Congress Seeks to Force (and Tie) President’s Hand on Sanctions Through Passage of Significant New Law Codifying and Expanding U.S. Sanctions on Russia, North Korea, and Iran

July 28, 2017

Last month, we wrote to you about a "Blockbuster Week in U.S. Sanctions" during which the Senate overwhelmingly approved of a bill that would expand sanctions imposed against Iran and Russia.[1]  Since then, the Senate bill proceeded to the House, where it was held for a little over a month, reportedly due to a "blue slip" violation—that is, a violation of the Constitutional provision requiring revenue provisions to originate in the House.  This past week, the House introduced and overwhelmingly approved a version of that bill, titled the "Countering America’s Adversaries through Sanctions Act," by a vote of 419-3.[2]  Two days later, on July 27, the Senate voted to pass the House version of the bill by a vote of 98-2.  The Trump administration has not yet committed to signing the bill into law, expressing some concerns about provisions in the bill that purport to limit the President’s ability to terminate or waive sanctions.  But even if President Trump were to veto the bill, it would still likely be enacted, given the overwhelming congressional support for the bill. 

During the month that the bill—now "H.R. 3364"—was held in the House, two developments led to significant changes in the bill.  First, on July 4, 2017, North Korea for the first time successfully tested an intercontinental ballistic missile.  On July 14, House Majority Leader Keven McCarthy announced his intention to add a North Korea sanctions bill, which had been previously passed by the House,[3] to the Iran-Russia sanctions bill.  H.R. 3364 ultimately included a slightly modified version of the North Korea sanctions bill that had previously passed the House. 

The other major development was that, during the month the sanctions bill was held in the House, U.S. and European business and policy leaders expressed concerns about certain provisions in the Russia-related portion of the bill.  Leaders from the U.S. business and foreign policy communities, particularly from the U.S. energy industry, expressed concerns that certain provisions in the bill could have an adverse impact on U.S. businesses and workers—perhaps, ironically, to the benefit of Russian business interests.  Leaders from the European business and foreign policy communities expressed concerns that the bill could weaken the business and diplomatic ties between the United States and Europe—again, perhaps, to the benefit of Russia.  In response to these concerns, several small but significant changes were made to the bill.

This client alert details those changes and how they fit within the context of the bill’s likely overall effects on the Iranian, Russian, and North Korean sanctions programs.

Iran

Title I of H.R. 3364, titled the "Countering Iran’s Destabilizing Activities Act of 2017" ("CIDA"), imposes an additional set of significant sanctions against Iran.[4]  CIDA targets Iran’s ballistic missile program, the Iranian Revolutionary Guard Corps, Iranian human rights abuses, and weapons transfers benefitting Iran.[5]  The bill also codifies the designations of persons pursuant to two executive orders and purports to limit the President’s ability to remove those persons from the Specially Designated Nationals ("SDN") list.[6]  Although the Trump administration continues to criticize the Joint Comprehensive Plan of Action ("JCPOA") negotiated by the United States, the other permanent members of the U.N. Security Council, Germany and the European Union, these new sanctions do not undo or violate the JCPOA.   

The provisions in the version of CIDA passed by Congress remain substantially identical to the Iran-related provisions in the bill as originally passed by the Senate.  For a more detailed look at these provisions, consult our June 19 client alert, A Blockbuster Week in U.S. Sanctions.

Russia

Title II of H.R. 3364, titled the "Countering Russian Influence in Europe and Eurasia Act of 2017" ("CRIEEA"), imposes a significant set of sanctions against the Russian Federation.  These sanctions are likely to have a wide-ranging impact on persons worldwide doing business with entities in the targeted sectors of the Russian economy. 

The sanctions to be imposed under CRIEEA would be a dramatic expansion of what is already a complex sanctions and export control regime.  CRIEEA would codify President Obama’s executive orders imposing sanctions on Russia and also imposes new sanctions on additional activities and sectors of the Russian economy.  The bill also imposes new restrictions on the President’s ability to terminate or waive the sanctions that President Obama imposed on Russia and any new sanctions President Trump imposes on his own volition or as required by CRIEEA.

