Information Bulletin from the ART DE LEX International Economic Compliance Practice (Issue 5, 2019)
RUSSIA
NEW SANCTIONS AGAINST RUSSIAN FEDERATION – A SECOND ROUND OF SALISBURY INCIDENT RESTRICTIONS
On 1 August 2019 President Donald Trump signed an Executive Order 13883 (an amendment to E.O. 12851), whilst on 3 August 2019 U.S. Department of Treasury issued a special CBW Act Directive introducing new sanctions against Russia. Restrictions show an opposition of the United States against prolongation of any loans as well as any financial or technological help of the international financial institutions, such as the World Bank and the IMF to Russia.
New sanctions cover a ban on the participation of the U.S. banks in the primary market for non-ruble denominated bonds issued by the Russian sovereign and in lending of non-ruble denominated funds to the Russian sovereign.
Foreign trade restrictions cover export licensing of certain commodities and technologies controlled by the U.S. Department of Commerce as part of non-proliferation of chemical and biological weapons regime.
According to the U.S. Department of State Fact Sheet, national security interests call for the waiver of certain restrictions with respect to banking loans and exports. That said, some of the spheres of the foreign trade would be a subject of case-by-case review. Space flights activities, facilitation of the safe operation of commercial passenger aviation, exports to commercial end-users for civil end-uses as well as exports to wholly owned subsidiaries of U.S. and other foreign companies in Russia are under exception regime. Exceptions also cover existing foreign trade contracts and export licenses deemed for Russian nationals working in the United States.
Export licensing regime сcertain for foreign trade operations with state-owned or state-funded entities in Russia will be subject to a “presumption of denial” policy. This regime calls for a default prohibition on certain actions except when compelled reasons provided to overcome it.
As provided in section 678 of Treasury FAQ, the U.S. financial institution are allowed to participate in a secondary sovereign debt market.
Treasury Directive says that evasion or avoidance of prohibitions set by the Directive whether conducted in a transaction or in a conspiracy aimed at circumvention of prohibitions shall not be allowed, except when authorized or licensed.
U.S. HOUSE OF REPRESENTATIVES PASSES NEW SANCTIONS AGAINST RUSSIA’S SOVEREIGN DEBT
On 11 July 2019 in a session of the U.S. House of Representatives, Rep. Bred Sherman (D-CA) and Rep. Maxine Waters (D-CA) (head of House Financial Services Committee) introduced an amendment to the bill H.R. 2500, the National Defense Authorization Act for Fiscal Year 2020. The Defense Authorization Act is the core fiscal legislation for military spending by the United States.
The amendment would require the Administration to impose a total ban on financial operations with Russian sovereign debt instruments. It would apply to all U.S. persons. The term sovereign debt instrument is defined as the bonds of the Russian Ministry of Finance, as well as debentures and securities issued by the Russian Central Bank. This prohibition would be subject to review by the Administration and Congress following each national mid-term (i.e., Congressional) and presidential election, and could be lifted in the absence of Russian interference in the most recent federal U.S. election.
The amendment would define interference as an interference with voter tabulation or voter registration processes, whereby Russia steals information for the purpose of influencing a federal election, or where Russian hackers use “false flag” communications, falsely pretending to be authorized American spokespersons.
It is worth mentioning that the amendment has been introduced to the House as part of a group of amendments, known as Amendments En Bloc 5, that was brought to the floor of the House by the original author of the entire fiscal defense bill, Rep. Adam Smith (D-WA). Usually, en bloc amendments are agreed to and introduced as a result of the discussions among a significant group of members of Congress. They are considered as a group, rather than as individual amendments, customary by unanimous consent of the House. This procedure is used when one particular member of Congress is focused on one amendment at the time, and, at the same time, there is a need for collective support for a related or parallel issue. As is customary with most en bloc amendments, En Bloc 5 was approved on a voice vote without individual “aye” or “nay” votes being recorded.
Separate from En Bloc 5, and prior to its introduction and vote, Representative Sherman introduced a special amendment, House Amendment 521(text), barring the transfer of defense funds to certain defense programs of Azerbaijan due to the concerns over civil aviation.
