National Defense Authorization Act Implications for U.S. Sanctions Programs
National Defense Authorization Act Implications for U.S. Sanctions Programs
After months of negotiations, Congress revealed the compromise version of the National Defense Authorization Act for Fiscal Year 2023 (NDAA) on December 6, 2022. The bill, viewed as a “must-pass” piece of legislation because it provides annual funding for the U.S. military, was passed by the U.S. House of Representatives on December 9, 2022, and is expected to be voted on by the U.S. Senate this week. The NDAA, which provides for roughly $857.9 billion in funding to the U.S. Department of Defense, would then go to President Biden’s desk for his approval.
While the NDAA impacts a wide range of areas, the bill includes several provisions relating to U.S. sanctions and related subjects, including Russia’s invasion of Ukraine, additional restrictions relating to Burma, and a comprehensive prohibition on the use of People’s Republic of China (PRC) military semiconductors by federal agencies. Notwithstanding these important reforms, the bill is also notable for amendments relating to U.S. sanctions that could have made their way into the final bill but were removed during the negotiation process. Below we discuss the most important national security highlights of the bill and those measures that ultimately failed to be included in the final NDAA but which could see the light of day in future legislation.
The bill would require the President to submit a periodic report to Congress identifying non-U.S. persons (i.e., individuals and entities) that knowingly participated in a significant transaction for the sale, supply, or transfer (including transportation) of gold from the Russian Federation or in which the Government of Russia has an interest, including from reserves of the Central Bank of the Russian Federation held outside the Russian Federation. The bill would then require the President, subject to certain waiver authority and exceptions, to impose blocking and visa sanctions against those persons identified in the reports.
The bill would require a semiannual assessment of the effects of sanctions imposed with respect to Russia’s invasion of Ukraine. The U.S. Director of National Intelligence would be required to submit a report outlining the Russian Federation’s efforts to circumvent sanctions through direct or indirect engagement from the regimes of Cuba, Nicaragua, Venezuela, the PRC, the Islamic Republic of Iran, and any other country the Director deems appropriate. The report must also contain a description of the material effects of U.S. and allied sanctions on individual sectors of the Russian economy, senior leadership, senior military officers, and state-sponsored and state-affiliated actors targeted by such sanctions. The report must also describe evasion techniques, including the use of digital assets, used by Russia in response to sanctions.
Additionally, the NDAA would modify the requirements on the “Annual Report on Military and Security Developments Involving the Russian Federation” that the Department of Defense must prepare a new section on the impact of U.S. sanctions on improvements to the Russian military and its proxies, including a description of how sanctions have impacted Russian private military companies’ behavior and an assessment of the impacts of the maintenance or revocation of such sanctions.
Following the February 1, 2021 coup in Burma, Congress has sought to hold the Burmese military and state-owned enterprises in Burma accountable for their actions. The NDAA would incorporate the Burma Unified through Rigorous Military Accountability Act of 2022 (the “BURMA Act”) into its provisions. The BURMA Act imposes two categories of sanctions on Burmese government officials and state-owned enterprises, subject to certain waiver authority and exceptions. First, the NDAA directs the President, subject to certain exceptions and waiver authority, to impose mandatory blocking, foreign exchange, and visa sanctions on any non-U.S. person who the Administration determines is a senior official in the Burmese military or political government, the defense sector, or state-owned enterprises in the industrial or executive sector that financially benefit the Burmese military. The bill also authorizes corresponding account or payable-through account sanctions against any non-U.S. financial institution that conducts a significant transaction on behalf of any such sanctioned person. Second, the BURMA Act also authorizes the President to impose discretionary sanctions on the Myanma Oil and Gas Enterprise, any state-owned enterprise—regardless of sector—that benefits the Burmese military, any person involved in activities related to the February 2021 coup, or any entity that provides material support to the Burmese military.
The BURMA Act also calls for the development of a comprehensive strategy with respect to sanctions on Burma to coordinate sanctions across the U.S. government (including with respect to requiring new reports to Congress), promote multilateral sanctions on the Burmese military and its allies, and exert additional pressure on China and Russia to enlist their support for a greater multilateral effort in Burma.
