Client Alert

Sanctions Spree: New Round of Sanctions against China and Russia

10 Jul 2020

Amid the COVID-19 pandemic and Black Lives Matter demonstrations, the U.S. Congress has stepped up its election year efforts by threatening heightened sanctions on China and Russia. The latest such bill, the Hong Kong Autonomy Act (“HKAA”), passed with ease through both houses of Congress last week without objection, signaling bipartisan consensus for an aggressive approach in responding to developments in Hong Kong. Notably, Congress passed the HKAA a mere two weeks after another China sanctions bill, the Uyghur Human Rights Policy Act, became law.

Key takeaways from the legislative activity include:

  • Stakes continue to rise between China and the United States as the U.S. Congress and the Trump Administration respond to China’s enactment of a new national security law for Hong Kong.  
  • Congress appears to be determined to counter what it sees as an erosion of the autonomy of  Hong Kong, as the HKAA both authorizes and mandates primary and secondary U.S. sanctions, even targeting foreign financial institutions transacting with anyone identified as contributing to that erosion.   
  • With the Trump Administration viewed as taking a soft stance on Russia, Congress continues to lead the charge to combat Russian election interference and the Nord Stream 2 and TurkStream gas pipeline projects.

China

Tension between the United States and China intensified in recent months as the two countries clashed over responsibility for the global pandemic, the situation in Hong Kong, and a host of international trade and financial policy issues. Similar policy disputes resulted last year in passage by Congress of twin pieces of legislation that we summarized in a prior alert, mandating that the Trump Administration impose certain sanctions and export restrictions relating to Hong Kong (certain required reports from the Administration to Congress, due within six months of the passage of the two bills in November 2019, remain outstanding as the May 25, 2020 deadline passed without apparent action). The most recent legislative measures include:

1. The Hong Kong Autonomy Act (“HKAA”)

In response to China’s enactment of a new national security law for Hong Kong, which the U.S. administration views as curtailing civil liberties in Hong Kong and reducing Hong Kong’s historical autonomy, President Trump announced in a press briefing on May 29, 2020 that his Administration would begin the process of revoking the “full range of agreements” providing Hong Kong separate treatment from mainland China. The President’s announcement followed Secretary of State Mike Pompeo’s May 27, 2020 report and certification to Congress that the State Department had determined that Hong Kong no longer enjoys a high degree of autonomy from mainland China, as required by the Hong Kong Policy Act of 1992, as amended by the Hong Kong Human Rights and Democracy Act of 2019. Importantly, Secretary Pompeo’s announcement has significant political and economic ramifications, such as suspending the separate, more favorable treatment the United States has provided to Hong Kong under U.S. export control, tariff, trade, visa, and sanctions laws.

With uncertainty lingering about President Trump’s willingness to risk increased tensions with China, given his focus on enhancing U.S.-China trade, Congress also swiftly responded to the new Hong Kong national security law. On July 1, Rep. Brad Sherman (D-CA-30) and a bipartisan group of 11 other U.S. Representatives introduced the Hong Kong Autonomy Act (“HKAA”) which, among other things, authorizes sanctions against individuals and entities that “materially contribute to the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law”, including a menu-based set of secondary sanctions against financial institutions that engage in significant transactions with such persons. The House passed the HKAA without objection the same day the bill was introduced, and the Senate subsequently followed suit clearing the HKAA via unanimous consent the next day, July 2, sending the bill to the President’s desk for consideration. The President has ten days to sign or veto the bill, but with veto-proof majorities and swift action by both legislative chambers, it is unlikely that the President will take any action in opposition that would ignite an executive-legislative showdown, be seen as “soft” on China, and face near-certain defeat at the hands of a united Congress.