After the Senate passed the initial version of the sanctions bill, leaders from the U.S. and European business and foreign policy communities expressed concerns that the sanctions would, in several ways, have unintended adverse consequences on U.S. economic and diplomatic policy interests.  In response to these concerns, several significant changes were made to the bill, as detailed below. 

Codification and Expansion of Sectoral Sanctions

As noted in our June client alert, the sanctions bill expands the targets of the sectoral sanctions, initially set forth in President Obama’s Executive Order 13662.  Rather than "blacklisting" designated targets, these sanctions prohibit persons from engaging in certain activities with designated persons within certain sectors of the Russian economy—namely, the finance, energy, and defense sectors. 

CRIEEA would expand the targeted sectors of the Russian economy to include state-owned entities in the railway, and metals and mining sectors.[7]  The initial Senate bill would also have added state-owned entities in the shipping sector to the targeted sectors,[8] but the shipping sector was not included in the House version of the bill that was passed by Congress.

CRIEEA would alter Directives 1 and 2 of the sectoral sanctions, which prohibit U.S. persons from issuing certain types of new debt to designated Russian entities.  Under the existing Directive 1, U.S. persons are prohibited from financing new debt with a maturity longer than 30 days to designated entities in Russia’s financial services sector; CRIEEA would alter Directive 1 by reducing the maximum permitted maturity on new debt from 30 days to 14 days.[9]  Under the existing Directive 2, U.S. persons are prohibited from financing new debt with a maturity longer than 90 days to designated entities in Russia’s energy sector; CRIEEA would alter Directive 2 by reducing the maximum permitted maturity on new debt from 90 days to 60 days.[10]  (The initial Senate bill would have reduced the maturity to 30 days, but this was revised to 60 in the House bill.)[11]  These sanctions will increase the difficulty that those designated in the financial and energy sectors already face in financing and using debt in their day-to-day business operations.

The more significant changes to the Russian sectoral sanctions program are found in CRIEEA’s expansion of Directive 4.  The existing Directive 4 prohibits the provision of goods, support, or technology to designated Russian entities relating to the exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation.[12]  The expanded Directive 4 under CRIEEA removes this geographic limitation, and instead targets the specified types of oil projects worldwide in which a designated Russian person has a "controlling interest or a substantial non-controlling ownership interest in such a project defined as not less than a 33 percent interest."[13]

The language specifying the threshold at which the involvement of a designated person triggers Directive 4 was added to the House version of the bill.  The initial version of CRIEEA would have prohibited U.S. persons from supporting such projects if a designated Russian entity had any involvement in the project, regardless of whether the project was capable of producing oil in the Russian Federation.  This version of the bill prompted much concern in the U.S. energy sector, as it would have prohibited U.S. persons from taking part in any deepwater, Arctic offshore, or shale project, worldwide, in which a designated Russian firm had even a minimal amount of involvement.  Ironically, the initial Senate bill could have allowed Russia to "weaponize" the sanctions to drive out U.S. interests from oil exploration and production projects. 

The revised bill tempers this possibility by imposing a threshold below which involvement of a Russian entity does not trigger the prohibitions of Directive 4.  Nevertheless, some uncertainty remains in the version of Directive 4 passed by Congress, particularly with respect to the definition of "controlling interest."  Seeking to provide some clarity, Representatives Pete Sessions and Ed Royce engaged in a colloquy on the floor of the House, specifying their understanding that "controlling" would mean "the power to direct, determine, or resolve fundamental, operational, and financial decisions of an oil project through the ownership of a majority of the voting interests of the oil project."[14]  

A second notable revision to CRIEEA’s expanded Directive 4 is the addition of the qualifier that the expanded Directive 4 will only apply to new deepwater, Arctic offshore, and shale projects.[15]  This qualification clarifies that the Directive will not require U.S. energy businesses already engaged in projects that could be covered under the expanded Directive 4 to divest from such projects.

The version of CRIEEA passed by Congress also clarifies that the expanded Directives 1 and 2 will take effect 60 days after the enactment of the bill into law.[16]  The expanded Directive 4 will take effect 90 days after the enactment of the bill into law.[17]

Imposition of Secondary Sanctions

As noted in our June client alert discussing the initial Senate version of CRIEEA, the willingness of the United States to impose so-called "secondary sanctions" on foreign persons and companies for conduct that may have no jurisdictional connection to the United States is a historical point of contention between the United States and its allies.  Foreign persons that engage in prohibited activities under secondary sanctions can be effectively cut off from access to the goods, services, and financing of the U.S. market. 

