August 3, 2019: CBW Act-related Executive Order, Directive and FAQs

Issuance of CBW Act-related Executive Order; Publication of CBW Act Directive and Frequently Asked Questions

On August 1, 2019, the President issued a new Executive Order (E.O.) “Administration of Proliferation Sanctions and Amendment of Executive Order 12851” , this E.O. is related to the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, as amended (“CBW Act”).  Pursuant to the CBW Act, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) is issuing a Russia-related Directive (CBW Act Directive).  The CBW Act Directive will have an effective date of August 26, 2019.  OFAC is also publishing new FAQs relating to the CBW Act Directive.

From the Executive Order:

Section 1. (a) When the President, or the Secretary of State pursuant to authority delegated by the President and in accordance with the terms of such delegation, pursuant to section 307(b)(1) of the CBW Act, selects for imposition on a country one or more of the sanctions set forth below and in section 307(b)(2) of that Act, the Secretary of the Treasury, in consultation with the Secretary of State, shall take the following actions, when necessary, to implement such sanctions:

(i) oppose, in accordance with section 701 of the International Financial Institutions Act (22 U.S.C. 262d), the extension of any loan or financial or technical assistance to that country by international financial institutions; and

(ii) prohibit any United States bank from making any

loan or providing any credit to the government of that country, except for loans or credits for the purpose of purchasing food or other agricultural commodities or products.

Here is the Directive:

RUSSIA-RELATED DIRECTIVE UNDER EXECUTIVE ORDER OF AUGUST 1, 2019 (“CBW Act Directive”)

Pursuant to sections 1(a)(ii), 1(b), and 5 of Executive Order of August 1, 2019 “Administration of Proliferation Sanctions and Amendment of Executive Order 12851” (the “Order”) and 31 C.F.R. § 544.802, and following the Secretary of State’s selection of the sanction related to bank loans pursuant to delegated authority under section 307(b) of the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, as amended (22 U.S.C. § 5605(b)), the Director of the Office of Foreign Assets Control has determined, in consultation with the Department of State, that the following activities by a U.S. bank, as defined below, including foreign branches, are prohibited, except to the extent provided by law or unless licensed or otherwise authorized by the Office of Foreign Assets Control: (1) participation in the primary market for non-ruble denominated bonds issued by the Russian sovereign, as defined below, after August 26, 2019; and (2) lending non-ruble denominated funds to the Russian sovereign, as defined below, after August 26, 2019.

For purposes of this Directive, the term “U.S. bank” means, consistent with the Order and 31 C.F.R. § 544.311, any entity organized under the laws of the United States or any jurisdiction within the United States (including its foreign branches), or any entity in the United States, that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures, or options, or procuring purchasers and sellers thereof, as principal or agent.

“U.S. bank” includes but is not limited to depository institutions, banks, savings banks, trust

companies, securities brokers and dealers, commodity futures and options brokers and dealers,

The term

forward contract and foreign exchange merchants, securities and commodities exchanges,

clearing corporations, investment companies, employee benefit plans, and U.S. holding

companies, U.S. affiliates, or U.S. subsidiaries of any of the foregoing. This term includes those

branches, offices and agencies of foreign financial institutions that are located in the United

States and otherwise meet the definition of “U.S. bank” used in this Directive, but not such

institutions’ foreign branches, offices, or agencies.

Furthermore, for purposes of this Directive, the term “Russian sovereign” means any ministry, agency, or sovereign fund of the Russian Federation, including the Central Bank of Russia, the National Wealth Fund, and the Ministry of Finance of the Russian Federation. This term does not include state-owned enterprises of the Russian Federation.

Except to the extent otherwise provided by law or unless licensed or otherwise authorized by the Office of Foreign Assets Control, the following are also prohibited: (1) any transaction that evades or avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate any of the prohibitions contained in this Directive; and (2) any conspiracy formed to violate any of the prohibitions in this Directive.

August 2, 2019

Here are the new FAQs:

673. What is the purpose of the Executive Order of August 1, 2019, “Administration of Proliferation Sanctions and Amendment of Executive Order 12851.”  

 

The Executive order (E.O.) of August 1, 2019 delegates to the Secretary of the Treasury the implementation of the sanctions related to multilateral development bank assistance and to United States bank loans that are contained in the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, as amended (“CBW Act”). 22 U.S.C. §5605(b)(2)(A)-(B). The E.O. also provides authority pursuant to the International Emergency Economic Powers Act to the Secretary of the Treasury to take certain actions to implement the sanction related to bank loans. [08-03-2019]


674. What action is the U.S. government taking under the CBW Act?

 