The NDAA would prohibit U.S. government procurement of semiconductor products and services produced by three PRC companies: Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, and Yangtze Memory Technologies Corp (or any subsidiary, affiliate, or successor of such entities) (collectively, the “covered semiconductor products or services”), and procurement of any electronic parts or products that include covered semiconductor products or services. Contractors that supply the federal government are responsible for certifying the non-use of covered semiconductor products or services in such parts or products.
These prohibitions would go into effect five years after the NDAA’s enactment. No later than three years after the enactment of the NDAA, the Federal Acquisition Regulatory Council shall prescribe regulations implementing the prohibitions. Further, the Secretary of Commerce is tasked with, in coordination with other government stakeholders and the public, establishing a microelectronics traceability and diversification initiative to coordinate analysis of and response to the federal government’s microelectronics supply chain vulnerabilities. Lastly, the prohibitions may be waived by the Administration if such waiver is determined to be in the critical national security interests of the United States.
The NDAA would require the Secretary of State to develop an interagency strategy to disrupt and dismantle narcotics production and trafficking networks linked to the regime of Bashar al-Assad in Syria, including a detailed plan to dismantle the narcotic networks and to use sanctions authorized under the Caesar Syria Civilian Protection Act of 2019.
The bill states that it is U.S. policy to hold to account any official of the government of the Islamic Republic of Iran who is responsible for human rights abuses in the form of politically motivated imprisonment, including through the imposition of sanctions pursuant to the Global Magnitsky Human Rights Accountability Act and other available authorities.
The addition of the Banking Transparency for Sanctioned Persons Act into the NDAA would require the Secretary of the Treasury to issue an annual report that includes a list of specific licenses issued by the Treasury in the preceding year that authorize U.S. financial institutions to provide financial services to the government of a state sponsor of terrorism, or persons sanctioned under the Office of Foreign Assets Control’s Global Magnitsky Sanctions. Such licenses typically authorize humanitarian, diplomatic, and agricultural goods, and their issuance has generally not been particularly controversial. According to the act’s sponsor, the purpose of the reporting requirement is to improve transparency of the license-granting process and ensure that the Executive Branch’s policy actions align with legislative intent.
The NDAA would require the Director of National Intelligence to designate an element within the Intelligence Community to carry out a pilot program to assess the feasibility of providing enhanced intelligence support, including intelligence derived from open source, publicly and commercially available information in aid of export controls and foreign investment screening. The pilot program would share information with the Department of Commerce and the Department of Homeland Security to support their respective export control functions.
The NDAA would obligate the Secretary of the Treasury to submit a report to Congress within 90 days of enactment on the steps that the Office of Sanctions Coordination—a division within the State Department established in 2021 and tasked with coordinating sanctions across U.S. government departments and international allies—has taken to coordinate its activities with the Department of the Treasury and humanitarian aid programs, in an effort to help ensure appropriate flows of humanitarian assistance and goods to countries subject to U.S. sanctions.
The compromises in the NDAA bill do not include several sanctions-related provisions debated during the bill’s development in the House and Senate. We highlight below certain omitted measures, which might arise again in future legislation.
Earlier versions of the NDAA contained various provisions that would have expanded the scope of U.S. sanctions against Russia.
The Biden Administration reportedly recently decided to exempt Lebanon from the secondary sanctions risks relating to Lebanon’s energy plan to receive natural gas and electricity that would pass through Syria. An earlier draft of the NDAA would have brought Lebanon’s plan squarely within the sanctions implemented by the Caesar Civilian Protection Act of 2019 by modifying the term “significant transaction” to explicitly include “any natural gas, electricity, or other energy-related transaction or transactions that provides material support to or otherwise may benefit  the Government of Syria.”
In short, most of the NDAA’s sanctions-related provisions do not create new sanctions or modify existing sanctions programs on their own but rather require reports concerning existing and potential sanctions—although such reports could lead to further sanctions legislation or executive action in the future. This is not to say that the sanctions provisions that did not make it into the NDAA will never become law; it is possible that other legislation including versions of the sanctions measures discussed above will be passed in the future. For that reason, it is important that the international business community continue to keep its eyes on Congress as it contemplates sanctions-related legislation. As always, we will continue to keep our clients apprised of the latest developments.
Law clerks Diego Negron-Reichard and Damian Mencini and paralegal Julia Searby contributed to this client alert.