CRIEEA authorizes or mandates secondary sanctions with respect to several activities.  The secondary sanctions provision in CRIEEA that received the most attention in the U.S. and European business communities was Section 232, which would authorize, but not require, the President to impose a set of secondary sanctions on any person providing a certain level of support to Russian energy export pipeline projects.[18]  European business and policy leaders objected to the bill’s targeting of energy projects such as the Nord Stream 2 pipeline, in which several large European companies are involved and which is viewed by many European leaders as an essential part of Europe’s long-term energy future.  U.S. businesses feared that Section 232 could result in the imposition of sanctions on the subsidiaries of foreign companies that invest in Russian energy export pipelines, such as the Nord Stream 2 project.

These concerns appear to have affected change in the version of the bill that was passed by Congress, under which the President is only authorized to impose sanctions under Section 232 "in coordination with allies of the United States."[19]  Notably, Congress also revised an earlier portion of the bill to note that it is the "sense of Congress" that the President "should continue to uphold and seek unity with European and other key partners on sanctions implemented against the Russian Federation."[20]  These additions seemingly recognize the important role that the European Union plays in enforcing and imposing sanctions on Russia—indeed, it was in cooperation with the European Union that the sectoral sanctions imposed against Russia were implemented.  Given the potential adverse effects the sanctions under Section 232 could have on the European Union, the requirement that the President only impose such sanctions "in coordination with allies of the United States" substantially reduces the likelihood that secondary sanctions under Section 232 will be imposed.  In addition to this change, a small fix to Section 232 clarified that only Russian energy export pipeline projects—not all Russian energy pipeline projects—would be targeted if Section 232 were implemented.

The bill passed by Congress, like the initial Senate bill, requires the President to impose secondary sanctions on persons that engage in significant transactions with persons that are part of, or operate for or on behalf of, the defense or intelligence sectors of the Russian Federation.[21]  In a slight change from the initial Senate bill, the bill as passed allows the President to delay the imposition of these sanctions against a person that is reducing the number of transactions covered under these sanctions.  Moreover, the bill as passed requires the President to issue regulations further specifying which persons "are part of, or operate for or on behalf of, the defense and intelligence sectors of the Russian Federation."[22]

Several other provisions requiring the imposition of secondary changes in the bill as passed remain substantially unchanged from the initial Senate Bill.  CRIEEA requires the President to impose sanctions on persons materially supporting certain efforts to undermine cybersecurity, persons investing in or otherwise facilitating the privatization of Russia’s state-owned assets, persons providing certain types of support to the government of Syria, and persons evading sanctions.[23]

The menu of 12 possible secondary sanctions that can be imposed on persons violating the secondary sanctions provisions also remains substantially unchanged from the initial Senate version.[24]  For an in-depth look at these possible sanctions, consult our client alert, A Blockbuster Week in U.S. Sanctions.

Other Sanctions

Other sanctions measures in CRIEEA were substantially unchanged between the initial and final versions of the bill.  The bill as passed, like the initial Senate bill, requires the President to impose sanctions on persons engaged in, materially supporting, or providing financial services in support of "significant activities undermining cybersecurity of any person . . . on behalf of the Russian Federation."[25]  Notably, on the same day that the Senate passed the initial version of CRIEEA, the EU announced it would be prepared to impose sanctions against "state and non-state actors" as part of a broader policy of combatting malicious cyber activity.[26]

CRIEEA also amends the Ukraine Freedom Support Act ("UFSA") by making it mandatory—"unless the President determines that it is not in the national interest of the United States"—that the President impose sanctions on any person that "knowingly makes a significant investment" in a "special Russian crude oil project," which is defined as "a project intended to extract crude oil from—(A) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (B) Russian Arctic offshore locations; or (C) shale formations located in the Russian Federation."[27]  CRIEEA similarly modifies other parts of the UFSA to make additional sanctions mandatory rather than permissive.[28] 

