Russia Sanctions Under CAATSA: A Quick Reference Guide

December 1, 2017 Advisory

On August 2, 2017, the President signed into law the Countering America's Adversaries Through Sanctions Act ("CAATSA"). The President subsequently delegated certain functions and authorities under CAATSA to the Secretary of State and others to Treasury. Although CAATSA included new sanctions on Iran, Russia, and North Korea, the Russia provisions are particularly wide-ranging and complex. This Quick Reference Guide highlights and summarizes the most significant Russia-related CAATSA provisions. The modifications to Executive Order 13622 Directives 1, 2, and 4 that were required by Section 223(b)-(d) have been implemented. The remaining provisions summarized below relate to sanctions that may or will be imposed against individuals and entities that have not yet been named. Sanctions designations typically do not provide for a grace- or wind-down period; therefore, businesses may wish to get ahead of risk by evaluating current customer, vendor, and partner profiles to identify entities that may be at risk of CAATSA sanctions in the future.

Section & Agency

Summary of Provision
(refer to original text for exact scope)

Summary of Guidance

223(a)Treasury

Permits sanctions on any "state-owned entity operating in the railway or metals and mining sector of the Russian economy."

https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#539

FAQ 539: Section 223(a) sanctions are discretionary. "[M]aintaining unity with partners on sanctions implemented with respect to the Russian Federation is important to the U.S. government … [and] the United States will continue to work closely with our allies to address unintended consequences arising as a result of such sanctions."

223(b)-(d)Treasury

Requires modification of existing Russia sectoral sanctions (Directives 1, 2 and 4 of Executive Order 13622)

§ Maturity period reduced to 14 days for Directive 1

§ Maturity period reduced to 60 days for Directive 2

§ Scope of Directive 4 expanded to include deepwater, Arctic offshore, or shale projects: (i) that are initiated on or after January 29, 2018; (ii) that have the potential to produce oil in any location; and (iii) in which any person subject to Dir. 3, their property, or their interests in property (a) has a 33% or greater ownership interest, or (b) owns a majority of the voting interests.

https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#ukraine

Numerous FAQs issues on Directives 1-4 since initial issuance. Recent additions address many questions about application of the maturity periods in Directives 1-3 and the scope of Directive 4, including:

FAQ 394: Drawdowns/disbursements with repayment terms longer than the period specified in the relevant Directive are permitted if the terms – including repayment period, interest rate, and maximum draw – were contractually agreed before the sanctions effective date.

FAQ 412: Prohibited services include drilling, geophysical, geological, logistics, management, modeling and mapping services, but do not include financial services, e.g., clearing transactions or providing insurance. (But note separate Section 226 sanctions for foreign financial institutions engaging in "significant" transactions involving Russian deepwater, Arctic offshore or shale oil projects.)

FAQ 419: "Production" refers to the lifting of oil to the surface and gathering, treating, field processing, and field storage. Production ends when extracted oil is transported off a field production site and Directive 4 does not prohibit transactions relating only to oil that has already been extracted and transported off a field production site.

FAQ 536: A project is "initiated" for purposes of Dir. 4 when a government entity formally grants exploration, development, or production rights to any party.

FAQs 573 & 538: In determining whether a project is subject to Directive 4 due to SSI entity property interests, both the 50 Percent Rule and aggregation of SSI ownership interests apply. Thus, the prohibition applies to projects owned 33 percent or more in the aggregate by one or more Directive 4 SSI entities or entities owned 50 percent or more by such persons, and to projects in which one or more Directive 4 SSI entities or entities owned 50 percent or more by such persons own an aggregated majority of the voting interests.

224
Treasury

Requires sanctions on persons – including non-U.S. persons – who knowingly engage on behalf of Russia in "significant" activities undermining cybersecurity, as well as their owned/controlled entities, their agents, and those who provide goods, services, or material assistance in support of the prohibited activities.

No guidance issued. Key points from the text of CAATSA:

§ The President may waive implementation (i) in the vital national security interests of the United States or (ii) based on Russian certification of significant efforts to reduce Russian cyber intrusions.

