On August 2, 2017, President Donald Trump signed into law the Countering America’s Adversaries Through Sanctions Act (the Act), which significantly expands U.S. sanctions against Russia while enacting modest new sanctions on Iran and North Korea. The Russia-focused measures tighten existing sectoral sanctions and impose a host of new sanctions, including “secondary sanctions,” that could significantly impact U.S. and non-U.S. companies. The Act, which passed both the Senate and the House of Representatives with overwhelming support, also imposes significant new procedural requirements on the president with respect to the easing, lifting and licensing of Russia-related sanctions.
In signing the Act, the president issued two statements that make clear his administration has fundamental concerns with the law. While President Trump stated that he was signing the Act “for the sake of national unity,” he asserted that the law is “significantly flawed” and that it contains provisions that are “clearly unconstitutional” because they tread on the president’s constitutional foreign affairs powers. He also stated that his administration “will give careful and respectful consideration to the preferences expressed by Congress” in the law but expressed that the executive branch will implement the sanctions “in a manner consistent with the President’s constitutional authority to conduct foreign relations.”
While the new measures imposed with respect to Iran and North Korea have generated only modest attention outside those countries, the new sanctions on Russia have elicited a strong response not only from Russia, which has reacted by reportedly expelling hundreds of U.S. diplomats, but also from the European Union due to concerns about the potential impact some provisions could have on European companies. Certain voices in Europe, including in Germany, have called for possible countermeasures against the new law. It will be important to monitor any European Union legal response to the sanctions.
Codification of Existing Authorities and Expansion of Sectoral Sanctions
The Act codifies several existing executive orders, including the four Ukraine/Russia-related executive orders (13660, 13661, 13662 and 13685) and executive orders (13694 and 13757) that provide the president with the authority to impose sanctions on persons engaged in malicious cyber-related activities.
Beyond codifying these existing authorities, the Act tightens the sectoral sanctions imposed pursuant to Executive Order 13662. Under four directives issued in 2014, the Office of Foreign Assets Control (OFAC) instituted narrowly tailored prohibitions on U.S. persons and transactions within the United States with respect to identified companies in Russia’s financial (Directive 1), energy (Directives 2 and 4), and defense (Directive 3) sectors, and companies in which the identified companies hold a 50 percent or greater interest. The Act does not alter Directive 3 but directs the secretary of the treasury to modify the other three directives as follows:
Limitations on the President’s Authority to Ease Sanctions and Issue Licenses
The Act subjects to congressional review the president’s ability to waive or terminate the application of sanctions imposed on targeted persons under the Act, any of the now-codified executive orders referenced above or certain statutes. This would include congressional review of any removals of individuals or entities from OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List) or from the Sectoral Sanctions Identifications List (SSI List).
Significantly, the Act also subjects to congressional review “any licensing action that significantly alters” U.S. foreign policy with respect to Russia, but it clarifies that “the routine issuance of a license that does not significantly alter” this policy need not be sent to Congress. Congressional review and approval of certain OFAC licenses is a departure from past precedent and raises the prospect that the licensing process could be politicized. It is also not yet clear whether this review would in practice be applied only to general licenses (broad authorizations) or would also include specific licenses (case-by-case authorizations that require an application to OFAC).
The Act puts “secondary sanctions” front and center in the Russia context. Secondary sanctions, which are most closely identified with U.S. sanctions on Iran, are a set of measures that principally target foreign individuals and entities for engaging in enumerated activities that may have no U.S. jurisdictional nexus. Unlike a violation of “primary sanctions,” such as the sectoral sanctions discussed above (which can result in civil or criminal penalties), a party that engages in conduct that is subject to secondary sanctions can be sanctioned by the U.S. government.
Secondary sanctions have existed in the Russia sanctions context since 2014. However, in large part due to a signing statement issued by President Barack Obama upon signing the Ukraine Freedom Support Act in 2014 (UFSA), in which he stated that “the Administration does not intend to impose sanctions under this law,” UFSA’s discretionary secondary sanctions have to date largely been disregarded.
The Act makes mandatory certain previously discretionary secondary sanctions and enacts new mandatory and discretionary secondary sanctions. Whether mandatory (the president “shall” impose) or discretionary (the president “may” impose), each measure requires a determination by the president that a specific individual or entity has engaged in the enumerated sanctionable conduct. None of the measures is self-executing, and some include an option for the president to determine it is not in the national interest to impose the sanction.
