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US State Department Issues Guidance Regarding Imposition of Retaliatory Sanctions for Dealings with 39 Entities Associated with the Russian Defense and Intelligence Sectors

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On October 27, 2017, the US State Department issued guidance regarding Section 231 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”; see our previous blog post on the CAATSA here). This provision requires that the President impose retaliatory sanctions on any individual or entity, regardless of nationality, that knowingly engages in a “significant transaction” with a person that is determined to be part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation. The State Department will not begin imposing retaliatory sanctions under Section 231 until January 29, 2018, but this guidance provides important information for US and non-US companies that do business in Russia with the entities targeted by entities.

CAATSA Section 231 and the Section 231 Lists and Guidance

Section 231(d) of CAATSA required that the Trump Administration issue guidance 60 days after the passage of CAATSA (i.e., by October 1, 2017) identifying the Russian entities determined to be part of or operating on behalf of Russia’s defense and intelligence sectors. After a delay of over three weeks, the State Department issued the following:

Section 231 does not impose new sanctions directly on the entities identified on the Section 231 Lists, although many of these entities have already been designated by the US Government on the US Specially Designated Nationals and Blocked Parties (“SDN”) or Sectoral Sanctions Identifications (“SSI”) Lists. Rather, Section 231 provides that any parties engaging in “significant transactions” with these entities could be subject to retaliatory sanctions. In this sense, Section 231 is similar to the “secondary sanctions” measures used to great effect in the past by the US Government as part of its Iran sanctions program.

Guidance on “Significant Transactions”

One of the biggest questions around Section 231 related to how the State Department would determine whether a transaction is a “significant transaction.” According to the Section 231 Guidance, the State Department will consider “the totality of the facts and circumstances surrounding the transaction and weigh various factors on a case-by-case basis.” The guidance does not provide a de minimis exception. Factors that the State Department says will weigh towards finding a transaction to be “significant” include:

  • Having a significant adverse impact on US national security and foreign policy interests;
  • The nature and magnitude of the transaction; and
  • The relation and significance of the transaction to the defense or intelligence sectors of the Russian government.

The State Department states that, in the initial stage of implementing Section 231, it will focus on transactions of a “defense or intelligence nature.” Thus, if a transaction has purely civilian end-uses and/or end-users and does not involve intelligence entities, the State Department advises that those factors will weigh heavily against finding a transaction to be “significant.” The Section 231 Guidance also provides that, if a transaction with the Federal Security Service (“FSS” or “FSB”) is necessary to comply with rules and regulations administered by that agency, including regulations involving the importation, distribution, or use of information technology products in Russia, that would weigh heavily against finding the transaction to be “significant.”

Potential Retaliatory Sanctions

If the State Department determines that a person has engaged in a “significant transaction” with an entity on the Section 231 Lists on or after January 29, 2018, it must impose five or more of the following sanctions on that person:

  • Denial of assistance by the US Export-Import Bank;
  • Denial of specific authorization to receive exports of controlled goods or technology from the United States;
  • Restrictions on receiving loans totaling more than USD 10 million over any 12-month period from US financial institutions;
  • A requirement that the United States oppose any loan from international financial institutions that would benefit a sanctioned person;
  • If the person is a financial institution, it may be prohibited from being designated as a primary dealer in US Government debt instruments or serving as an agent of the US Government or a repository for US Government funds;
  • Debarment from US Government contracting;
  • A prohibition on engaging in any transactions in foreign exchange that are subject to US jurisdiction;
  • Restrictions on banking transactions by the sanctioned person, including on transfers of credit or payments between, by, through, or to any financial institution;
  • A prohibition on transactions involving the property of the sanctioned person that is subject to US jurisdiction;
  • A ban on investment in the equity or debt of the sanctioned person;
  • Denial of entry visas to the United States for foreign officers, principals, and controlling shareholders of the sanctioned person; or
  • The application of any of the above sanctions on the principle executive officer(s) of the sanctioned person.

Conclusion

Despite this new guidance, it remains to be seen whether the State Department will be aggressive in its application of the Section 231 sanctions—particularly given the broad discretion that it has retained to determine whether a transaction is “significant.” Although the new sanctions require that a person “knowingly” engage in a significant transaction with an entity on the Section 231 Lists in order to be sanctioned, it is also unclear how the State Department will apply that provision. CAATSA defines “knowingly” by referencing the definition for that term in the Iran Sanctions Act of 1996, which provides that “knowingly,” “with respect to conduct, a circumstance, or a result, means that a person has actual knowledge, or should have known, of the conduct, the circumstance, or the result.”

Finally, it is possible that the Russian Government could retaliate against these steps by the Trump Administration. Baker McKenzie will continue to monitor the situation and provide updates on new developments.

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Ms. Kim focuses on outbound trade compliance issues that arise under US economic sanctions, export control laws, investment restrictions, anti-boycott regulations, anti-money laundering laws and the Foreign Corrupt Practices Act. She represents and advises US and non-US companies in criminal and regulatory proceedings, internal investigations, and compliance audits relating to these areas of law. She also advises on the extraterritorial application of these laws in cross-border transactions, including mergers and acquisitions, joint venture arrangements, and other international commercial activities. Her practice includes the development and implementation of workable, risk-based internal compliance programs and procedures for companies in a wide range of industries.

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Lloyd advises clients on compliance with the International Traffic in Arms Regulations administered by the US Department of State, and the Export Administration Regulations administered by the Department of Commerce. He has assisted in conducting internal investigations and compliance audits, drafting export licenses and Technical Assistance Agreements, developing comprehensive compliance programs and drafting voluntary disclosures. Lloyd also advises on trade sanctions administered by the Treasury Department’s Office of Foreign Assets Control. He has experience drafting license applications for sanctioned countries and parties, conducting internal investigations into potential sanction violations, drafting voluntary disclosures, and conducting due diligence ahead of mergers and acquisitions. A Certified Fraud Examiner and former police detective, Lloyd also conducts complex internal investigations on behalf of clients into potential violations of various regulations. He has interviewed witnesses and subjects, reviewed large volumes of data for relevant evidence, analyzed complex regulatory requirements and prepared investigative reports provided to government agencies.

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Joseph Schoorl is an associate in the Washington, DC office. Prior to joining the Firm, he worked as a clerk in the spring of 2012 and as a summer associate in 2011 at Baker McKenzie. In addition, he interned with the Department of Commerce’s Office of Chief Counsel for Industry and Security. He advises US and non-US companies on licensing, enforcement actions, internal investigations and compliance audits, mergers and acquisitions and other cross-border transactions, and on the design, implementation, and administration of compliance programs. Mr. Schoorl's practice focuses on international trade. He advises clients on compliance with US export controls, trade and economic sanctions, and anti-boycott controls.

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