§ Applicable sanctions vary between sanctions targets (perpetrators vs. subsidiaries vs. material supporters, etc.)

§ "Significant activities undermining cybersecurity'' include significant (i) destructive malware attacks; (ii) denial of service activities; (iii) efforts to deny access to or degrade, disrupt, or destroy an information and communications technology system or network; (iv) efforts to exfiltrate, degrade, corrupt, destroy, or release information from such a system or network without authorization for purposes of (a) conducting influence operations; or (b) causing a significant misappropriation of funds, economic resources, trade secrets, personal identifications, or financial information for commercial or competitive advantage or private financial gain.

225
State

Modifies Section 4(b)(1) of the Ukraine Freedom Support Act of 2014 (22 U.S.C. 8923) to require sanctions on foreign persons who make "significant" investments in "special Russian crude oil projects."


 

https://www.state.gov/e/enr/275194.htm:

§ "[S]pecial Russian crude oil project" means a project intended to extract crude oil from: (i) the exclusive economic zone of the Russian Federation in waters more than 500 feet deep; (ii) Russian Artic offshore locations; or (iii) shale formations in the Russian Federation.

§ "Significant" investment: "[A]n investment is not significant [for Sec. 225 purposes] 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." Otherwise, significance depends on the totality of the circumstances, including impact on U.S. national security and foreign policy, size of the investment relative to the project's overall capitalization, and relation and significance of the investment to the Russian energy sector.

§ "Investment" may include arrangements where equity or right to profits/revenue is provided in exchange for goods or services

226
Treasury

Modifies Section 5 of the Ukraine Freedom Support Act of 2014 (22 U.S.C. 8924) to require restrictions on U.S. correspondent accounts of foreign financial institutions that engage in "significant" transactions involving:

(i) sale of Russian defense articles to Syria;

(ii) Russian deepwater/Arctic offshore/shale oil projects; or

(iii) Russian persons "included on" the SDN List pursuant to UFSA or any Executive Order addressing the crisis in Ukraine.

https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#sec_226

FAQs 541-543:

§ FFIs will not be sanctioned for facilitating significant financial transactions on behalf of SSI entities.

§ In determining "significance" for Sec. 226 purposes, OFAC will consider: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) any other factors Treasury deems relevant.

§ "Financial transactions" include any transfer of value involving a financial institution, including (i) receipt or origination of wire transfers; (ii) accepting or clearing commercial paper (including checks); (iii) receipt or origination of ACH or ATM transactions; (iv) holding of nostro, vostro, or loro accounts; (v) trade finance or letter of credit services; (vi) guarantees or similar instruments; (vii) investment products or instruments or participation in investments

§ "Facilitated" will be broadly interpreted to include: provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of personnel, software, technology, goods, or of other services of any kind.

§ FFIs sanctioned under this provision will be enumerated on a new list (to be published if and when such sanctions are imposed)

227
Treasury

Modifies Section 9 of the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (22 U.S.C. 8908(a)) to require sanctions on Russian government officials, their close associates and family members who are determined to be responsible for, or complicit in, "ordering, controlling, or otherwise directing, acts of significant corruption" in Russia or elsewhere, as well as those who materially assist.

No guidance issued.

228
Treasury

Modifies Sections 10 and 11 of the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014 (22 U.S.C. 8909) to require sanctions on foreign persons who, post-CAATSA:

(i) knowingly materially violate, attempt or conspire to violate, or causes a violation of UFSA,CAATSA, Ukraine EOs 13660, 13661, 13662, 13685, or Russia Cyber EOs 13694, 13757;

(ii) are responsible for, or complicit in, or materially assist serious human rights abuses in territory forcibly occupied or controlled by Russia, or are owned/controlled by or act for such persons;

(iii) knowingly facilitate "significant" transactions for or on behalf of parties subject to sanctions imposed by the U.S. with respect to the Russian Federation and their children, spouses, parents, or siblings

https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#sec_228

§ "Foreign person" is defined, by reference to 31 C.F.R. 595.304, as "any citizen or national of a foreign state (including any such individual who is also a citizen or national of the United States), or any entity not organized solely under the laws of the United States or existing solely in the United States, but does not include a foreign state." (Author's note – this definition is much broader than the traditional definition of "foreign person" as an individual/entity that is not a U.S. person.)

