By Arnaud Fendler and Gwen Green
Following the outbreak of the Ukrainian conflict in 2014, the U.S. Government and the European Union Council have imposed Ukraine-/Russia-related sanctions against Russia largely in cooperation with each other.
U.S.-EU coordination sought to close as many gaps as possible between the two sanctions regimes and were initially focused around three types of restrictive measures:
- Restrictive measures on individuals and entities in Russia and Ukraine believed to be involved in the annexation of Crimea and destabilization of eastern Ukraine;
- Economic sanctions targeting Russia’s finance, defense, and energy sectors (sectoral sanctions); and
- Restrictions on economic relations with Ukraine’s occupied Crimea region (global embargo of goods, capital and services to and from Crimea).
This coordination was however disrupted in August 2017 with the adoption by the U.S. Congress of the Countering America’s Adversaries Through Sanctions Act (CAATSA), and the designation of Russian oligarchs in April 2018. Through these measures, the U.S. authorities broadened the pre-existing sanctions, paved the way for secondary sanctions directed at non-U.S. operators and widened the gap between the U.S. and EU sanctions regimes towards Russia.
Secondary sanctions, a concept also applied in sanctions regimes towards Iran and North Korea, involve additional economic restrictions designed to deter non-U.S. persons from engaging in transactions with a target of primary U.S. sanctions. In other words, a European registered entity could be sanctioned by the U.S. Government for engaging in dealings with targets of U.S. primary sanctions.
Although most of the Ukraine-/Russia-related secondary sanctions apply to deals or transactions in connection with sectors originally targeted by the sanctions regimes towards Russia (cyber-security, defense, military, finance and oil and gas), Section 228 of the CAATSA seemingly extends these secondary sanctions to other sectors of the Russian economy.
Section 228 of the CAATSA requires the imposition of mandatory sanctions on foreign persons who knowingly (i) “materially violates, attempts to violate, conspires to violate, or causes a violation of” any provision of U.S. sanctions against Russia; or (ii) facilitate significant transactions, including deceptive or structured transactions, for or on behalf of any person subject to U.S. sanctions with respect to the Russian Federation, or their child, spouse, parent, or sibling.
Section 228 extends to Specifically Designated Nationals (SDN) and persons listed on the Sectoral Sanctions Identifications (SSI), as well as entities owned 50 percent or more by those sanctioned persons. Given that many Russian entities are owned by SDN listed oligarchs, Section 228 of the CAATSA provisions potentially extends to a wide range of activities and transactions.
Since CAATSA’s enactment, the U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC) published guidance regarding the concept of “facilitation” and “significant transaction”. However, this guidance mainly confirms that these concepts are defined and interpreted extremely broadly by OFAC.
For example, OFAC’s guidance defines “facilitation” to mean “providing assistance for a transaction from which the person in question derives a particular benefit of any kind”. OFAC states it will consider the totality of the facts and circumstances when determining whether transactions are “significant.” However, transactions with sanctioned persons only identified on the SSI list must also include “deceptive practices (i.e., attempts to obscure or conceal the actual parties or true nature of the transaction(s), or to evade sanctions) to potentially be considered significant.”
Given the sweeping interpretations of “facilitation” and “significant transactions” taken by the U.S. Government, Section 228 of CAATSA could extend to a wide-breadth of transactions and activities by non-U.S. persons with Russian entities and individuals.
To minimize disruption to global markets, OFAC issued general licenses allowing wind-down activities related to certain sanctioned Russian entities. Despite the U.S. authorities’ assertion that it will not impose any CAATSA sanctions without coordination with its allies, EU businesses are understandably skeptical of the current U.S. Administration’s commitment to consult the EU and its member states ahead of imposing new sanctions, especially amid broader European concerns about whether the current U.S. Administration regards the EU as a partner or a competitor.
Without much doubt Section 228 is the broadest CAATSA provision and represents an unprecedented expansion of OFAC’s designation authority. Its applicability remains also very uncertain and difficult to assess in many situations, despite the efforts made by the U.S. Government to reduce concerns raised amongst EU member states and other foreign countries concerning the application of these provisions to some of their national champions.
As of today, the U.S. Government has not yet imposed sanctions on EU businesses under Section 228 of CAATSA. The U.S. Government has however imposed sanctions on foreign persons under other provisions of CAATSA.
Additional sanctions bills towards Russia are percolating through the U.S. Congress. In particular, the Defending American Security from Kremlin Aggression Act (DASKAA), first introduced in 2018 and again in 2019, could, if passed further severely broaden and tighten U.S. sanctions against Russia.
EU businesses who transact with Russian entities and persons should evaluate those activities to ensure that they are outside the scope of sanctionable activities. And since, the provisions of Section 228 of CAATSA are intentionally broad in scope, case-by-case assessments remain indispensable for transactions with Russian entities, which could directly or indirectly linked, in one way or another, to SDN or SSI listed persons.