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Russia Sanctions under CAATSA – U.S. Updates Rules and Provides Guidance on Enforcement

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This week, the U.S. government took several steps to implement sections of the Countering America’s Adversaries Through Sanctions Act of 2017 (CAATSA), with implications for Russia-related sanctions and their enforcement. On October 27, 2017, the Department of State (DoS) published guidance on sanctions with respect to Russia’s Defense and Intelligence Sectors under Section 231 of CAATSA. In addition, on October 31, 2017, DoS published guidance on how it would view secondary sanctions for investments in special Russian crude oil projects and energy export pipelines. Separately, the Department of Treasury’s Office of Foreign Assets Control (OFAC) amended Directive 4 of the Ukraine/Russia related sanctions and published updated FAQs relating to the amended Directive as well as new guidance on CAATSA sections 223(a), 226, 228, 233.

The key elements of the DoS guidance and OFAC amendment Directive and FAQs are as follows:

State Department entity listings and guidance on “significant” transaction with the military/intelligence sectors

    • DoS listed 39 entities identified as being part of the Defense sector or Intelligence sector of the Government of the Russian Federation.

 

    • DoS explained that sanctions will be imposed on persons that are determined to knowingly engage in “significant” transactions with a listed entity. In determining whether a transaction is “significant,” DoS will analyze the “totality of the facts and circumstances surrounding the transaction and weigh various factors on a case-by-case basis.”

 

  • Sanctions may include, for example, prohibitions on transfers of credit and financing from U.S. financial institutions, prohibitions on procurement from sanctioned parties, and sanctions on principal executive officers of sanctioned persons. (See Section 235 of CAATSA.)

More information on this element can be found here.

State Department guidance on projects involving Russia’s crude oil projects and energy export pipelines

    • DoS issued guidance on its implementation of secondary sanctions addressed in CAATSA’s section 225, “Imposition of Sanctions Relation to Special Russian Crude Oil Projects,” and section 232, “Sanctions with Respect to the Development of Pipelines in the Russian Federation.”

 

  • Section 225 made mandatory the existing secondary sanctions under the Ukraine Freedom Support Act of 2014 (UFSA). These secondary sanctions will apply if the Secretary of State, in Consultation with the Secretary of Treasury, determines that a foreign person knowingly makes a significant investment in a special Russian crude oil project on or after September 1, 2017.
    • In determining whether an investment is “significant” DoS explained that it “will consider the totality of the facts and circumstances surrounding the investment and weigh various factors on a case-by-case basis.”
        • DoS also explained that for the purposes of Section 225, an investment is not significant if U.S. persons would not require specific licenses from the U.S. Treasury Department’s Office of Foreign Assets Control to make or participate in it.

       

    • The sanctions under this section may include, for example, prohibitions on guarantees, insurance, and extension of credit from the export-import bank for projects in connection with the sanctioned party, and prohibition of transfers of credit or payments between financial institutions that involve any interest of the sanctioned party. (See section 4(c) of the UFSA.)

 

  • Section 232 provides for discretionary sanctions in certain Russian energy export pipelines. DoS asserted that the focus of implementation would be on persons it determines to have “knowingly, on or after ‎August 2, 2017 (1) made an investment that meets the fair market value thresholds in Section 232(a) [$1,000,000 or more] and directly and significantly enhances the ability of the Russian Federation to construct energy export pipeline projects initiated on or after August 2, 2017, or (2) sells, leases, or provides to the Russian Federation goods or services that meet the fair market value thresholds in Section 232(a) and that directly and significantly facilitate the expansion, construction, or modernization of such energy export pipelines by the Russian Federation.” DoS clarified that implementation of section 232 sanctions would not target investments or activities related to the standard repair and maintenance of pipelines in existence as of August 2, 2017.

More information can be found here.

OFAC update to Directive 4

    • Section 223 of CAATSA required OFAC to revise Directive 4 to address new projects outside of Russian territory where a party is designated on the Sectoral Sanctions Identification List (SSI List) under Directive 4 and has a controlling interest or 33 percent or greater ownership interest.