Pursuant to Section 5 of the Act, the Secretary of State has 90 days after the enactment of the Act to supply Congress with a report identifying “foreign persons” (individuals or entities) that the Secretary of State views as having materially contributed to the erosion of Hong Kong’s autonomy. The Act authorizes sanctions against such identified foreign persons, including prohibitions on U.S. property transactions and visa bans. Given that the deadline for this report would be sometime in mid-October, mere weeks before the U.S. elections, the Administration is likely to consider the politics carefully but it is hard to predict whether political pressure will spur the Administration to take aggressive action as permitted under the law or avoid any action altogether.

Additionally, the Act authorizes, and subsequently mandates, sanctions on any foreign financial institution that “knowingly” conducts a “significant” transaction with any foreign person identified in the Secretary of State’s report. These financial institutions, to be identified in annual reports to Congress submitted by the Secretary of the Treasury starting 60 days after the Secretary of State’s report noted above, are then subject to “menu-based” secondary sanctions. Specifically, if a foreign financial institution is still identified in the above-referenced reports to Congress one year after its initial inclusion, it will be subject to 5 out of the 10 sanctions options listed below. After two years from the date on which a financial institution is first included in a report, and assuming it has not been excluded from a subsequent report, all of the 10 sanctions listed below must be imposed (which the Treasury Department’s Office of Foreign Assets Control (“OFAC”) could implement via a listing of the financial institution on its List of Specially Designated Nationals and Blocked Persons (“SDN List”):

  • Prohibition on obtaining loans or credits from U.S. financial institutions
  • Prohibition on designation as a primary dealer for U.S. government debt instruments
  • Prohibition on serving as a repository for U.S. government funds
  • Prohibition on foreign exchange transactions subject to U.S. jurisdiction
  • Prohibition on transfers of credit or payments between financial institutions subject to U.S. jurisdiction
  • Prohibition on property transactions subject to U.S. jurisdiction
  • Prohibition on exports, re-exports, and in-country transfers of U.S.-origin commodities, software, and technology to a financial institution
  • Prohibition on obtaining equity or debt investment from any U.S. person
  • Prohibition on the entry into the U.S. of corporate officers, principals, or controlling shareholders of the foreign financial institution
  • Sanctions on principal executive officers of the foreign financial institution in the same manner as other foreign persons sanctioned under the bill
2. The Uyghur Human Rights Policy Act of 2020 (“UHRPA”)

Only weeks before passage of the HKAA, on June 17, 2020, President Trump signed the UHRPA into law. Sen. Marco Rubio (R-FL) originally introduced the UHRPA in the Senate on May 14, 2020, where it received bipartisan support with over 66 co-sponsors. The UHRPA requires relevant Federal departments and agencies to submit a report to Congress listing Chinese officials, entities, and others identified as being responsible for carrying out human rights abuses in the Xinjiang Uyghur Autonomous Region (“XUAR”). Once identified, the individuals and entities identified in the reports will be subject to traditional blocking sanctions and visa bans.

The bill also requires the Secretary of State to submit a report to Congress addressing a number of matters the bill identifies as concerns, including (1) human rights abuses in Xinjiang; (2) efforts to protect U.S. citizens and residents, including ethnic Uyghurs and Chinese nationals studying or working in the United States, from harassment and intimidation by the Chinese government; and (3) the Chinese government’s acquisition and development of technology to facilitate internment and mass surveillance in Xinjiang.

After the passage of the UHRPA, the Departments of State, Treasury, Commerce, and Homeland Security issued a joint business advisory on July 1, 2020 warning of the “reputational, economic, legal, and other risks” for businesses with supply chain exposure to entities that are viewed as being engaged in “forced labor and other human rights abuses” in XUAR, advising those businesses to “implement human rights-related due diligence policies and procedures.”

Despite the UHRPA already having become law, several news outlets have reported that President Trump will hold off on implementing these sanctions in an effort to protect the Phase 1 U.S.-China trade deal. In response to this, a bipartisan group of Senators and Representatives led by Sen. Joni Ernst (R-IA) sent a letter to the Secretary of State and the Secretary of Treasury urging action by the Administration. Following pressure from Congress, on July 9, 2020, OFAC announced human rights sanctions on the Xinjiang Public Security Bureau and four Chinese officials under the Magnitsky Act, including Xinjiang Communist Party Secretary Chen Quanguo.