During the debates, Congressman Sherman expressed serious concern about the hostile rhetoric of the Azerbaijan Government, threatening physical destruction of airplanes in Stepankert Airport in Nagorno-Karabakh Region. (Azerbaijan had stated, that flights going into Stepanakert Airport would be destroyed for violating territory claimed by Azerbaijan.)
Representative Ron Wright (R-TX) stood in a harsh opposition to the amendment, emphasizing (A) the strategic importance of U.S.-Azerbaijan relations and Azerbaijan’s location between two powers hostile to the United States: Russia and Iran; (B) the initial role of Azerbaijan as the U.S. ally in Afghanistan; and (C) the unacceptability of the discussion of political discussions during the consideration of a defense authorization bill, especially taking into consideration the role of the United States as co-chair position in OSCE Minsk group seeking a peaceful settlement of the Nagorno-Karabakh conflict.
Despite the opposition from the Republicans, the restrictions on certain defense spending in Azerbaijan was approved by the majority vote.
In conclusion, it must be said, that principal policy issues may also be addressed by non-traditional mechanisms, such using a defense-spending initial bill to cover matters of foreign policy.
To become law, the Bill must be passed by the U.S. Senate and signed by the President of the United States. It should be noted that prior to the debates and vote on the Bill in Congress, the White House issued a special document that stated its position on a likely veto of the Bill by the President, should it be adopted in a present state.
Media commentary says that should the provisions of the Bill be adopted in its present state, it would only spark the interest of European and Asian investors in Russian debt instruments, due to their expected inevitable increase in profitability.
THE BILL ON BANK LIABILITY FOR SANCTIONS COMPLIANCE
On 19 June 2019, Member of the State Duma Vladimir Reznik introduced a bill authorizing Russia’s Central Bank to administer the Register of Unreliable Suppliers of Informational and Technological Services.
The concept of the Bill is focused on the minimization of risks caused by technological and informative services with respect to the stability of their services.
In particular, the Bill would include, as an unreliable supplier of services in the special register, one that unilaterally refuses to supply a service due to the party to settlements being a subject of sanctions (e.g., a halt of all operations with bank card services due to a designation on a sanctions list).
Once an organization has designated into this register, banks would be barred entering into new contractual relations with informational and technological organizations so designated. On top of that, within six months following the designation, the banks would be required to wind down any existing relations with the entities designated by the Central Bank.
TWO PRIVATELY-OWNED RUSSIAN BANKS ARE BAILING OUT OF THE SAINT-PETERSBURG CURRENCY EXCHANGE (SPCEX) AUTHORIZED CAPITAL
Alfa Bank JSC and Bank of Saint Petersburg PJSC have departed from SPCEX, which can become a base for the creation of a designated stock-exchange for the trade in securities, bonds, and debentures of the companies under sanctions. This was declared by the Deputy Minister of Finance Alexey Moiseev in summer of 2018. It is also reported that state-held banks are still in ownership and control of the stock exchange.
RUSSIA LIFTS SANCTIONS ON ERITREA
On 22 July 2019, the Russian Federation lifted sanctions against Eritrea. The Presidential Decree on the matter is published on the official legal information website.
Initially introduced in July2010, the restrictions were a part of the implementation of the United Nations Security Council Resolution 1907 of 23 December 2009. Those restrictions included economic sanctions and an arms embargo.
UN-level sanctions were introduced because of Eritrea’s support of Islamic radicals in Somalia. The lifting of the sanctions is associated with the normalization of situation.
THE EUROPEAN UNION
EU COURT PARTIALY LIFTS SANCTIONS ON YANUKOVICH AND HIS FAMILY MEMBERS
As stated in the EU Court press-release of 11 July 2019, a number of lawsuits filed by the former President of Ukraine Viktor Yanukovich, his son Alexander, and few of his associates have been satisfied. As a result of these actions, the assets of aforementioned individuals in the European Union were unfrozen.
