Worldwide: Sanctions Round Up: Second Quarter 2019


While this quarter saw no major developments in Russia sanctions programs, OFAC signaled its continued willingness to target Russian banks for assisting others evade US sanctions. Meanwhile, as most Deripaskarelated sanctions have been lifted, GAZ Group remains listed. Finally, Turkey's purchase of a missile defense system from Russia may soon test the Trump Administration's willingness to enforce tough CAATSA sanctions against a NATO ally.

OFAC Continues to Target Entities Outside of North Korea for Assistance in Sanctions Evasion

On June 19, OFAC targeted a Russian foreign financial institution for assisting North Korea's pursuit of nuclear weapons. Pursuant to Executive Order ("E.O.") 13382, which aims to prevent nuclear proliferation, Russian Financial Society ("RFS") was targeted for its support of Dandong Zhongsheng Industry & Trade Co. Ltd., an entity owned by Foreign Trade Bank ("FTB"), North Korea's primary foreign exchange bank. Both FTB and Dandong Zhongsheng are designated entities. According to OFAC, RFS opened bank accounts for Dandon Zhongsheng and an executive from Korea Zinc Industrial Group (also a designated entity). Access to the RFS accounts allowed North Korea to evade US and U.N. sanctions, and provided a means by which North Korea could access the global financial system, generating revenue to finance its nuclear program. This is not the first time OFAC has designated a Russian bank for processing transactions for or on behalf of North Korea. Last August, OFAC designated Agrosoyuz Commercial Bank for opening bank accounts for a number of North Korean front companies.

GAZ Group LLC Still Subject to US Sanctions

Although the high-profile sanctions against EN+ Group PLC, United Company RUSAL PLC, and JSC EuroSibEnergo have been lifted, one company connected to Oleg Deripaska remains designated amid the apparent continuation of negotiations with OFAC. On June 26, OFAC issued two amended General Licenses, extending the deadline by which investors must divest, and entities to wind-down operations, related to the automotive conglomerate, GAZ Group LLC. Specifically, OFAC issued General License 13L and General License 15F. GL 13L authorizes investors, until November 8, 2019, to engage in all transactions and activities ordinarily incident and necessary to divest or transfer their interests in GAZ Group, or to engage in activities that facilitate the divestment or transfer to non-US persons. GL 15F authorizes, through November 8, 2019, all transactions ordinarily incident and necessary to the maintenance or wind-down of operations involving GAZ Group or its related entities. Meanwhile, Deripaska continues to proceed with his US federal lawsuit against OFAC, claiming that last year's blocking sanctions against his companies was unlawful.

Turkey's Arms Deal with Russia Could Prompt First Test of Mandatory CAATSA Sanctions

Despite intense opposition from the US, Turkey reportedly will soon take its first delivery of the S-400 missile defense systems it purchased last year from Russia. According to the US, Turkey's use of the S-400 is incompatible with its desire to purchase and build American F-35 stealth fighters, as the defense systems would enable Russia to collect critical intelligence on the F-35 program. The confrontation comes amid deteriorations between the US-Turkey relationship prompted by the fallout from Iran sanctions, tariffs, and allegations by the US of human rights abuses by the Erdogan government. The US Congress has already begun to draft additional sanctions against Turkey in response to the purchase, including by blocking Turkey's participation in the F-35 and imposing other arms embargos. Trump Administration officials this quarter repeated the threat to end Turkey's participation in the F-35 program by July 31 if the deal is not scrapped.

In addition to these punitive measures, Turkey's purchase of the S-400s would almost certainly trigger separate sanctions by the US under the 2017 Countering America's Adversaries Through Sanctions Act ("CAATSA"). Specifically, the statute mandates sanctions on any country that "engages in a significant transaction" with the Russian defense and intelligence sector. Turkey's purchase of the S-400s would provide the first test of the law, which mandates the imposition of a menu of sanctions ranging in severity, from banning Turkey's access to US banks and capital markets, to export and procurement restrictions, to more targeted sanctions on Turkish government officials. Although CAATSA mandates sanctions, the statute provides President Trump with a degree of discretion in choosing which restrictive measures to apply. Following discussions with President Erdogan at the G-20 summit, President Trump appeared to contradict his own officials, walking back the threat of punitive sanctions and casting the blame of the proposed arms-deal on the Obama Administration. President Erdogan has maintained that Turkey will begin accepting delivery of the defense systems in days.

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