3.  Senate Bill 945, the “Holding Foreign Companies Accountable Act”

On May 20, 2020, the U.S. Senate passed by unanimous consent the “Holding Foreign Companies Accountable Act” (“HFCA”), which was authored by Sen. John Kennedy (R-LA) and introduced with bipartisan support from Sen. Chris Van Hollen (D-MD). The primary impact of the HFCA would be to prohibit foreign companies from listing and trading on U.S. exchanges if the Public Companies Accountability Oversight Board (“PCAOB”) cannot inspect the foreign companies’ audits over a period of three consecutive years. While the HFCA would apply to any country and company that triggers its provisions, it is widely understood to be a response to restrictions imposed by the Chinese government on the PCAOB’s ability to oversee the work of accounting firms auditing Chinese companies listed in the United States and the HFCA’s authors have made clear that their target is China and Chinese companies.  

Representative Bradley Sherman (D-CA) introduced identical legislation in the House of Representatives, which Speaker Nancy Pelosi confirmed is under review by the relevant House committees. Analysts have noted that the HFCA is moving at “warp speed” and “it is only a matter of time before this bill (or something similar) is signed into law”.

Russia

In this election year, Democrats and Republicans in Congress appear poised to maintain pressure on the Government of Russia over its purported attempts to continue to interfere with U.S. elections and with European energy security. Although President Trump has been widely criticized by Members of Congress for not standing up to Russia for its election interference and other malign activities, the Administration appears to share the Congressional desire to stop the Nord Stream 2 gas pipeline project, which would connect Russia to Germany via the Baltic Sea. The Nord Stream 2 pipeline would run alongside the already-completed Nord Stream pipeline, doubling capacity along the route.

1. Nord Stream 2

As we discussed in a previous alert, President Trump signed into law the Protecting Europe’s Energy Security Act of 2019 (“PEESA”), as part of the National Defense Authorization Act for Fiscal Year (“NDAA”) 2020, on December 20, 2019. PEESA requires the Secretary of State to issue a report within 60 days, and every 90 days thereafter, on (1) vessels that engaged in pipe‑laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2 pipeline, the TurkStream pipeline, or any successor project; and (2) foreign persons determined to have knowingly: (i) sold, leased, or provided those vessels for the construction of any such pipeline; or (ii) facilitated deceptive or structured transactions to provide those vessels for such a project. As a result of being identified in any of the reports, the following sanctions would be mandatory (unless the President certifies that any identified foreign persons (individuals or entities) engaged in good faith efforts within 30 days of enactment to wind down sanctionable operations): (A) The assets subject to U.S. jurisdiction of any foreign persons identified in (2) above would be required to be blocked (or frozen); and (B) The corporate officers and principal shareholders of any company owning a vessel identified in (1) above, as well as any foreign persons identified in (2) above, would be denied visas and prohibited from entering the United States.

It remains unclear whether the Administration has met the deadline in PEESA for the above‑mentioned reports, but the mere threat of sanctions under PEESA succeeded in persuading Allseas, a Swiss pipe-laying company, from carrying out its planned operations on the Nord Stream 2 Project. Despite the Allseas departure from the project and the significant sanctions threat, Russia has vowed to continue construction of the remaining 100 miles of the pipeline. In response to the publicity surrounding the continued construction and recent provocations from Russian leaders like Foreign Minister Sergei Lavrov, who said, “I don’t think the project can be stopped,” a bipartisan group of senators, including Sen. Ted Cruz (R-TX), introduced a bill on June 4, 2020 that would add additional sanctions on the Nord Stream 2 project.

