting Americans from Foreign Adversary Controlled Applications Act, 270 days after enactment (subject to extension), it will be unlawful for an entity to “distribute, maintain, or update (or enable the distribution, maintenance, or updating of) a foreign adversary controlled application” within the United States. The term “foreign adversary controlled application” specifically refers to ByteDance Ltd., TikTok, and any subsidiary, successor, or entity owned (directly or indirectly) by these two companies (or their subsidiaries or successors).
To avoid being subject to these restrictions, TikTok must complete a “qualified divestiture.” A “qualified divestiture” means a divestiture or similar transaction that the President determines, through an interagency process, (1) results in TikTok “no longer being controlled by a foreign adversary”; and (2) “precludes the establishment or maintenance of any operational relationship between the United States operations” of TikTok and any of its former affiliates.
The Protecting Americans from Foreign Adversary Controlled Applications Act requires that any challenges to the law must be brought no later than 165 days from April 24, 2024 (i.e., by October 6, 2024) before the U.S. Court of Appeals for the D.C. Circuit. In response, on May 7, 2024, TikTok filed suit in the same appeals court seeking to block the law from coming into effect on multiple grounds, including the First Amendment. Although there is limited precedent to look to for guidance on the likelihood of the suit’s success, there are two relevant data points. First, in 2020, federal judges blocked the Trump Administration’s Executive Order to ban TikTok, finding it likely exceeded the President’s legal authority. Second, in November 2023, a federal judge ruled a Montana law banning TikTok likely violated the First Amendment.
Conclusion
The National Security Act has received significant press for its actions taken on TikTok, as well as the appropriations passed for Israel, Ukraine, Taiwan, and other beneficiaries, but it promises to usher in some other changes. We will be monitoring how the Administration moves to implement these wide-ranging provisions.
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