State Department Releases Russia Sanctions Guidelines in Implementation of CAATSA

The U.S. State Department released guidance on Friday, October 28, regarding the implementation of certain sanctions targeting activities involving Russia’s intelligence and defense sectors as part of the Trump Administration’s obligations under the Countering America’s Adversaries Through Sanctions Act (“CAATSA”), which became law in August 2017. 

This action does not impose any new sanctions against any Russian entities but provides insight into the types of activities that could result in the imposition of sanctions against persons that engage in transactions involving entities in the Russian defense and intelligence sectors. 

Identification of Russian Defense and Intelligence Entities 

CAATSA, which was enacted on August 2, 2017, contained various measures that either required – or authorized – sanctions related to Russia, North Korea, and Iran. Sec. 231 of CAATSA requires the President to impose sanctions against persons that engage in “significant transactions” with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation. Sec. 231 required the President to issue guidance identifying the specific persons who are part of, or operate for or on behalf of, the Russian defense and intelligence sectors within 60 days of the law’s enactment (i.e., by October 1, 2017). 

The guidance issued by the State Department is intended to fulfill this requirement (available here). It identifies approximately 40 entities determined to be part of, or operate for or on behalf of, the Russian defense and intelligence sectors. The list includes many prominent Russian companies, many of which already are targeted under U.S. sanctions through the U.S. List of Specially Designated Nationals (“SDN List,” e.g., Kalashnikov Concern, United Shipbuilding Corporation, Federal Security Service) or the U.S. Sectoral Sanctions Identification list (“SSI List,” e.g., Rostec, Oboronprom). Being named on the list does not mean that the entity is being or will be added to the SDN or SSI Lists or otherwise targeted under U.S. sanctions – the list is meant only to identify entities which the U.S. Government has determined meet the criteria as a person who is part of, or operating for or on behalf of, Russia defense and intelligence sectors under Sec. 231 of CAATSA. 

Guidance on “Significant Transactions” 

The President is required to impose sanctions against persons that engage in “significant transactions” with the identified Russian defense and intelligence-related entities starting from 180 days after the enactment of CAATSA (i.e., the end of January 2018). The State Department provided some guidance as to the nature of activities that could result in sanctions under Sec. 231: 

• Sanctions will be imposed only against persons that knowingly engage in “significant transactions” with the identified persons on or after August 2, 2017 – engaging in transactions that are not “significant” with such persons would not result in sanctions. 
• The State Department will consider “the totality of facts and circumstances surrounding the transaction” in assessing whether a particular transaction is “significant”, including: (i) the significance and potential adverse impact of the transaction to U.S. national security and foreign policy interests; (ii) the nature and magnitude of the transaction; and (iii) the relation and significance of the transaction to the defense or intelligence sector of the Russian government. 
• Transactions of a defense or intelligence nature are more likely to be deemed “significant” and result in sanctions, while transactions for purely civilian purposes are less likely to be considered “significant”. 
• Transactions with the Federal Security Service (“FSB”, which is identified on the CAATSA list as well as the SDN List) that are necessary to comply with rules and regulations administered by the FSB – including requirements related to the importation, distribution, or use of IT products in Russia – also are less likely to be considered “significant” for purposes of potential sanctions. This guidance is consistent with previous U.S. Government actions related to the FSB: even though the FSB is identified on the SDN List, the U.S. Government has issued a general license (meaning no transaction-specific prior authorization is required) authorizing U.S. persons to engage in transactions with the FSB that are related to requesting licenses and authorizations for the importation, distribution, or use of certain IT products in Russia and otherwise related to complying with rules administered by the FSB. 

Scope of Potential Sanctions 

If a person is determined to have engaged in a significant transaction with a person operating in the Russian defense or intelligence sectors, the President must impose five of the sanctions measures set forth in Sec. 235 of CAATSA. These potential measures include, among others, prohibitions on dealings in any property of the sanctioned person, export license restrictions, Export-Import Bank assistance restrictions, debt and equity restrictions, visa ramifications for corporate officers, and restrictions on participating in U.S. Government procurement activities. Sanctions may be imposed not only on a company that engages in covered transactions, but also on the principal executive officers of the company. 

The President may, however, waive the application of sanctions against a person if the President certifies that the waiver is vital to U.S. national security or that the Russian government has made significant efforts to reduce cyber attacks. The President also may delay the imposition of sanctions against a person that would otherwise be targeted by certifying that the person is substantially reducing the number of significant transactions involving the Russian defense and intelligence sectors. 

Companies that engage in activities involving Russian defense and intelligence entities identified on the list must act quickly to assess their potential risk under CAATSA in light of the guidance issued by the State Department and consider ways to mitigate any such risk. More generally, any company that engages in business with Russia should be aware of the increasing sanctions against Russia, particularly with respect to “secondary sanctions” that could result in penalties even if no U.S. persons are involved. Dechert will continue to monitor sanctions-related developments and issue updates as appropriate.