§ "Materially violate" means "egregious" violation as described in OFAC's Economic Sanctions Enforcement Guidelines, 31 C.F.R. 501, Appx. A.

§ "Facilitation for or on behalf of" sanctioned party means providing assistance for a transaction from which the sanctioned party derives a particular benefit (as opposed to a generalized benefit conferred upon undifferentiated persons in aggregate).

§ "Facilitation" will be broadly interpreted to include: provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of personnel, software, technology, goods, or of other services of any kind.

§ "Significant transaction": (i) a transaction is not significant for Sec. 228 purposes if U.S. persons would not require specific licenses from OFAC to participate in it; (ii) otherwise, in determining "significance" for Sec. 228 purposes, OFAC will consider: (1) the size, number, and frequency of the transaction(s); (2) the nature of the transaction(s); (3) the level of awareness of management and whether the transaction(s) are part of a pattern of conduct; (4) the nexus between the transaction(s) and a blocked person; (5) the impact of the transaction(s) on statutory objectives; (6) whether the transaction(s) involve deceptive practices; and (7) any other factors Treasury deems relevant.

§ Persons subject to sanctions imposed by the U.S. with respect to the Russian Federation includes persons sanctioned under the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014, the Ukraine Freedom Support Act of 2014, Ukraine EOs 13660, 13661, 13662, 13685, or Russia Cyber EOs 13694, 13757. Persons "subject to sanctions imposed by the United States with respect to the Russian Federation" include persons listed on either the SDN or SSI List, as well as persons subject to sanctions pursuant to OFAC's 50 percent rule.

§ SSI entities are within the scope of parties subject to sanctions imposed in connection with Russia, but non-deceptive transactions with SSI entities will not be considered significant

231
State

Requires sanctions on persons – including non-U.S. persons – who, on or after August 2, 2017 (the date that the CAATSA was enacted), knowingly engage in "significant transactions" with parties that are part of, or operating for or on behalf of, the Russian defense or intelligence sectors. Requires the President to issue guidance to specify the persons that are part of, or operate on behalf of, the Russian defense and intelligence sectors.[1]


 

https://www.state.gov/t/isn/caatsa/275118.htm

§ "Significant transaction": In determining "significance" for Sec. 231 purposes, State will consider: (1) the size of the transaction; (2) the nature of the transaction; (3) its significance to the Russian defense and intelligence sectors; (4) whether it has a significant adverse impact on U.S. national security and foreign policy interests; and (5) any other factors State deems relevant.

§ Focus will be on "significant transactions of a defense or intelligence nature"

§ Transactions likely will not be deemed significant if they have "purely civilian end-uses and/or civilian end-users" and do "not involve entities in the intelligence sector".

§ Transactions likely will not be deemed significant if they are "necessary to comply with rules and regulations administered by the Federal Security Service, or law enforcement or administrative actions or investigations involving the Federal Security Service," including FSS rules, regulations and fees for import, distribution, or use of information technology products.[2]

232
State

Authorizes sanctions against persons – including non-U.S. persons – who make significant investments related to Russian energy export pipelines or provide goods or services in support of their construction.

https://www.state.gov/e/enr/275195.htm

§ Sec. 232 sanctions are discretionary. State will coordinate with U.S. allies and seek to avoid designations that would endanger public health or safety or U.S. partners' energy security

§ Focus will be on investments and sale, lease or supply of goods/technology/services, as follows:

§ Sanctions will not apply to investments/loans in effect before Aug. 2, 2017

§ Sanctions will not target investments/activities related to standard repair and maintenance of pipelines in existence and capable of transporting commercial quantities as of Aug. 2, 2017

§ For the purposes of Section 232, a project is initiated when a contract for it is signed

233
Treasury

Requires sanctions against persons who, with actual knowledge, post-CAATSA, make or facilitate investments of $10,000,000 or more (as a lump or through aggregation of investments of at least $1M each over 12 months) where the investments directly and significantly contribute to the ability of the Russian Federation to privatize state-owned assets in a manner that unjustly benefits Russian officials or their close associates or family members.


