On January 1, 2021, the U.S. Senate passed – over President Trump’s veto – the National Defense Authorization Act, or NDAA, for Fiscal Year 2021 (H.R. 6395), a massive annual Department of Defense spending bill, which this year includes a section expanding sanctions on the Nord Stream 2 and TurkStream pipeline projects. The Senate action follows House passage of the bill over the President’s veto on December 28, 2020.
Section 1242 of the 2021 NDAA broadens the scope of the sanctions provisions contained in the 2020 NDAA in the following principal ways:
- For Nord Stream 2 only, it targets foreign persons that provide “services for the testing, inspection, or certification necessary or essential for the completion or operation of the … pipeline[.]”
- For both Nord Stream 2 and TurkStream, it –
- expands the scope of sanctionable activities in support of pipe-laying for these projects to include activities that “facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe[;]”
- includes, in addition to selling, leasing or providing the covered pipe-laying vessels, “facilitat[ing]” that activity (even if not involving “deceptive or structured transactions,” language that had been included in the 2020 NDAA); and
- clarifies that the scope of sanctionable activity includes providing underwriting services for covered vessels or insurance or reinsurance necessary or essential for the completion of the project; and providing services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, covered vessels that are necessary or essential for the completion of the project.
While these provisions are broad, they have been designed to target key chokepoints for the Nord Stream 2 project in particular, and some of the language included in this statute raises important questions. For example, some types of contracting in support of these projects may not be sanctionable if it is not “necessary or essential for the completion of the project.” Companies facing these questions should consider carefully whether or how to proceed.
Senator Ted Cruz (R-TX), a vocal opponent of Nord Stream 2, has described the 2021 NDAA as a “second wave of sanctions” that is “designed to be surgical, to make clear this project will not be completed.” According to Senator Cruz, while the initial sanctions “halt[ed] the pipeline in its tracks[,]” the second wave will “rachet up the pressure even further.” Similar provisions are found in bills introduced in 2020 by Senator Cruz and others, as discussed in our prior blog post on Nord Stream 2.
The 2021 NDAA provides a 30-day wind-down period starting from January 1, 2021, although it leaves some ambiguity regarding whether wind-down must be fully completed by that time (stating that the President must certify within that timeframe that the person has “engaged in good faith efforts to wind down” its sanctionable activity). Companies that do not anticipate being able to fully terminate their sanctionable activity within 30 days should consider engaging with the U.S. government to demonstrate their good faith efforts to that end. Activity that was sanctionable under the 2020 NDAA has not been granted any additional wind-down period under the 2021 NDAA, and remains sanctionable.
In addition, the 2021 NDAA clarifies that these sanctions shall not apply to the governmental entities of the EU and its member states, the UK, Switzerland, or Norway. However, it adds a potential ambiguity that may limit that carve-out when such an entity is “operating as a business enterprise.” Nor is it entirely clear that sub-national (e.g., regional/provincial and local) governments would be exempt. The law requires the State Department to consult with these countries prior to the imposition of sanctions – that consultation requirement does not give any other government a veto over the imposition of sanctions, but largely leaves it in the discretion of the U.S. government how to approach these consultations. While the incoming Biden administration has expressed a clear desire to work closely with European partners on U.S. sanctions implementation, the U.S. Congress is likely to insist on the full implementation of these provisions in a timely manner as provided by law.
The 2020 NDAA provides for the issuance of a series of reports by the State Department identifying foreign persons that have “knowingly” engaged in the enumerated sanctionable activities. The first report was due to Congress 60 days after enactment, or in February 2020, and such reports have been due every 90 days thereafter. Senator Cruz stated on December 17, 2020 that “a report is due from the administration in the coming days of any companies that have committed sanctionable activities.” Accordingly, companies monitoring this U.S. sanctions risk area are advised to closely track these developments.