Countering America’s Adversaries Through Sanctions Act On: 8 Questions 8 answers

Nowadays, we face a lot of news, comments and explanations on the commercial relations between the USA and Turkey that are mentioned as “sanctions”. I have not yet come across any explanatory study of what this “sanction“ means, what the risks it poses to Turkish companies, and how to protect them from these risks.

In this context, I prepared 8 answers to the 8 questions that I was wondering the answer to for you dear readers. First of all, I would like to express that this work is aimed only at raising awareness and information.

The real determination of the sector, product, level of institutionalization and customer/supplier status of the current sector requires a universal study. I believe that the professional associations, civil society organizations and chambers have a great role to play in this issue. In my opinion, the damages that are likely to occur later can be greatly reduced by early work.

1) What is CAATSA?

United States Congress “Countering America’s Adversaries Through Sanctions Act -2017, CAATSA” adopted a law in its name. In the first year of his presidency, Trump has remained quite reluctant to sign this law. The law comes across as a complex, highly cited and difficult-to-understand text. The reason for this is that “codification”. In other words, Russia, Iran and North Korea in different laws against different countries envisaged in a single law aims to collect and rearrange the sanctions.

Since the subject of the article is Russia “Countering Russian Influence In European and Eurasia Act of 2017 – CRIEEA” in the second part of CAATSA will be taken into consideration.

This law sets out rules governing current sanctions against Russia, new sanctions Targets, and congressional scrutiny of decisions the president will make regarding sanctions enforcement due to Russia’s activities in Ukraine starting in 2014 and threats to the cyber security of the United States (Interference in the 2016 Presidential Election).

Accordingly, due to Turkey’s decision to acquire the S-400 weapons system from Russia, there is a possibility that the institutions and persons involved in the process will be sanctioned within the framework of the CAATSA.

2) How many kinds of effects do sanctions set in CAATSA have?

1) “Primary sanctions” – apply to United States citizens and legal entities established in the United States, limiting their activity in the sanctioned country. We will not go into detail as this type of sanction is outside our topic.

2) “Secondary/Extraterritorial Sanctions”- In accordance with article 231 of the CAATSA, 3. nationals of the country or 3. the objective of the sanction is to sanction legal persons established in a country for carrying out “significant transactions” with natural and legal persons subject to sanctions in the country.

Accordingly, 3. All persons/institutions/sectors/financial services or products of the country are not subject to all sanctions.

3) Has CAATSA made a definition for “significant transactions”?

The concept of “significant transactions” is not defined in CAATSA. The guidance issued by the U.S. Department of State describes “all events and situations that will be evaluated in consideration of both the effects of the United States on security and foreign policy and the importance of the Russian government in terms of the defense and intelligence sector.“

Although there is no clear definition of ”significant transactions”, there are publications, declarations and practices that evaluate agreements regarding the S-400 air defense system in this context.

4) What are the subjects of activities of persons and institutions subject to sanctions that can be applied in accordance with CAATSA?

1) Institutions and persons engaged in transactions with the Russian government in the defense and intelligence sectors.

2) Institutions and persons providing products, services, technology and information related to the development and construction of the pipeline of the Russian Federation.

3) Institutions and persons that help invest and privatize state owned enterprises by the Russian Federation.

4) Institutions and persons involved in the process of sending weapon to Syria.

5) What are the sanctions list/options that the president of the United States can enforce under the CAATSA?

In CAATSA Article 235, 12 methods of sanction were counted. The president of the United States has to apply at least 5 of these methods to the sanctioned person or institution, and which ones will be implemented is entirely at the initiative of the President. I share with you below the summarized form of this sanctions list:

1) Prohibition of bank supports such as collateral, insurance in import and export goods and services transactions against the person under embargo (CAATSA Article 235/a-1)

2) Prohibition of the sale of the following products to the embargoed person (CAATSA Article 235/a-2.):

• Banning the export of dual-use and high-tech products
• Prohibiting the export of all defense-related products
• Banning the export of all nuclear-related products
• The Prohibition of the export of goods required prior review and approval of all other United States

3) Prohibiting the making loans and providing credits of over $10 million to embargoed persons in the 12-month period of United States financial institutions (CAATSA Article 235/a-3).

4) The president of the United States may issue a resolution against the executive directors of the international financial institutions and instruct them to take a decision directing them to vote and to express their opinions in favor of the embargoed person (CAATSA Article 235/a-4).

5) The embargoed person shall be prohibited from being recognized by the institutions in the United States financial system and from acting as their authorized agent (CAATSA Article 235/a-5).

6) Prohibition of entering into United States procurement of goods and services (CAATSA Article 235/a-6).

7) Foreign exchange transactions may be prohibited in the United States for the benefit of the embargoed person (CAATSA Article 235/a-7).

8) It may limit and prohibit the transfer of funds and payments to the benefit of the embargoed person by financial institutions in the United States (CAATSA Article 235/a-8).

9) The embargo may limit any transactions such as real estate transactions and transfers that are in the interest of the person who is embargoed (CAATSA Article 235/a-9).

10) The embargo may limit or prohibit a person from investing in a person of United States nationality by issuing a substantial amount of capital-like debt (CAATSA Article 235/a-10).