 

https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_other.aspx#540

§ "Investment" will be broadly interpreted for Sec. 233 purposes as any transaction that constitutes a commitment or contribution of funds or other assets or a loan or other extension of credit to an enterprise, where a loan or extension of credit is any transfer or extension of funds or credit on the basis of an obligation to repay, or any assumption or guarantee of the obligation of another to repay an extension of funds or credit, including: overdrafts, currency swaps, purchases of debt securities issued by the Government of Russia, purchases of a loan made by another person, sales of financial assets subject to an agreement to repurchase, renewals or refinancings whereby funds or credits are transferred or extended to a borrower or recipient described in the provision, the issuance of standby letters of credit, and drawdowns on existing lines of credit.

§ "Facilitates" will be broadly interpreted to include: provision of currency, financial instruments, securities, or any other transmission of value; purchasing; selling; transporting; swapping; brokering; financing; approving; guaranteeing; the provision of personnel, software, technology, goods, or of other services of any kind.

§ "Unjustly benefits" will be broadly interpreted to refer to activities, such as public corruption, that result in any direct or indirect advantage, value, or gain, whether tangible or intangible. For example, misuse of Russian public assets or the misuse of public authority.

§ "Close associate" means a person who is widely or publicly known to, or actually known by the person making or facilitating the investment to, maintain a close relationship with the relevant official.

§ "Family member" includes parents, spouses (current and former), extramarital partners, children, siblings, uncles, aunts, grandparents, grandchildren, first cousins, stepchildren, stepsiblings, parents-in-law, and spouses of any of the foregoing.

234
Treasury

Requires sanctions on foreign persons who, post-CAATSA, knowingly provide the Syrian Government with significant financial, material, or technological support that materially contributes to the Syrian Government's ability to acquire or develop armaments, as well as on the foreign successor entities, foreign owned/controlled entities, and foreign agents of such persons.

No guidance issued. These sanctions target Syria, but are relevant to business with Russia in light of ongoing military cooperation between Russia and Syria.

UPDATE, February 2018: On January 29, 2018, pursuant to CAATSA Section 241, Treasury delivered to Congress a list of senior political figures, oligarchs, and parastatal entities of the Russian Federation. Per new FAQ #552 , "[t]his report is not a ‘sanctions list'" and "inclusion … does not, in and of itself, imply, give rise to, or create any restrictions, prohibitions, or limitations on dealings with such persons." However, according to a Treasury press release citing testimony to a Senate Committee, "Secretary Mnuchin has made clear that Treasury is using this report to inform future targeted sanctions, and ‘there will be sanctions that come out of this." Businesses may wish to update their assessments of possible future risk areas and red flag processes accordingly.


[1] On October 27, 2017, the State Department issued guidance to specify persons that are part of, or operating for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation ("Section 231 Guidance"). Because this is not a sanctioned party list, these entities may not be flagged by companies' existing sanctions screening protocols and new procedures may be necessary to identify and avoid "significant" transactions involving such entities.

[2] Russia's Federal Security Service (a.k.a. Federalnaya Sluzhba Bezopasnosti, a.k.a. FSB) was designated as a Specially Designated National on December 28, 2016 pursuant to Executive Order 13757. Persons subject to U.S. jurisdiction are therefore generally prohibiting from transacting with FSB, although a general license now authorizes, under certain circumstances, requesting, receiving, using, paying for, or dealing in licenses, permits, certifications, or notifications issued or registered by FSB for the import, distribution, or use of information technology products in the Russian Federation.