The UFSA discretionary measures that are now mandatory include the following:
The Act also provides for the new mandatory and discretionary secondary sanctions that include the following:
There are a number of definitional considerations and questions that arise in Section 228. For example, the definition used for “foreign person” is unusual and includes “any entity not organized solely under the laws of the United States, or existing solely in the United States,”1 which has the potential to be much broader than the traditional definition of an individual or entity that is not a U.S. person. Second, the term “person subject to sanctions” could potentially include persons on the SDN List as well as persons on the SSI List, as the U.S. government has imposed some level of sanction on each. Were SSI List entities to be captured, this provision could, in effect, swallow the more narrowly tailored sectoral sanctions. We anticipate that OFAC will issue clarifying guidance on Section 228, among other provisions, as it determines its implementation approach to the Act.
No later than 60 days after the date of enactment, the president is required to issue regulations or other guidance that will “specify the persons that are part of or operating on behalf of the defense and intelligence sectors of the Government of the Russian Federation.” Therefore, it appears likely that OFAC will entertain a list-based approach to the persons in the defense and intelligence sectors that can trigger sanctionable conduct. At a minimum, that list would appear to include the Main Intelligence Agency of the General Staff of the Armed Forces and the Federal Security Service, both of which are identified in Section 231.
In addition to the expansion of sectoral sanctions and secondary sanctions, the Act also contains additional bases for designation (i.e., being added to OFAC’s SDN List):
The Iran-related sanctions are largely additive to existing sanctions and are unlikely to materially impact the imposition or enforcement of U.S. sanctions related to Iran. A key question, however, is whether these sanctions will nevertheless engender a response from Iran that could put the Iran nuclear deal — the Joint Comprehensive Plan of Action (JCPOA) — at risk. The Iran sanctions in the Act include the following:
North Korea sanctions were a late addition to the Act and followed a North Korean intercontinental ballistic missile test on July 4, 2017. The Act’s North Korea-focused sanctions principally serve to expand the categories of activities set out in the North Korea Sanctions and Policy Enhancement Act of 2016 (NKSPEA) that could result in an OFAC designation.
As a result of these sanctions, the president is required to designate persons who the president determines engage in a variety of activities, including purchasing or acquiring from North Korea gold, titanium ore, vanadium ore, copper, silver, nickel, zinc or rare earth minerals; selling or transferring to North Korea any significant amounts of rocket, aviation or jet fuel (except for use by civilian aircraft outside North Korea); providing fuel, supplies or bunkering services for designated North Korean vessels or aircraft; providing insurance or registration services to a vessel owned or controlled by the North Korean government; and maintaining a correspondent account with a North Korean financial institution.
The Act also increases the president’s discretionary sanctions authority under NKSPEA and authorizes the president to designate persons who knowingly engage in a range of activities, including purchasing or acquiring significant quantities of coal, iron or iron ore from the North Korean government; purchasing or acquiring significant types or amounts of textiles or agricultural products from the North Korean government; purchasing significant amounts of petroleum products or natural gas resources to the North Korean government; engaging in, facilitating or being responsible for the online commercial activities of the North Korean government, including online gambling; purchasing or otherwise acquiring fishing rights from the North Korean government; and engaging in, facilitating or being responsible for the exportation of workers from North Korea.
Mirroring the action taken by the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) under Section 311 of the USA PATRIOT Act in 2016, the Act prohibits U.S. financial institutions from allowing foreign financial institutions to use correspondent accounts to provide significant financial services indirectly to certain persons, foreign governments or financial institutions designated under the NKSPEA.
While the Act does not alter the model of sanctions that the U.S. has imposed with respect to North Korea, it does expand the criteria that OFAC can use to sanction parties dealing with North Korea. With several recent rounds of U.S. sanctions targeting individuals and entities in China, we would expect Chinese companies to be a particular focus of U.S. authorities as they determine how to use these new authorities.
Associates Ondrej Chvosta, James E. Perry, Innokenty Pyetranker and Ashton M. Simmons assisted in the preparation of this memorandum.
1 See 31 C.F.R. 595.304.