Potential expansions of US sanctions on China, Nord Stream 2/TurkStream pipelines, and Turkey

If the bill becomes law, the NDAA 2021 would impact US sanctions on (i) China, (ii) the Nord Stream 2 and TurkStream pipelines and (iii) Turkey.

(i) Further developments in sanctions on Chinese military companies

The NDAA 2021 would add to recent actions taken against companies that the US deems to have close ties to the Chinese military. In particular Executive Order 13959 from November 2020 which effectively prohibited US persons from investing in companies identified as "Communist Chinese Military Companies" by the US Department of Defense ("DOD") (see our previous Sanctions Alert).

Section 1260H of the NDAA 2021 requires the DoD to produce a list of "Chinese Military Companies" by 15 April 2021, and annually thereafter.

Notably, the NDAA 2021 would expand the scope of targeted entities to also include "military-civil fusion contributor[s] to the Chinese defense industrial base [..] engaged in providing commercial services, manufacturing, producing or exporting." The term "military-civil fusion contributor" is broadly defined and sets out several different ways such entities may be linked to the Chinese military industry. This includes inter alia links by way of "receiving assistance, operational direction or policy guidance" from certain governmental bodies, being awarded military production licenses, or advertising on Chinese military equipment procurement platforms. The Secretary of State is also given a wide discretionary power to list as a military-civil fusion contributor "[a]ny other entities the Secretary determines is appropriate."

Note also in connection with sanctions on China, that the NDAA 2021 Section 1252 would extend and modify existing export controls with respect to export of certain munitions to the Hong Kong Police Force.

Furthermore, Section 1299C would require the Secretary of Defense to establish an initiative to work with institutions of higher education who perform defense research and engineering activities, with an aim to protect national security-relevant intellectual property, controlled information, key personnel and information about critical technologies. Among other functions and mechanisms, the initiative would produce and maintain a list of Chinese, Russian and other foreign academic institutions that inter alia "have a history of improper technology transfer, intellectual theft, or cyber or human espionage[..]" or "operate under the direction of the military forces or intelligence agency."

(ii) Expanded sanctions to counter Nord Stream 2 and TurkStream pipelines

As context, last year's NDAA 2020 included Title LXXXV – Protecting Europe's Energy Security Act ("PEESA"), which contained legal basis to impose targeted secondary sanctions on vessels, entities and individuals determined to engage in the construction of the Nord Stream2 and TurkStream pipelines (see our previous Sanctions Alert). In July of this year, the US also made clear that it would expand its interpretation of the scope of existing sanctions within the Countering America's Adversaries Through Sanctions Act ("CAATSA") to include the pipelines. Similarly, in October 2020, the State Department published a guidance saying it would interpret the PEESA sanctions to include foreign persons who provide certain services or goods necessary and essential for the provision or operation of the vessels involved in the two projects.

The NDAA 2021 would add further to these existing sanctions designed to counter the pipeline projects.

Firstly, Section of 1242 of NDAA 2021 would expand the scope of PEESA-sanctions from vessels engaged in "pipe-laying," to also include vessels engaged in "pipe-laying activities". This term is relatively broadly defined to mean: "activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating and lowering pipe."

PEESA sanctions also targeted those that "sold, leased, or provided" vessels for the construction of the pipelines. NDAA 2021 would expand this wording to also include those that "facilitated selling, easing or providing" the vessels. Pursuant to last week's bill, sanctions would also extend to foreign persons determined to have provided such vessels underwriting services, insurance or reinsurance, or "provided services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels", if these services or facilities are "necessary or essential" for the completion of the pipelines. Furthermore, the PEESA sanctions would extend to those that "provide service for the testing, inspection, or certification necessary or essential for the completion or operation of the Nord Stream 2 project."

(iii) Sanctions in response to Turkish acquisition of the S-400 missile system

Turkey's acquisition from Russia of the S-400 anti-aircraft missile system has long been the source of controversy, inter alia due to the perceived threat it poses to NATO (even though Turkey itself is a member of that organization). Pursuant to the NDAA 2021's Section 1241, the President will have 30 days from enactment of the law, to impose sanctions on persons determined to have "knowingly engaged in the acquisition of the S-400 air defense system [..]". The sanctions in question shall be chosen from the menu set out in Section 235 of the CAATSA.

Notably, the NDAA 2021 also determines explicitly that the Turkish acquisition constituted a "significant transaction" with the defense or intelligence sectors of the government of the Russian Federation, as described in Section 231 of the CAATSA. On 14 December 2020, two days after the NDAA 2021's passing vote in the Senate, the US Department of State announced that it is imposing sanctions under CAATSA Section 231 on the Turkish Presidency of Defense Industries for knowingly engaging a significant transaction with Rosoboronexport, Russia's main arms export entity, by procuring the S-400 system.

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WR Sanctions Alerts provide you with updates on material developments in the country-specific sanctions programs implemented by the US, the UN, the UK, the EU and Norway. We will not provide updates on mere prolongations, without material changes, of existing sanctions programs, nor on any listings or de-listings of individuals/entities placed on implemented sanctions lists . Please note that the WR Sanctions Alerts are provided as general information and do not constitute legal advice.