 

    • The updated Directive prohibits the provision, exportation, or reexportation, directly or indirectly, of goods, services (except for financial services), or technology in support of exploration or production for deepwater, Arctic offshore, or shale projects that:
        • have the potential to produce oil in the Russian Federation, or in maritime area claimed by the Russian Federation and extending from its territory, and that involve any person determined to be subject to Directive 4 or any earlier version thereof, their property, or their interests in property; or

       

      • that are initiated on or after January 29, 2018, that have the potential to produce oil in any location, and in which any person determined to be subject to Directive 4 or any earlier version thereof, their property, or their interests in property has (a) a 33 percent or greater ownership interest, or (b) ownership of a majority of the voting interests.

 

  • Revised FAQ 412 states that the prohibitions on the exportation of services include “for example, drilling services, geophysical services, geological services, logistical services, management services, modeling capabilities, and mapping technologies.”

The Directive can be found here.

OFAC guidance on CAATSA sections 223(a), 226, 228, and 233

  • Section 223(a): OFAC guidance clarifies that although the Secretary of Treasury may find that state-owned entities in the railway or mining sectors of the Russian Federation come under the blocking provisions of Executive Order 13662, section 223(a) does not require the imposition of sanctions on persons in those sectors.

More information on Section 223(a) can be found here.

    • Section 226: Section 226 of CAATSA makes mandatory the existing secondary sanctions under Section 5 of the UFSA for “foreign financial institutions.” Specifically, secondary sanctions can apply to non-U.S. banks where the Secretary of the Treasury determines the banks knowingly (a) engaged in significant transactions involving persons sanctioned under Section 4 of UFSA; or (b) facilitate significant financial transactions on behalf of a Russian SDN designated pursuant to UFSA, Executive Orders 13660, 13661, 13662, 13685 (or others addressing the crisis in Ukraine).

 

  • Section 5 of the UFSA allows the President to prohibit the opening or place strict conditions in maintaining correspondent accounts or payable-through accounts by foreign financial institutions in the United States.

More information on Section 226 can be found here.

    • Section 228: Section 228 of CAATSA adds new mandatory secondary sanctions to the Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (SSIDES). Specifically, secondary sanctions apply to non-U.S. persons that knowingly “facilitate a significant transaction…, including deceptive or structured transactions, for or on behalf of … any person subject to sanctions imposed by the United States with respect to the Russian Federation” or close relatives of same. OFAC clarified that “persons subject to sanctions” include SSI List parties in addition to SDNs and blocked persons. OFAC also stated that for purposes of this section of SSIDES, a transaction is not significant if U.S. persons would not require specific licenses from OFAC to participate in it. Thus, transactions with SSI List parties that are not prohibited for U.S. persons should not be captured.

 

  • The new mandatory sanctions allow the President to block and prohibit all transactions in property and interest in property of a person found to be in violation of SSIDES or the UFSA.

More information on Section 228 can be found here.

    • Section 233: Section 233 of CAATSA adds new mandatory secondary sanctions on persons that invest or facilitate investment of $10,000,000 or more to privatize Russian Federation assets in a manner that unjustly benefits government officials or their close associates or family members. OFAC guidance clarifies that it will interpret the terms “investment” and “facilitation” broadly. In addition, OFAC will view the term “unjustly benefits” to refer to activities such as corruption that results in direct or indirect advantage for government officials. OFAC will interpret the term “close associate” to mean someone who maintains a close relationship with an official, and the term “family members” to include parents, spouses, extramarital partners, children, siblings, uncles, aunts, grandparents, grandchildren, first cousins, stepchildren, stepsibling, parents-in-law, and spouses.

 

  • The new mandatory sanctions may include prohibitions in financing from U.S. and international financial institutions, prohibitions on transfers of credit or payments between financial institutions that have any interest of sanctioned persons, bans on investment in equity or debt of sanction persons, prohibition of transactions in foreign exchange in which the sanctioned person has any interest, prohibitions on procurement from sanctions persons, visa denials for corporate officers, and the imposition of sanctions on the principal executive officers of sanctioned persons. (See Section 235 of CAATSA.)

More information on Section 233 can be found here.