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US imposes new sanctions on Russia, Iran and North Korea

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  • Sanctions

08-08-2017

On 2 August 2017, President Trump signed the “Countering America’s Adversaries through Sanctions Act” (the “CAATSA”), into law, one of the first pieces of bipartisan legislation of his presidency.

Iran

Title I of CAATSA, “Countering Iran’s Destabilising Activities Act 2017” (“CIDAA”) is designed to combat support of terror organisations, and restrain the country’s continued missile tests, nuclear advancements, and human rights abuses.

CIDAA’s sanctions on Iran are directed at Iran’s ballistic missile programme, and the terrorism-related activities of the Islamic Revolutionary Guards Corps (the “IRGC”) after Iran was found to be threatening US national security and undermining global stability with a range of aggressive acts.

CIDAA provides for:

(a)  terrorism sanctions against the IRGC: the IRGC will be placed on the list of specially designated global terrorists and:

  (i) all assets and property in the US belonging to IRGC-linked individuals and entities will be frozen

  (ii) no American individual or entity has the right to establish financial, business, services or other affiliations with any individuals directly or indirectly associated with the IRGC

  (iii) no American individual or entity has the right to violate these sanctions through intermediaries or bypassing these procedures

  (iv) all individuals and entities having any relations with the IRGC must be sanctioned, and

  (v) as these measures place the IRGC under secondary banking sanctions, no financial institution – including foreign banks – will be able to provide direct or indirect banking services to any IRGC-connected individuals and entities

(b)  ballistic missile program and arms embargo sanctions: provided that the President determines that persons have knowingly contributed to (i) Iran’s ballistic missile or weapons of mass destruction programs or (ii) transactions concerning specified military equipment (or related technical or financial assistance), sanctions can be imposed. This codifies the major provisions present in Executive Order 13382

(c)  human rights sanctions: these can be imposed, at the President’s discretion, against persons responsible for certain human rights violations, including extrajudicial torture, against individuals in Iran

CIDAA also requires the Secretaries of State, Defence and Treasury, in addition to the Director of National Intelligence, to provide a comprehensive strategy for deterring destabilisation activity in Iran.

The new sanctions have been condemned by Iran as “hostile, reprehensible and unacceptable” (Foreign Ministry spokesman), and in breach of the 2015 Joint Comprehensive Plan of Action Agreement (“JCPOA”) whereby Iran agreed to limit its nuclear activities.


Russia

In retaliation for Russia’s cyber-presence during the 2016 Presidential Election, Title II of CAATSA “Countering Russian Intelligence in Europe and Eurasia Act 2017” (“CRIEEA”) targets the country’s intelligence, energy, defence, mining and railway industries. The new sanctions add to those already in place following the 2014 annexation of Crimea.

CRIEEA:

(a)  codifies existing sanctions: CRIEEA codifies the current Russia/Ukraine related sanctions under Executive Orders 13660, 13661, 13662 and 13685 which block the property of certain persons contributing to the situation in the Ukraine and those engaging in significant malicious cyber-enabled activities, and prohibits certain transactions with respect to Crimea. These sanctions are therefore now a matter of law, rather than executive action

(b)  expands existing “sectoral sanctions”: CRIEEA allows for the inclusion of Russian state-owned companies in the railway, metals and mining sectors as entities subject to Directives 1 to 4 issued under Executive Order No. 13662. The scope of those Directives (which relate to transactions involving the issuing of debt of varying tenors) as they relate to the financial services and energy sectors, has also been expanded. Russian oil projects in which a sanctioned person holds 33% or more interest have also become a target. This is contrary to general US Treasury prohibitions which target companies with a majority interest of 50% or more by a sanctioned individual

(c)  amends the scope of sanctionable activity under the Ukraine Freedom and Support Act (the “Ukraine Act”): In 2014, the Ukraine Act gave the President discretion to impose sanctions if he determined that a person was engaged in sanctionable activity. Under President Obama’s regime, one entity was sanctioned under this authority. CRIEEA modifies the Ukraine Act so that now, the President is required (unless it is not in the United States’ national interest), to impose sanctions if it is determined that a person knowingly (i) made an investment in a strategic Russian crude oil project (ii) engaged in significant transactions that help provide arms to Syria or (iii) engaged in significant transactions with persons on the Specially Designated Nationals list