Limitations on President’s Ability to Terminate or Waive Sanctions

One of the most unusual aspects of CRIEEA is the extent to which it seeks to limit the President’s discretion to waive or terminate the sanctions or issue licenses that would "significantly alter[] United States’ foreign policy with regard to the Russian Federation."[29]  Under CRIEEA, before undertaking these actions, the President must first submit a report justifying the action to Congress, which then normally has 30 days to review the report.[30]  Congress can pass a "joint resolution of disapproval" during this time, which, once passed by Congress, restricts the President from taking the described action for a period of 12 days.[31]  If the President then vetoes the joint resolution of disapproval, he is still restricted from taking the action for an additional 10 days.[32]  If the joint resolution of disapproval is ultimately enacted (presumably through a vote overriding the President’s veto), the President cannot take the action.[33] 

The constitutionality of these provisions is uncertain, given the restrictions on the President’s discretion and, perhaps more problematically, the potential distortion of the constitutional processes for the enactment of legislation.  Nevertheless, these provisions signal Congress’s intention to take an active role in ensuring the vigorous enforcement of sanctions against Russia. 

One significant change between the initial version of the bill and the bill as passed concerns the President’s ability to issue licenses under the Russian sanctions.  The bill requires the President to submit a report for congressional review whenever he engages in a "licensing action that significantly alters United States’ foreign policy with regard to the Russian Federation."[34]  Notably, however, the bill as passed by Congress contains a "Rule of Construction" clarifying that the bill "shall not be construed to require the submission of a report . . . with respect to the routine issuance of a license that does not significantly alter United States foreign policy with regard to the Russian Federation."[35]  This is a significant addition to the bill, in that it leaves the President with substantial latitude to issue licenses authorizing activities that would otherwise result in sanctions being imposed.  For instance, one concern raised by U.S. companies was that U.S. subsidiaries could be subject to sanctions under the bill’s secondary sanctions provisions—not because of any activities the subsidiaries were themselves involved in, but rather because of the activities of their foreign parent companies.  Under the Office of Foreign Asset Control’s 50% rule, any entity that is more than 50% owned by a sanctioned entity is also treated as a sanctioned entity, and thus the activities of a foreign parent company could, in theory, result in a U.S. subsidiary being sanctioned, even if the U.S. subsidiary engaged in no sanctionable activities.  The revision to the bill ensuring that the President retains his ability to issue routine licenses leaves open the possibility that the President could issue a license protecting the U.S. subsidiaries of sanctioned entities from being sanctioned under the 50% rule. 

North Korea

On July 4, 2017, North Korea tested an intercontinental ballistic missile for the first time.  Following this missile test, additional sanctions against North Korea were added to the sanctions bill targeting Iran and Russia.  These additional sanctions are located in Title III of the bill, titled the "Korean Interdiction and Modernization of Sanctions Act" ("KIMSA").[36] 

Under KIMSA, which is, in essence, a modified form of a bill passed by the House last March, the list of sanctionable activities with respect to North Korea is expanded.  Under KIMSA, the President must designate persons that engage in:

  • purchasing or acquiring any of various precious metals from North Korea;[37]
  • selling or transferring rocket, aviation or jet fuel to North Korea;[38]
  • providing fuel or supplies for designated North Korean vessels or aircrafts;[39]
  • providing insurance services for vessels owned or controlled by the North Korean regime;[40] and
  • maintaining a correspondent account with any North Korean financial institution.[41] 

KIMSA also expands the list of activities triggering discretionary designations.  Under KIMSA, the President may designate persons that engage in:

  • purchasing or acquiring significant quantities of coal, iron, or iron ore from the government of North Korea;[42]
  • purchasing or acquiring significant amounts of textiles from the government of North Korea;[43]
  • facilitating a transfer of funds or property of the government of North Korea that materially contributes to any violation of an applicable United Nations Security Council Resolution;[44]
  • transferring a significant amount of bulk cash, precious metals, gemstones, or other stores of value to or from the government of North Korea;[45]
  • selling, transferring, or providing significant amounts of oil or natural gas to the government of North Korea;[46]
  • engaging in or facilitating the online commercial activities of North Korea, including online gambling;[47]
  • purchasing or acquiring fishing rights from the government of North Korea;[48]
  • purchasing or acquiring significant types or amounts of food or agricultural products from the government of North Korea;[49]
  • engaging in, facilitating, or being responsible for the exportation of workers from North Korea in a manner intended to generate significant revenue for the government or ruling party of North Korea;[50]
  • conducting a significant transaction in North Korea’s transportation, mining, energy, or financial services industries;[51] and
  • facilitating the operation of any branch, subsidiary, or office of a North Korean financial institution.[52] 