Following the chemical weapons attack in Salisbury, United Kingdom, the Department of State, acting under the CBW Act pursuant to authority delegated to the Secretary of State, made a determination on August 6, 2018 that the Government of the Russian Federation had used chemical weapons in violation of international law or had used lethal chemical weapons against its own nationals. Effective as of August 27, 2018, the United States imposed a first round of sanctions against Russia. On November 6, 2018, the Department of State determined that the Government of the Russian Federation had failed to meet the conditions described in the CBW Act to avoid the imposition of a second round of sanctions, including failing to provide reliable assurances that it would not engage in future chemical weapons attacks. On August 2, 2019, the Department of State selected three additional sanctions to impose on Russia pursuant to the CBW Act, specifically, the sanctions related to U.S. bank loans, opposition to multilateral development bank assistance, and further export restrictions administered by the Department of Commerce. [08-03-2019]


675. How is OFAC implementing sanctions related to U.S. bank loans imposed on Russia pursuant to the CBW Act?

 

Pursuant to E.O. of August 1, 2019, 31 C.F.R. § 544.802, and the CBW Act, OFAC issued a Russia-Related Directive under E.O. of August 2, 2019, (the “CBW Act Directive”) , which prohibits U.S. banks from participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign and also prohibits U.S. banks from lending non-ruble denominated funds to the Russian sovereign. These prohibitions do not apply to bonds or loans denominated in rubles. This prohibition only applies to “U.S. banks,” as that term is defined in the CBW Act Directive and consistent with section 4(c) of E.O. of August 1, 2019 and consistent with the definition of U.S. financial institution at 31 C.F.R. § 544.311. The CBW Act Directive includes a definition of the term “Russian sovereign.” The CBW Act Directive is effective as of August 26, 2019. [08-03-2019]


676. What do the CBW Act Directive terms “U.S. bank” and “Russian sovereign” mean?

The CBW Act Directive  defines the term “U.S. banks.” This definition is consistent with section 4(c) of E.O. of August 1, 2019, and with the definition of U.S. financial institution at 31 C.F.R. § 544.311. The CBW Act Directive defines the term “Russian sovereign” as any ministry, agency, or sovereign fund of the Russian Federation, including the Central Bank of Russia, the National Wealth Fund, and the Ministry of Finance of the Russian Federation. This term does not include state-owned enterprises of the Russian Federation. [08-03-2019]


677. How does OFAC’s CBW Act Directive impose costs on the Government of the Russian Federation?  

 

The CBW Act Directive imposes long-term costs on Russia for its brazen use of chemical weapons and its failure to meet the conditions described in the CBW Act, including the failure to provide reliable assurances that Russia would not engage in future chemical weapons attacks. The Government of the Russian Federation cannot leverage U.S. banks for future non-ruble denominated sovereign bond offerings or benefit from non-ruble denominated loans provided by U.S. banks. [08-03-2019]


678. Does the CBW Act Directive prohibit participation in the secondary market for Russian sovereign debt?

 

No, the CBW Act Directive does not prohibit U.S. banks from participating in the secondary market for Russian sovereign debt. [08-03-2019]

And Treasury issued a press release:

PRESS RELEASES

Treasury Announces Sanctions under the Chemical and Biological Weapons Control and Warfare Elimination Act 

Washington– The U.S. Department of the Treasury announced today that it is implementing two sanctions on the Russian Federation as part of measures imposed by the U.S. government pursuant to the Chemical and Biological Weapons Control and Warfare Elimination Act of 1991, as amended (“CBW Act”), in response to Russia’s use of the “Novichok” nerve agent in Salisbury, United Kingdom (UK) in March 2018.  This action follows the Department of State’s determination that the Government of the Russian Federation failed to comply with the conditions described in the CBW Act.  Treasury is imposing a prohibition related to certain U.S. bank loans and will oppose multilateral development bank assistance to the Russian Federation.  

To implement the sanction related to U.S. bank loans, Treasury’s Office of Foreign Assets Control (OFAC) is issuing a Russia-related Directive (the “CBW Act Directive”) under the Executive Order (E.O.) of August 1, 2019.  The CBW Act Directive prohibits U.S. banks from participating in the primary market for non-ruble denominated bonds issued by the Russian sovereign and also prohibits U.S. banks from lending non-ruble denominated funds to the Russian sovereign.  The CBW Act Directive will become effective on August 26, 2019, following a Congressional notification period required by the CBW Act.  OFAC is publishing a list of Frequently Asked Questions (FAQs) to provide guidance to the public on the CBW Act Directive. 

Treasury will also ensure that the U.S. Government’s existing policy of opposing multilateral development bank assistance to the Russian Federation remains permanently in place until Russia complies with the requirements of the CBW Act.

Mr. Watchlist notes that nothing in the Executive Order (or the Press Release) notes the enhanced licensing requirements for controlled goods exports to Russia that was mentioned in the State Department press release. Although the licensing changes would be issued by Commerce, not Treasury, I wonder if issuing the Executive Order is a way to bypass the CBW Act’s actual requirements, which require the imposition of 3 of 6 possible sanctions (only 2 of which are mentioned in the Executive Order).

Links:

OFAC Notice

CBW Act Executive Order

Russia-related Directive

New FAQs

Treasury Press Release

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