On 14 December 2020, the U.S. Department of State announced the imposition of sanctions on one Turkish entity, the Republic of Turkey’s Presidency of Defense Industries (“SSB”), and four Turkish individuals in relation to the procurement of the S-400 surface-to-air missile system from Russia in mid-2019. The sanctions were imposed pursuant to Section 231 of the 2017 Countering America’s Adversaries Through Sanctions Act (“CAATSA”) and include restrictions on the granting of export licenses and authorizations, or loans or credits involving SSB. The SSB officers were also designated as Specially Designated Nationals (“SDNs”) on the SDN List and are subject to full blocking sanctions and visa restrictions (the SSB itself is not an SDN and is not subject to blocking).
SSB’s Violation of CAATSA
Under Section 231 of CAATSA, the U.S. government must impose at least five of the twelve sanctions enumerated in Section 235 on any person determined to have knowingly engaged in a significant transaction with a person that is a part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation.
According to a fact sheet distributed by the U.S. Department of State, SSB knowingly engaged in a significant transaction with Rosoboronexport (“ROE”), Russia’s main arms export entity, to purchase the missile defense system. ROE is included on the State Department’s CAATSA Section 231 List of Specified Persons, as a person that is part of, or operates for or on behalf of, the defense sector of the Government of the Russian Federation. The Treasury Department’s Office of Foreign Assets Control (“OFAC”) has added SSB to its new Non-SDN Menu-Based Sanctions List, which indicates that SSB is not an SDN but instead is subject to the more limited sanctions from the Section 235 menu-based sanctions in CAATSA.
The Secretary of State, in consultation with the Secretary of Treasury, has selected the following sanctions from CAATSA Section 235, as implemented by Executive Order 13849, to impose on SSB:
- a prohibition on granting specific U.S. export licenses and authorizations for any goods or technology transferred to SSB;
- a prohibition on loans or credits by U.S. financial institutions to SSB totalling more than $10 million in any 12-month period;
- a ban on U.S. Export-Import Bank assistance for exports to SSB; and
- a requirement for the United States to oppose loans benefitting SSB by international financial institutions.
The U.S. government also imposed full blocking sanctions and visa restrictions on the following individual corporate officers of SSB:
- Dr. Ismail Demir, president of SSB;
- Faruk Yigit, SSB’s vice president;
- Serhat Gencoglu, Head of SSB’s Department of Air Defense and Space; and
- Mustafa Alper Deniz, Program Manager for SSB’s Regional Air Defense Systems Directorate.
As noted above, OFAC has added these four individuals to its SDN List, reflecting that their property and interests in the property that are in the United States or within possession or control of a US person are subject to blocking (freezing). Also, non-US persons who engage in future dealings with these SDNs may face exposure under secondary US sanctions pursuant to Section 228 of CAATSA if such transaction is considered by OFAC to be “significant”.
The sanctions come following the passage of legislation by both Chambers of the US Congress requiring the imposition of sanctions on Turkey under CAATSA Section 231 for its purchase of the missile defense system. The provision was part of the Conference Report of the Fiscal Year 2021 National Defense Authorization Act, which passed with a veto-proof majority, but has yet to be signed into law.
Upon announcing the new sanctions, Secretary of State Mike Pompeo said, “The United States made clear to Turkey at the highest levels and on numerous occasions that its purchase of the S-400 system would endanger the security of U.S. military technology and personnel and provide substantial funds to Russia’s defense sector, as well as Russian access to the Turkish armed forces and defense industry.” It appears that the White House preferred to impose these latest sanctions under the existing CAATSA framework—as opposed to following a new mandate from Congress.
What does this mean?
As a result of these sanctions, U.S. Persons are not generally prohibited from engaging in all transactions relating to SSB as a whole, but are restricted from engaging in specified activities involving loans and credits to SSB. No person will be able to export goods or technology to SSB that require U.S. government export licenses or other authorizations to Turkey, as such applications for such licenses or authorizations will now be denied. For instance, a Turkish company will no longer be permitted to transfer to SBB an item exported to Turkey under a U.S. export license.
U.S. persons are prohibited from engaging in any transaction, activities, or dealings involving the designated individuals, and non-U.S. persons are also prohibited to the extent there is a U.S. nexus. The prohibition applies to any entity that is owned, directly or indirectly, 50 percent or more, individually by an SDN or, when aggregated, with the ownership interests of any SDNs.
Businesses should review current contracts and projects to determine the potential involvement of SSB or the designated individuals and to determine the involvement of any U.S. persons, U.S.-origin items or services, or any U.S.-dollar transactions of financial institutions.
For further information or assistance, please contact any of the Hogan Lovells lawyers.
Authored by: Ajay Kuntamukkala, Ari Fridman, Deborah Wei, Cayla Ebert.