The case of Azarov v.Council (C-530/17 P) is considered to be the precedent that the Court considered as the main guideline. Earlier on, while sanctioning certain individuals involved in criminal cases over the embezzlement of state funds and their withdrawal from Ukraine, the EU Council used only the information provided by the investigative authorities of Ukraine.
The latest EU Court case requires the EU Council to check whether the rights of the individual under restrictions to an effective remedy were fulfilled, and whether access to justice was provided prior to imposing any restrictions. That is especially relevant if the grounds for restrictions and designation is information about the initiation of a criminal case and the proceedings that follow from a third state. The EU Council failed to meet these procedural requirements to protect the rights of the sanctioned persons, which is why the sanctions were lifted.
THE UNITED STATES
NORD STREAM 2 SANCTIONS ARE AUTHORIZED BY THE SENATE FOREIGN RELATIONS COMITEE
On 31 July 2019, Senate Foreign Relations Committee authorized an adoption with an amendments S.1441 bill aka PESS (“Protecting Europe’s Energy Security Act”). According to the bill, the U.S. would be entitled to impose sanctions on companies involved into layering of deep underwater pipelines (30 meters (100 feet) and more below the sea level). It might be the case, that these restrictions can cover both Nord Stream 2 and the TurkStream energy projects.
Sanctions would cover issues of migration, banking and insurance activities, financial intermediation, asset freeze and currency exchange. However, the bill allows certain exceptions associated, among other things, with national security or humanitarian interests and the U.S. international national obligations.
Among potential targets of the latest restrictions are German-based Uniper and Wintershall, a British-Dutch Shell, French Engie and the Austrian OMV.
To become the law, the bill should pass the Senate and House of Representatives votes and later on be signed by the President of the United States.
Earlier, on the eve of the vote on the Senate Foreign Relations Committee mark-up of legislation imposing sanctions on the Nord Stream 2 energy project, Senator Rand Paul (R-KY) postponed the planned vote.
According to the Daily Beast, on 26 July 2019, Senator Paul sent his colleagues a letter, stating the counter-productive nature of the restrictions to be imposed. Starting with the legal uncertainty of the legislation, Senator Paul then emphasized the injustice of sanctioning America’s NATO allies in the European Union as well as sanctions on companies based in Switzerland, a country that has been neutral through its history.
Senator Paul is famous for his criticism of the U.S. foreign policy on Russia. That said, along with Senator Bernie Sanders (IND-VT), Paul voted against the CAATSA, they being the only two senators recorded as voting against the Federal law imposing additional sanctions against Iran, North Korea, and Russia.
Nord Stream is one of Russia's key energy projects in Europe. Being an extension of the original Nord Stream project, Nord Stream 2 is aimed at ensuring the reliable supply of Russian gas to European consumers, without breaches of continuity and decreasing the number of transit countries with influence over the flow of the gas supply. A transmission pipeline is due to be laid on the seabed of the Baltic with the route passing through the waters of several European countries.
IRAN IS WITHDRAWING FROM A NUMBER OF JOINT COMPREHENSIVE PLAN OF ACTIONS COMMITMENTS
In response to the imposition of new sanctions against Iran by President Trump in Executive Order 13871, imposing restrictions on exploration and production of iron, steel, aluminum and copper in Iran, the Islamic Republic declared it would withdraw from a number of commitments undertaken in JCPOA.
DESIGNATION OF CUBAMETALES AND DELISTING OF THE ITALIAN TRANSPORTATION COMPANY PB TANKERS – ACTIONS UNDER THE VENEZUELA SANCTIONS REGIME
On the eve of Independence Day in the United States, 3 July 2019, the United States Treasury designated the foreign trading company Cubametales for its continued support of Maduro’s regime and its vital role in brokering the oil trade with Venezuela.
According to the Treasury, starting from the time of the designation of PDVSA on 28 January 2019, Cubametales played a vital role in transportation of oil, acting in favor of Venezuela.
At the same time, the delisting of the Italian company PB Tankers S.p.A. is an important development in sanctions regulation. According to the Treasury press release, the company proved its non-affiliation to the Regulator and its determination never to step into the operations with Cuba and Venezuela, as well as its general commitment never to violate U.S. sanctions again.