The bill also takes steps to strengthen measures aimed at North Korean correspondent accounts,[53] the North Korean shipping sector,[54] and North Korea’s use of forced labor.[55]  Finally, the bill requires the Secretary of State to submit a determination as to whether North Korea meets the criteria for designation as a state sponsor of terrorism.[56] 

These sanctions are a signal that Congress is continuing to search for ways to isolate the North Korean regime and limit its ability to finance its operations.  Given the broad range of criteria these sanctions now introduce for mandatory or discretionary sanctions designations, KIMSA will enable the President to impose sanctions on many Chinese companies and persons that have historically provided the specified kinds of support to North Korea.  We expect the Chinese government to have a strong reaction to this expansion of North Korean sanctions either upon enactment of the bill or once the President begins to designate Chinese entities under the law.

Conclusion

The overwhelming congressional support for expanded sanctions on Iran, Russia, and North Korea underscores the extent to which there exists a political appetite for the extensive use and vigorous enforcement of sanctions as a tool of foreign policy.  It also signals Congress’s appetite for taking a direct role in the imposition of sanctions, potentially setting up a conflict with the executive branch over the proper scope of Congress’s role in foreign policy. 

Historically, the U.S. sanctions regime has been shaped by the competing demands of the Executive and Legislative branches.  Once codified, it has been tremendously difficult to muster congressional support for further modification of the law.  For this reason, the sanctions relief offered by the JCPOA takes the form of a complicated licensing scheme designed to permit activities otherwise prohibited by various statutes.  In passing the new Iran, Russia and North Korea sanctions, Congress has made it significantly more difficult to modify U.S. sanctions policy, setting the stage for a similarly arduous process of retooling policies if and when these regimes change.   

As the sanctions legislation makes it way towards the President’s desk and potential enactment into law, risks abound for entities and individuals with cross-border exposure, given the rapidly changing nature of sanctions policies and priorities. 

The Gibson Dunn team will continue to provide frequent updates on this and any other sanctions programs that may receive alterations or enhancements in the time ahead.


  [1]   See Countering Iran’s Destabilizing Activities Act of 2017, S. 722, 115th Cong. (2017), available at https://www.congress.gov/115/bills/s722/BILLS-115s722es.pdf (initial Senate bill).

   [2]   Countering America’s Adversaries Through Sanctions Act, H.R. 3364, 115th Cong. (2017), available at https://www.congress.gov/115/bills/hr3364/BILLS-115hr3364eh.pdf (bill as passed).

  [3]   See Korean Interdiction and Modernization of Sanctions Act, H.R. 1644, 115th Cong. (2017), available at https://www.congress.gov/115/bills/hr1644/BILLS-115hr1644rfs.pdf (prior House bill).

  [4]   H.R. 3364, § 101.

  [5]   See id. §§ 104-107.

  [6]   See id. §§ 108, 112 (referring to Executive Orders 13382 and 13224).

  [7]   Id. § 223(a).

  [8]   S. 722 § 223(a).

  [9]   H.R. 3364, § 223(b).

[10]   Id. § 223(c).

[11]   S. 722 § 223(c).

[12]   OFAC, Directive 4 under Executive Order 13662, available at https://www.treasury.gov/resource-center/sanctions/Programs/Documents/eo13662_directive4.pdf.

[13]   H.R. 3364, § 223(d).

[14]   163 Cong. Rec. H6217, 6265 (daily ed. July 25, 2017) (statement of Rep. Sessions).

[15]   H.R. 3364, § 223(d).

[16]   See id. § 223(b)-(c).

[17]   See id. § 223(d).

[18]   See id. § 232.