Like PEESA, Senator Cruz’s follow on bill, the “Protecting Europe’s Energy Security Clarification Act,” was repackaged as an amendment, in this case Senate Amendment #1886, to the FY2021 NDAA. The amendment was adopted by the Senate en bloc as part of a manager’s package of 79 amendments pre-cleared by Republican and Democratic bill managers. Although a similar provision does not appear in the House’s marked-up version of the FY2021 NDAA, we believe it likely that this provision will ultimately be included in the final version of the bill. This is because chairmanship of the conference committee lies with the Senate this year, and the likely inclusion of Sen. Tom Cotton (R-AR) and Sen. Jeanne Shaheen (D-NH), co-sponsors of Senate Amendment #1886 and senior members of the Senate Armed Services Committee, as members of the inter-chamber conference committee.

The amendment would expand sanctions to include penalties on parties involved in a wider range of pipe-laying activities defined in the amendment as “activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe.” Furthermore, the amendment also targets foreign persons that support the expanded definition of pipe-laying activities, for example by providing  underwriting services, insurance, or reinsurance for vessels; services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels; or services for the testing, inspection, or certification necessary for, or associated with the operation of, the Nord Stream 2 pipeline.

Two other Russia-related bills, detailed below, continue to percolate, but have not gained as much traction as efforts to stymie the Nord Stream 2 and TurkStream projects.

2.  Defending American Security from Kremlin Aggression Act (“DASKA”)

In February 2019, led by Senator Graham, a bipartisan group of senators introduced DASKA, a comprehensive and wide-ranging bill covering numerous contentious issues related to Russia, such as Russia’s continued interference in democratic processes in the United States and abroad, malign influence in Syria, continued aggression toward Ukraine, and support of criminal organizations and other malicious actors in cyberspace. DASKA includes several sanctions provisions, including the following:

  • Sanctions on any person that knowingly makes a new large investment in a liquefied natural gas (LNG) export facility outside Russia or any energy project outside Russia “supported by” a Russian parastatal entity or an entity owned or controlled by the Russian Government;
  • Sanctions against the sale, lease, or provision of high-value goods, services, technology, financing, or other support, including infrastructure repair or modernization, which significantly contributes to the Russian Government’s development and production of crude oil resources in Russia (but which would not apply to efforts to maintain projects ongoing on the date of DASKA’s enactment);
  • Sanctions on Russian oligarchs linked to President Putin who facilitate bad acts on his behalf;
  • Prohibitions on U.S. persons from dealing in new Russian sovereign debt – including bonds issued by, and foreign exchange swap agreements with, the Russian Central Bank, National Wealth Fund, or Federal Treasury – exceeding 14 days’ maturity;
  • Sanctions on Russian financial institutions that provide financial or other support for Russian government interference in democratic processes outside Russia; and
  • Mandatory quarterly determinations by the Secretary of State on whether the Russian Government was interfering with freedom of navigation anywhere in the world, and if so, sanctions against all entities operating in the Russian shipbuilding sector.

DASKA was approved by the Senate Foreign Relations Committee in December 2019, but has yet to be voted on by the full Senate.

3.  Defending Elections from Threats by Establishing Redlines Act of 2019 (“DETER”)

The DETER act, introduced in April 2019 by Senators Rubio and Van Hollen, would require (1) determinations and reports to Congress by the Director of National Intelligence (DNI) within 60 days of a U.S. election on whether, with a high level of confidence, a foreign government or agent of a foreign government knowingly interfered in the election; (2) annual reports to Congress providing information on Russian oligarchs, senior political figures, and parastatal entities; and (3) biannual reports to Congress on the wealth, sources of wealth, and use of wealth of such persons, including Russian President Putin. If it is determined that Russia interfered with any U.S. election, mandatory sanctions would be triggered, including blocking sanctions and prohibitions on certain transactions and investments relating to Russia. The DETER act was blocked by Senate Republicans in December 2019 and apparently has gained no traction since then.

Raymond Rif, a Legal Analyst in the Morrison & Foerster LLP National Security practice, contributed to this alert.

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