(d)  permits sanctions designations relating to pipelines: authorising the President to impose certain sanctions against persons determined to have invested or supported the maintenance or expansion of the construction, modernisation or repair of the Russian energy pipelines

(e)  increases extraterritoriality: the new measures extend penalties to beyond just US persons to foreign persons who “cause a violation” by a US person

(f)  introduces new cybersecurity and human rights related sanctions: new sanctions are now available against designated persons who undermine US cybersecurity, designated foreign persons who contribute to human rights abuses, transactions with designated persons affiliated with Russian defence or intelligence sectors, persons who facilitate deceptive or structured transactions on behalf of sanctions persons or their family members, and persons found to have made certain investments relating to the privatisation of Russian state firms. CRIEEA also requires the President to impose sanctions on any Russian government officials or their close associates or family members if they are responsible for, or complicit in, an act of significant corruption in Russia or elsewhere

CRIEEA also introduces a “congressional review process”. By requiring the approval of Congress prior to waiving or terminating these sanctions, the President’s ability to unilaterally scale back any sanctions is limited. Congress has an opportunity to, effectively, veto the proposed sanctions relief should it disagree with the President’s rationale for the decision.

Russia has already retaliated over the bill being passed, instructing the US to reduce the number of diplomatic personnel in Russia, and seizing properties used by US personnel.

These sanctions have also been criticised by France, Germany and the European Union over concerns that they could impact European business. Jean Claude Junker has warned against any “unintended unilateral effects” the new sanctions may precipitate on the EU’s energy security, and companies which have business interests in Russia.


North Korea

Title III of CAATSA, the “Korean Interdiction and Modernisation of Sanctions Act 2017” (“KIMSA”) amends the North Korea Sanctions and Policy Enhancement Act 2016. The sanctions are intended to thwart the country’s ambition for nuclear weapons, removing access to the funds required to follow through with nuclear plans.

KIMSA:

(a)  expands mandatory secondary sanctions: the President is mandated to impose sanctions on persons engaged in:

  (i) the acquisition, from North Korea, of significant amounts of gold and silver

  (ii) the provision of rocket or jet fuel, and

  (iii) the provision of goods or services to North Korean vessels sanctioned by the US or the UN

(b)  expands discretionary secondary sanctions: the President is authorised to sanction dealings in North Korean exports, or transfers to North Korea of bulk cash, precious metals or crude oil

(c)  introduces financial institution related prohibitions: CAATSA prohibits US financial institutions from knowingly permitting a foreign financial institution to use its correspondent account to provide financial services indirectly to North Korea, or any designated person or financial institution

(d)  prohibits forced labour: goods produced by North Korea’s forced labour will be prohibited from entering the United States. The President will be required to sanction those involved in the export or use of forced labour

US ambassador to the UN, Nikki Hayley, stated that North Korea is “already subject to numerous Security Council resolutions that they violate with impunity”.

It therefore remains to be seen whether sanctioning North Korea will have the desired effect, with many commentators requesting that China take greater steps towards challenging the North Korean regime.


Eversheds Sutherland comment

CAATSA is a significant and detailed piece of sanctions legislation, targeting key jurisdictions already subject to various international and domestic  sanctions. By passing CAATSA into law, the US has increased the risks of doing business with any counterparty linked with these jurisdictions and will undoubtedly cause international companies to re-evaluate their strategies in relation to them. In the short term, we are likely to see disruption in the energy and petrochemical industries, with projects undertaken with Russian counterparties, particularly affected.

Additionally, CAATSA will exacerbate geopolitical tensions between the United States and Russia, Iran and North Korea. It remains to be seen whether CAATSA has any long term impact upon the JCPOA. Iran has already stated that it believes the new sanctions are a breach of the existing agreements not to implement further sanctions.

The US has the most comprehensive and complex sanctions regime in the world- CAATSA has just increased the complexity.

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