[19]   Id.

[20]   See id. § 212.

[21]   Id. § 231.

[22]   See id. § 231(c)-(d).

[23]   See id. §§ 224(a)(2) (cybersecurity), 228 (evasion), 233(a) (state-owned assets), 234 (Syria).

[24]   See id. § 235.

[25]   Id. § 224(a).

[26]   Press Release, Council of the European Union, "Cyber attacks: EU ready to respond with a range of measures, including sanctions," available at http://www.consilium.europa.eu/press-releases-pdf/2017/6/47244660913_en.pdf.

[27]   H.R. 3364, § 225.

[28]   See id. § 226.

[29]   Id. § 216(a)(2)(A)(iii).

[30]   Id. § 216(b)(1).  Congress has 60 days if the report is submitted between July 10 and September 7.

[31]   Id. § 216(b)(4).

[32]   Id. § 216(b)(5).

[33]   Id. § 216(b)(6).

[34]   Id. § 216(b)(1).

[35]   Id. § 216(a)(6).

[36]   Id. § 301.

[37]   Id. § 311(a)(10).

[38]   Id. § 311(a)(11).

[39]   Id. § 311(a)(12).

[40]   Id. § 311(a)(13).

[41]   Id. § 311(a)(14).

[42]   Id. § 311(b)(1)(D).

[43]   Id. § 311(b)(1)(E).

[44]   Id. § 311(b)(1)(F).

[45]   Id. § 311(b)(1)(G).

[46]   Id. § 311(b)(1)(H).

[47]   Id. § 311(b)(1)(I).

[48]   Id. § 311(b)(1)(J).

[49]   Id. § 311(b)(1)(K).

[50]   Id. § 311(b)(1)(L).

[51]   Id. § 311(b)(1)(M).

[52]   Id. § 311(b)(1)(N).

[53]   Id. § 312.

[54]   Id. § 315.

[55]   Id. § 321.

[56]   Id. § 324.

 


The following Gibson Dunn lawyers assisted in preparing this client update: Judith Alison Lee, Michael Bopp, Adam Smith, Henry Phillips, Stephanie Connor, and Christopher Timura.

Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the above developments.  Please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s International Trade Group:

United States:
Judith A. Lee – Co-Chair, International Trade Practice, Washington, D.C. (+1 202-887-3591, jalee@gibsondunn.com)
Ronald Kirk – Co-Chair, International Trade Practice, Dallas (+1 214-698-3295, rkirk@gibsondunn.com)
Michael D. Bopp – Co-Chair, Public Policy Practice, Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com)
Caroline Krass – Chair, National Security Practice, Washington, D.C. (+1 202-887-3784, ckrass@gibsondunn.com)
Alexander H. Southwell – Chair, PCCP Practice, New York (+1 212-351-3981, asouthwell@gibsondunn.com)
Jose W. Fernandez – New York (+1 212-351-2376, jfernandez@gibsondunn.com)
Marcellus A. McRae – Los Angeles (+1 213-229-7675, mmcrae@gibsondunn.com)
Daniel P. Chung – Washington, D.C. (+1 202-887-3729, dchung@gibsondunn.com)
Adam M. Smith – Washington, D.C. (+1 202-887-3547, asmith@gibsondunn.com)
Christopher T. Timura – Washington, D.C. (+1 202-887-3690, ctimura@gibsondunn.com)
Stephanie L. Connor – Washington, D.C. (+1 202-955-8586, sconnor@gibsondunn.com)
Kamola Kobildjanova – Palo Alto (+1 650-849-5291, kkobildjanova@gibsondunn.com)

Europe:
Peter Alexiadis – Brussels (+32 2 554 72 00, palexiadis@gibsondunn.com)
Attila Borsos – Brussels (+32 2 554 72 10, aborsos@gibsondunn.com)
Patrick Doris – London (+44 (0)207 071 4276, pdoris@gibsondunn.com)
Penny Madden – London (+44 (0)20 7071 4226, pmadden@gibsondunn.com)
Benno Schwarz – Munich (+49 89 189 33 110, bschwarz@gibsondunn.com)
Mark Handley – London (+44 (0)207 071 4277, mhandley@gibsondunn.com)


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