House Passes Bill Authorizing Additional Sanctions Against Russia, North Korea and Iran

by Dechert LLP

Dechert LLP

After weeks of discussion and procedural uncertainty, the U.S. House of Representatives passed new legislation by a vote of 419–3 that, if enacted into law, will strengthen existing sanctions against Russia and also impose additional sanctions against Iran, Russia and North Korea. The House bill, approved Tuesday, is very similar to the Senate bill that passed by a 98–2 vote in June (at least with respect to the Iran and Russia measures) with a few key alterations. The bill’s most notable effects are with regard to Russia: in particular, to codify sanctions related to Russia that had been enacted under previous Executive Orders and to require the President to seek congressional approval before easing or terminating sanctions against Russia or undertaking licensing actions that significantly alter U.S. foreign policy toward Russia.

The bill also expands and adjusts the existing sanctions regime in several ways. It expands the scope of prohibited activities involving designated Russian financial and energy companies under Directives 1, 2 and 4 of the Sectoral Sanctions Identification List (“SSI List”) and authorizes the designation of Russian state-owned entities operating in the railway or metals and mining sectors of the Russian economy. The bill also authorizes new, and potentially chilling, secondary sanctions targeting non-U.S. persons who engage in a variety of activities involving Russia, including those who engage in significant transactions involving the Russian defense, intelligence, and energy sectors and those involved in computer hacking on behalf of the Russian Government.

The legislation now moves back to the U.S. Senate, where it is expected to receive strong bipartisan support and be passed prior to the August recess. Recent comments by members of the Senate and Trump administration officials suggest that the bill may face further changes and/or challenges before becoming law, but it seems likely to pass given significant bipartisan support and the resulting likelihood that a veto would be overridden.

I. Codification of Russian Sanctions

The House bill focuses on codifying a series of Executive Orders imposing sanctions against Russian parties promulgated under the Obama administration. The Executive Orders were issued in the spring and summer of 2014; through them, President Obama imposed sanctions against certain named Russian individuals and businesses, as well as sectoral measures targeting both Russia and Ukraine, in response to Russia’s actions in Crimea and eastern Ukraine. The current effort to codify these sanctions appears to be a response to concerns that President Trump would ease or terminate sanctions in an effort to improve the United States’ relationship with Russia. The new sanctions legislative basis would limit the President’s ability to take such steps without first securing congressional approval.

If the House bill becomes law, it will replace Executive Orders 13660, 13661, 13662, 13694, and 13757. The first three Executive Orders established sanctions against Russian individuals and entities in response to Russia’s actions in the Crimea and Ukraine, while the latter two created a new body of sanctions applying to individuals involved in computer hacking that threatens U.S. national security, foreign policy, economic health, or financial stability. In December 2016, in response to reports by the U.S. intelligence community that Russia had used cyberattacks to influence the U.S. presidential election, President Obama imposed sanctions under these authorities against several Russian individuals and entities (for more information, see our prior OnPoint here).

The new legislation explicitly codifies the sanctions imposed against various Russian individuals and entities under these Executive Orders, reducing the Executive Branch’s discretion to unilaterally ease or terminate sanctions against Russia. The new law would require President Trump to submit written reports to Congress and receive congressional approval in order to lift sanctions from particular individuals and entities. The bill would, however, permit the Executive Branch to engage in routine licensing actions that do not significantly alter U.S. foreign policy regarding Russia without prior congressional review or approval.

II. Additional Measures Targeting Russia

The bill also introduces a number of important changes to the current sanctions regime against Russian parties, including by modifying certain SSI List restrictions, potentially targeting investments in new Russian pipeline projects, and authorizing sanctions against certain entities in the state-owned metals, mining, and railway industries. Certain of these changes, including the modifications to SSI List restrictions regarding designated Russian financial and energy companies, are required to be implemented within a short time following the passage of the bill. Other measures, including the new secondary sanctions targeting various activities with Russia, provide the Executive Branch with significant discretion, and it appears unlikely that the President will exercise these powers in the near future.

