Sanctions Intelligence Update: Potential Impacts of Sanctions Legislation Targeting Russia, DPRK, and Iran

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Executive Summary

On August 2, 2017, the President signed the Countering America’s Adversaries Through Sanctions Act of 2017, which calls for an expansion of a wide range of sanctions targeting Russian, Democratic People’s Republic of Korea (DPRK), and Iranian activities.   The new legislation reflects bipartisan support for limiting the flexibility of the administration to lift sanctions without congressional review. While the actual implementation of the Act remains unclear, the increasingly complex sanctions environment reinforces the need for financial institutions and multinational corporations to continually assess their exposure to sanctions-related risks. The following analysis of the legislation highlights key new and expanded provisions for sanctions and provides some examples of their potential impact.

Focus on Russian Energy and Core Industries

The legislation aims to expand the scope of companies targeted by sanctions that are active in Russia’s energy and industrial sectors, including investors in Russian energy export pipelines. It also calls for expanding the number of industrial sectors and lowers debt maturity thresholds under existing Russia-related sectoral sanctions. Other new sanctions target those who engage with Russian intelligence and defense sectors, facilitate privatization of Russia’s state-owned companies, and undermine cybersecurity on behalf of the Russian government. 

  • While attention has focused largely on Nord Stream 2, the legislation could impact a number of other energy pipeline projects involving Russian and international energy companies.  For example, an international pipeline project owned by the Russian government and a number of major energy companies transports Central Asian and Russian energy products to the Black and Caspian Seas where it is distributed globally. 
  • Under the expanded sectoral sanctions, Russian state-owned companies in the railway or metals and mining sectors may now be subjected to sanctions.  Russia is a significant producer of diamonds, for instance, with the majority of Russia’s largest diamond mining company held by government entities. 
  • The legislation threatens sectoral sanctions on new energy projects with a threshold Russian ownership stake of 33 percent and on firms providing support services to such projects.  In May 2017, for example, Rosneft — designated under sectoral sanctions in September 2014  — and a major European energy firm expanded their partnership in Russia to include joint offshore drilling activities.   Any further expansion of this relationship could be subject to sanctions. 

 Targeting DPRK Export and Shipping Industries

 The legislation calls for new sanctions targeting a number of economic sectors, including textiles and certain energy, metal, and mining products. It also calls for sanctions on entities engaged in the employment of and products produced by DPRK labor. The Act also calls for new sanctions for firms that provide support to DPRK-related ships and aircraft, along with ships from foreign countries that fail to comply with DPRK-related UNSC resolutions. Other notable changes include calling for a Presidential determination on whether to designate six specific DPRK-related targets listed in the legislation, including the DPRK Central Bank.  

  • The textile and energy-related product sanctions provisions of the legislation may subject a range of corporates, notably China-based companies, to sanctions risk. DPRK’s Office 39, for example — sanctioned in 2010 for managing slush funds and generating revenues for DPRK leadership — is involved in a textile sector joint venture with a firm based in China.  DPRK coal exports to China, for example, involve a Chinese firm that  maintains a network of Chinese steelworks partners, including Chinese state-owned companies,  managers, vendors, and other affiliates. 
  • On overseas labor, DPRK exports workers to a number of regions, including to the Middle East, Asia, and Africa as a means of generating revenue for the DPRK government. For instance, a Namibian-subsidiary of Mansudae Overseas Project Group,  sanctioned by the US government in 2016 for the exportation of workers from DPRK,  was involved in the construction of a Namibian government headquarters building in its capital as of early 2017. 
  • DPRK shipping interests already targeted by sanctions include Ocean Maritime Management Company Limited (OMM) and 18 vessels in which it maintained an ownership interest. Following their designation in July 2014,  thirteen of these vessels were renamed and 16 changed registered owners. These renamed vessels have made port calls in Japanese and Chinese ports, which in one case preceded a port call to a DPRK port,  according to shipping data. Some of the renamed, sanctioned vessels were insured by DPRK’s Korea Shipowners’ Protections and Indemnity Association,  one of the legislation’s proposed targets. 

Largely Symbolic Statement, Mandating Existing Sanctions on Iran

 While the practical impact of the Iran provisions remain unclear, the legislation mandates sanctions under existing programs such as supporters of Iran’s ballistic missile program.  The legislation also sanctions the Islamic Revolutionary Guard Corps (IRGC) as a terrorist organization, but it is already subject to several sanctions authorities, including the proliferation executive order.   Overall, the legislation’s provisions on Iran are more significant as a political statement than as an expansion of sanctions authorities; nonetheless, Iranian companies associated with the cited activities may come under renewed focus for sanctions and other enforcement efforts. 

  • Aerospace Industries Organization (AIO) — which was sanctioned by the US government in June 2005  for overseeing Iran’s ballistic missile program — purchased specialized industrial equipment and software from Iran-based suppliers through a network of subsidiaries and front companies. AIO subsidiaries and front companies have obtained sensitive products from Iran-based companies that maintained commercial relationships with firms located in Europe.  
  • The IRGC-controlled Bonyad Taavon Sepah, a large holding company designated by the US and EU, maintains a range of partial or controlling ownership interests across various sectors of commercial activity.  Bonyad Taavon Sepah is active in banking and financial services,  minerals and mining,  farm and industrial equipment,  steel,  engineering,  automobile distributorships,  petrochemicals,  aviation,  and telecommunications.  As with many holding company structures in Iran, ownership and beneficial ownership interests are often opaque.

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This Sanctions Intelligence Update was prepared with research and analysis provided by Kharon, a sanctions intelligence platform that connects users to deep data research and analysis on the networks of individuals and entities targeted by US and international sanctions programs. Kharon is a Camstoll Group company.

The Camstoll Group advises on sanctions, illicit finance, national security, and regulatory matters. Our deep data approach for financial institutions, multinationals, and governments is designed to generate insights and options for complex policy, regulatory, or competitive challenges.

Contact: Howard Mendelsohn, mendelsohnh@camstoll.com

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