On August 2, 2017, President Trump signed into law the Countering American’s Adversaries Through Sanctions Act (the “Act”). Passed by overwhelming bipartisan majorities in both Houses of Congress, the Act combines several different pieces of legislation and expands current sanctions on Russia, Iran, and North Korea. The Act, in particular, enhances current sanctions against Russia, requiring the president to impose certain additional measures in the Russia defense, financial, and energy sectors, while codifying into law the Russia sanctions measures already in place (which had been implemented pursuant to executive action), and imposing a complex legislative mechanism to allow Congress to review and disapprove significant changes to the Russia sanctions regime. The Act also imposes additional nonnuclear related sanctions against Iran, including requiring the designation of the Islamic Revolutionary Guard Corps (“IRGC”) under terrorism-related sanctions, and steps up sanctions against North Korea with new measures that target the shipping, aviation, and metals sectors. U.S. persons are already broadly prohibited from engaging in transactions with Iran and North Korea, directly or indirectly, so the main impact of the Act with respect to these countries will be from new “secondary” sanctions, which allow for the imposition of sanction measures on non-U.S. persons for activities outside of U.S. jurisdiction.

On the same day as signing, President Trump issued two statements on the Act (here and here). While supporting the Iran and North Korea measures in the Act, the president expressed criticism of some of the Russia-related provisions, arguing that Congress has interfered with his ability to negotiate any future agreements with the Russian government related to sanctions and that the congressional review mechanism may be unconstitutional. Given this viewpoint, it remains uncertain to what extent the president will exercise his new discretionary authority or vigorously enforce the congressional requirements to impose or tighten sanctions, under the Act. However, even if the president elects not to implement or vigorously enforce certain of the provisions, the overall effect of the Act may be to discourage parties (especially non-U.S. persons) from exploring opportunities in sectors of the Russian economy that could be impacted by these sanctions in the future.

The following is a brief summary of the key provisions of the Act. Attached is a more detailed discussion of those key provisions.

Russia Sanctions

• Expansion of prohibitions under Directives 1 and 2 of Executive Order 13662 on U.S. persons transacting in new debt of Russian entities in the financial and energy sectors designated under specific sectoral sanctions;
• Expansion of the prohibition (from Russia to worldwide) under Directive 4 of Executive Order 13662 on certain U.S. person transactions with designated Russian entities in the energy sector with respect to deepwater, Arctic offshore, and shale projects that have the potential to produce oil;
• Authorization of secondary sanctions on any persons in connection with the development of energy export pipelines in Russia, the corrupt privatization of state-owned assets in Russia, or transactions with the intelligence and defense sectors of the Russian government;
• Mandating the imposition of sanctions that previously were discretionary in connection with: investments in Russian crude oil projects, opening or maintaining correspondent accounts of certain Russian restricted parties, and involvement in significant acts of corruption or serious human rights abuses in Russia; and
• Codification of current Russian sanctions (including current designations of persons) and imposition of a process for congressional review of significant changes to Russian sanctions regime.

Iran Sanctions

• Authorization of additional sanctions on any persons materially contributing to Iran’s ballistic missile program or supplying military equipment to Iran;
• Imposition of terrorist sanctions on the IRGC as well as IRGC officials, agents, and affiliates; and
• Imposition of sanctions on persons responsible for human rights abuses in Iran.

North Korea Sanctions

• Expansion of mandatory sanctions to cover certain North Korea-related transactions by any person with respect to: precious metals, ores, and rare earth minerals; rocket, aviation, and jet fuel; insuring or registering vessels; and maintenance of correspondent accounts;
• Expansion of discretionary sanctions to cover certain North Korea-related transactions involving coal, iron, iron ore, textiles, crude oil and refined petroleum products, fund and property transfers, online commercial activity, food and agricultural products, fishing rights, exportation of workers, and the transportation, extractive, and financial services industries; and
• Expansion of the prohibition on U.S. assistance to foreign governments that provide military-related assistance to the North Korean government.

Of course, given the limited trade activities involving North Korea, the most consequential provisions of the Act relate to Russia and Iran. Although a substantial part of the Russian sanctions provisions is directed to a codification of existing sanctions, as noted above, new categories of Russian companies subject to blocking sanctions are added; existing restrictions on certain transactions by U.S. persons with designated Russian companies in the financial, defense, and energy sectors are tightened; and the potential categories of transactions that can give rise to secondary sanctions are expanded. The provisions of the Act relating to Iran, given the continuation of the U.S. primary embargo restricting U.S. persons’ dealings with Iran, principally directly affect non-U.S. persons by adding categories of Iranian persons subject to blocking sanctions and of activities by non-U.S. persons involving Iran that can lead to blocking or secondary sanctions. However, because of the potential reverberating effect of blocking and secondary sanctions, the expanded Iran sanctions may also have at least an indirect impact on U.S. persons. As such, provisions of the Act can impact U.S. as well as non-U.S. companies and bear further evaluation by any person doing business with Russia or Iran or with persons doing business with those countries.

For example, in the case of Russia, because of the shortening of the debt term restrictions applicable to persons designated under Directives 1 and 2, even permissible commercial transactions with those persons may become problematic. Office of Foreign Assets Control (“OFAC”) has interpreted “debt” to include deferred payment terms, so the Act will significantly impact U.S. persons engaged in the sale of goods, technology, software, and services, directly or indirectly, to an entity designated under those Directives.

Also, in the case of Russia, the restrictions on U.S. persons engaging in activities (including as a supplier) in support of projects that have the potential to produce oil and that involve companies in Russia designated under Directive 4 will no longer be limited to projects only in Russia and will now apply to new oil projects involving those companies anywhere in the world, including any project in which they have an ownership interest of at least 33 percent. It is not yet clear what OFAC will consider to be a “new” project.

In the case of the new or expanded blocking provisions, in certain instances the Act also provides for the blocking of persons that provide supplies or financial support to the blocked entities and the expanded secondary sanctions may result in penalties imposed against non-U.S. persons in connection with additional types of transactions with Russia and Iran. Both of these categories of expanded sanctions can create risks and due diligence considerations for any company, including a U.S. company, dealing with persons that, in turn, engage in the types of transactions with Russia or Iran that could lead to blocking and secondary sanctions.

Finally, non-U.S. companies engaged in transactions in North Korea should be mindful of the North Korea-related provisions under the Act, which expand secondary sanctions for various categories of transactions that have no nexus to the United States.

* * *

We expect to issue further alerts as significant developments occur in connection with the implementation of the Act.