  • Changes to Scope of Prohibited Debt Under Directives 1 and 2 of the SSI List: Currently, U.S. persons are prohibited from dealing in any new equity or new debt with a maturity of greater than 30 days of Russian financial companies designated under Directive 1 of the SSI List. The bill would tighten these prohibitions to include any new debt with a maturity of greater than 14 days. Similarly, U.S. persons currently are prohibited from dealing in any new debt with a maturity date of greater than 90 days for Russian energy companies designated under Directive 2 of the SSI List – the bill would tighten these prohibitions to include any new debt with a maturity of greater than 60 days. These changes are mandatory and would become effective 60 days after the Secretary of Treasury formally modifies the directives.
  • Changes to Scope of Sanctioned Russian Energy Companies Under Directive 4 of the SSI List: Under Directive 4 of the SSI List, U.S. persons currently are prohibited from providing goods, services or technology in support of Russian deepwater, Arctic offshore or shale oil projects that involve designated Russian entities or other entities in which such sanctioned persons hold an ownership of 50% or more in the aggregate. The bill would expand these restrictions to include any entity in which designated Russian energy companies hold an ownership interest of 33% or more. This change is mandatory and would become effective 90 days after the Secretary of Treasury formally modifies Directive 4. This provision represents a compromise as the original language restricted any entity in which such Russian energy companies had an interest.
  • Authorization of SSI List Designations for Russian Railway or Mining and Metals Companies: The bill authorizes – but does not require – the Secretary of Treasury to impose restrictions under the SSI List against Russian state-owned entities operating in the railway or metals and mining sectors of the Russian economy. The bill does not dictate the specific restrictions to be imposed against such entities, and it is unknown whether restrictions would encompass all new equity or new debt (or the maturity limits of prohibited new debt) of such entities.
  • Authorization of Secondary Sanctions Related to Russian Energy Export Pipelines: The bill would authorize – but does not require – the imposition of so-called “secondary sanctions” against non-U.S. entities that engage in certain activities involving Russia, even if such activities have no U.S. nexus. (These measures are similar to secondary sanctions implemented with respect to Iran, although most Iran-related secondary sanctions have been suspended as a result of the implementation of the Joint Comprehensive Plan of Action.) In particular, the bill would authorize the President to impose various restrictions (ranging from a denial of participation in U.S. government procurement contracts to a freezing of assets under U.S. jurisdiction) against any person (whether U.S. or non-U.S.) that knowingly engages in activities involving the construction, maintenance or expansion of Russian energy export pipelines (subject to certain monetary thresholds).
  • To address concerns raised by some other governments, especially in Europe, related to the potential imposition of secondary sanctions against non-U.S. companies involved in a number of Russian export pipeline projects, the House bill includes wording that would require the President to act “in coordination with allies of the United States” prior to imposing sanctions. The bill does not, however, provide any guidance as to the degree or nature of coordination required or the countries that must be consulted; additional guidance may be provided through implementing regulations if the bill is enacted. The European Commission is reported to be seeking assurances from President Trump that the secondary sanctions would not target European businesses. Absent such an assurance, it is reported that the Commission is considering other responses, including potentially seeking to prevent the application of any new sanctions using E.U. law or pursuing a response through the World Trade Organization.
  • Authorization of Other Secondary Sanctions: The bill also would authorize various potential restrictions against non-U.S. persons that engage in certain other activities in or relating to Russia, including:
  • Any person who knowingly assists, sponsors or otherwise supports persons that engage in significant activities undermining cybersecurity on behalf of the Russian Government;

  • Any person who knowingly engages in significant transactions with the Russian defense or intelligence sectors, including the Main Intelligence Agency of the General Staff of the Armed Forces of Russia or the Federal Security Service;

  • Any person who knowingly makes a significant investment in a “Russian special crude oil project” (defined to include any Russian deepwater, Arctic offshore or shale oil projects);

  • Any person who makes a significant investment that contributes to the ability of Russia to privatize state-owned assets in a manner that unjustly benefits Russian officials or their close associates or family members;

  • Any foreign financial institution that knowingly facilitates significant financial transactions on behalf of Russian persons identified on the U.S. List of Specially Designated Nationals or in support of certain sales of defense articles to Syria;

  • Any Russian officials determined to be involved in acts of significant corruption (such as those targeted under the Magnitsky Act), any person involved in the commission of serious human rights abuses in Russian territory and any other person who knowingly assists, sponsors or otherwise supports such persons; or

  • Any person who materially violates or conspires to violate or evade U.S. sanctions regarding Russia (similar to measures already in place with respect to the evasion of sanctions against Iran or Syria).

  • Required Reports Related to Russian Sovereign Debt and Other Activities: The bill requires the Executive Branch to issue reports related to the potential effect of expanding sanctions under Directive 1 of the SSI List (i.e., prohibitions on new equity and new debt) to prohibit participation in offerings involving Russian sovereign debt and related derivative products. U.S. persons would not, however, be prohibited from dealing in such products even if the bill is passed. The bill also requires the Executive Branch to issue reports on Russian senior political figures and oligarchs, Russian parastatal entities and illicit financing in Russia, presumably to determine whether other parties should be sanctioned.

III. Additional Sanctions Against Iran and North Korea

While the bill primarily is focused on codifying and tightening sanctions against Russia, it also imposes additional secondary sanctions related to Iran and North Korea. With respect to Iran, the bill authorizes penalties against any person who, among other activities, engages in transactions involving: (i) Iran’s ballistic missile program; (ii) human rights abuses by the Government of Iran; (iii) the sale of arms to Iran; or (iv) the Iranian Revolutionary Guard Corps.

With respect to North Korea, the bill authorizes sanctions against any person who, among other activities: (i) engages in transactions related to the purchase of gold (and other minerals), coal, textiles or agricultural products from North Korea; (ii) sells crude oil, natural gas or petroleum or petroleum byproducts to North Korea; (iii) supports online commercial activities of the Government of North Korea; facilitates transfers of cash, precious metals or gemstones to or from North Korea; (iv) supports sanctioned North Korean aircraft or vessels; or (v) maintains correspondent accounts with, or otherwise facilitates the activities of, any North Korean financial institutions.

IV. Next Steps

It is possible, but unlikely, that the legislation will face challenges in the Senate and from the President. While the legislation has bipartisan support in the Senate, it may nonetheless undergo some revisions before being approved. Senator Corker, chairman of the Senate Foreign Relations Committee, said that his colleagues will need to consider changes to the Senate version of the bill, including the additional provisions regarding North Korea that were not included in the Senate version.

If the bill passes the Senate, as is expected, President Trump will decide whether to sign or veto the legislation. In the weeks prior to the bill’s passage in the House, President Trump criticized Congress’s efforts to limit his authority to conduct relations with Russia. In any event, it is not clear whether President Trump will exercise his authority to veto the legislation if it passes the Senate with a “veto-proof” majority, which is likely to be the case.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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