11) Visa applications of designated corporate employees and shareholders of embargoed institution may be rejected (CAATSA Article 235/a-11).

12) The above-mentioned embargoes may also be imposed on the Executive Officers, Officers and representatives of the person being embargoed (CAATSA Article 235/a-12).

6) Does the president of the United States have the authority to lift sanctions?

CAATSA authorizes the president of the United States to waive/dispensation sanctions in certain circumstances, again referring to another regulation (National Defense Authorization Act of 2019). (Modified Waiver). President, within the security benefits of the United States, It will be able to exercise its authority if 3. countries take significant steps to reduce their defense purchases from Russia. This status is not a decision to be complied with by itself, depending on the event and the situation is given on a conditional and term basis.

7) Which are the countries of the 3rd party that face secondary/limited sanctions other than Turkey?

Indonesia: It is in a state of agreement with Russia for the supply of SU-35 fighter jets and amphibious armored personnel carriers. Sanctions have been waived by the United State President for now. However, the United State Secretary of State and the Deputy Secretary of Defense declare that there will be a sanction under the CAATSA if there is a procurement process.

Vietnam: 90% of its defense and military acquisitions are provided from Russia.  Although CAATSA faces sanctions, it has for now been waived by the US president from enforcing sanctions.

India: It has deep military and weapons systems supply relations with both Russia and the United States. CAATSA has faced sanctions over its recent acquisition of the S-400 air defense system from Russia. However, at the request of the president of the United States, the enforcement of sanctions has been waived for now.

Germany: Agreement with Russia on the second pipeline passing under the Baltic Sea is on the agenda. The US Ambassador to Germany has declared that if such an agreement exists, the US could impose sanctions on Germany under the CAATSA.

Gulf Countries: Saudi Arabia, Qatar and the compound Arab Emirates, which have expressed interest in Russia in particular against weapons systems such as the S-400, are on standby for now because of sanctions.

China: China is Russia’s biggest weapon buyer. Under these agreements, it supplied the S-400 air defense system from Russia. The following sanctions were imposed on Li Shangfu, the director of the China Equipment Development Department of Central Commission- EDD and the director of this agency, as the transaction was evaluated by the United States in the category of important transactions mentioned in CAATSA and developed defense and intelligence sectors with Russia:

• Banning the export trail of EDD in relation to technology products
• Banning foreign exchange transactions in the United States in the benefit of Li Shangfu, the director of the EDD institution
• The Prohibition of funds transfer and payment transactions by financial institutions in the U.S. jurisdiction to the benefits of Edd and Li Shangfu, who was the administrator of the institution.
• Freezing the assets owned and controlled by EDD and Li Shangfu, the corporation’s executive director, in the United States.
• EDD prohibits the travel of Li Shangfu, who is the administrator of the institution

8) How Turkey is affected by secondary sanctions; what can be done to prevent or mitigate the effects of sanctions?

From the optimistic side;

1) As I mentioned above, the United States does not impose sanctions on all foreign trade entities of our country in relation to Russia. Sanctions are imposed on certain individuals and institutions, and the goal is to reduce Russia’s military and economic effectiveness. In this context, it is not legally possible within the framework of CAATSA to take a sanction decision that will prevent all foreign trade of our country.

2) Secondly, as we have seen in the examples above, the US president frequently applies the “waiver” decision of sanctions (Modified Waiver).

On the other hand,

1) Especially our defense industry companies, machinery, metal and technology companies that supply products to these companies and the managers of all these companies can become the target of sanctions.

2) There is no direct negativity for foreign trade firms operating in other sectors. However, the fact that the USA, which is the biggest economic and financial power in the world, is subject to sanctions on an institution or persons in our country will result in a very negative morale loss in terms of international trade. Because, before the start of trade with a firm, serious research and auditing activities are carried out by dominant global trade actors, and “compliance” audits are conducted in relation to money laundering, bribery and corruption, terrorism financing and embargo practices. In the event of a violation of such a sanction, personal and criminal liability will be imposed for the directors of international commercial actors. While a Turkish company is doing business to eliminate these responsibilities; “I wonder if it is subject to sanctions? Is there any relationship with the sanctioned institution or person?” they will go to such inquires. Due to such inquiries and fears, they may be reluctant to engage in commercial relations with Turkish suppliers or customers, no matter which sector they operate in.

In this context, our foreign trade agencies need to prepare themselves, their companies and their employees, to prove that they are not under sanctions or doing business with a person or institution that is subject to sanctions when requested. For this, to our companies:

• To create awareness about the issue from top management to the lower level and to appoint an administrator responsible for these processes,
• To establish specific policies and procedures on the subject,
• To provide employees with training on these policies and procedures, and to store the training as evidentially evidenced as necessary,
• Keep supplier and customer information complete, update records immediately in case of a change in this information,
• SDN (List of Specially Designated Nationals and Blocked Persons) list showing the people and companies the United States embargoed to follow carefully,
• I would recommend that they make a written contract with the firm in which they are working, and that the firm or person should establish force major rules carefully in this respect, in particular by imposing provisions on contracts in case of subsequent entry into the SDN list.