THE TREASURY STRIKE ON IRAN’S NUCLEAR PROCUREMENT PROGRAM
On 18 July 2019 the Treasury designated an international network of suppliers to Iran’s nuclear procurement program. Seven entities and five individuals of Iran, Belgium and the People’s Republic of China are now under blocking sanctions with an SDN-status for violation of the non-proliferation of the weapons of mass destruction regime.
The goods originally supplied to the Iranian nuclear program are subject to control under the NSG (Nuclear Supplier Group) legal regime. NSG is a group of countries and an international export control system that oversee nuclear components. According to the United Nations Security Council Resolution 2231 (2015), which is considered to be one of the key documents endorsing JCPOA, any actions on the supply, transfer, and sale of the goods of this special category should be authorized by the UN Security Council on case-by-case basis. According to the Treasury, the narrow exceptions under the legal regime are inapplicable to this case.
Acting on behalf of TESA (Iran’s key entity in the market of centrifuges used in enrichment of Uranium (SDN since 21 November 2018) and AEOI (Iran’s key entity administering atomic energy (SDN since 5 November 2018), a number of interlinked companies and organizations facilitated the purchase and delivery of huge aluminum goods consignments from the PRC.
Using intermediaries with subsidiaries and commercial presence in Belgium, TESA agreed on coordinated actions with respect to the delivery of goods via the Chinese aluminum producers – Suzhou Zhongsheng Magnetic Company Limited and Suzhou A-One Special Alloy Co., Ltd – metallurgical companies from the city of Suzhou, Jiangsu Province, China. According to the Treasury, Iranian entities acted via the Fujian-based Sanming Sino-Euro Import and Export Co., Ltd, specially incorporated for the coordination of procurement procedures and settlement of accounts. It is also noted that the goods acquired are fit for the Iranian gas centrifuges. Moreover, the Chinese entities were fully informed of TESA as an end-user of the production.
The Treasury informs all the interested parties of the risks of secondary sanctions and particularly warns financial organizations over the risks of the deliberate facilitation of financial services for those under sanctions.
HUAWEI SECRETLY USED AMERICAN TECHNOLOGIES TO HELP NORTH KOREA TO CONSTRUCT WIRELESS FACILITIES FOR EIGHT YEARS
On 22 July 2019, journalists in the United States acquired confidential documents of Huawei that are evidence of the company involvement into doing business in the Democratic People’s Republic of Korea.
According to the Washington Post, Huawei, acting in coordination with the Chinese state corporation Panda International Information Technology Co. Ltd, contributed to the construction and exploitation of antennas, stations, and other equipment vital for the launch of the Koryolink telecom operator in North Korea. Moreover, the company provided services for network integration, software servicing, and the “expansion” of certain wireless facilities.
Sources claim the company worked in DPRK from 2008 to 2016, with the groundwork for the deal being made in 2006 during the secret visit of Kim Jong-il (father of the current DPRK leader Kim Jong-un) to the Huawei headquarters.
Information on the Chinese presence can be tracked in open sources as well. In one of the semi-official forums, an employee of the company shared his story of working in the DPRK, on the several projects as well as his initial transfer to Beijing for work in the Olympics and its projects. For all corporate documents and purposes that come along, the DPRK is noted as “A9.”
One of the key issues is the use of Huawei products that are technological components barred by U.S. export control for the supply to the DPRK. Previously, both Huawei and Panda were being watched closely by the American regulators.
In 2014 Panda was accused of using American components for the supply of the Chinese Army or other countries under the U.S. sanctions. Starting from that moment, any supply by this company of a product with at least 10% of the components being of U.S. origin, without a proper license, is considered a breach of export controls. Since May 2019, the same restrictions have been in effect for Huawei.
Documents in possession of the Washington Post also indicate that Huawei has tight business connections with the Chinese company Dandong Kehua (SDN since November 2017). The Chinese company violated the DPRK sanctions regime by conducting foreign trade activity with this country. In the view of the Treasury, by conducting these actions the company contributed to the development of the North Korean nuclear program.