On January 1, 2021, the National Defense Authorization Act for Fiscal Year 2021 (the “NDAA 2021”) was enacted into law after the US Congress voted to override the President’s veto of the bill. The defense budget legislation authorizes $740.5 billion for national defense spending and sets policies on military compensation, procurement of equipment, operations, and training. In addition, similar to most National Defense Authorization Acts in recent years, the NDAA 2021 includes provisions regarding sanctions and export controls.

Sanctions on Turkey

Section 1241 of the NDAA 2021 requires the President to impose by January 31, 2021 at least five sanctions described in Section 235 of the Countering America’s Adversaries Through Sanctions Act (“CAATSA”) to each person who knowingly engaged in Turkey’s acquisition of the S-400 air defense system (“System”) from Russia.

By way of background, in 2017, Turkey signed a deal with Russia to acquire the System, which caused tensions between Turkey and other members of the North Atlantic Treaty Organization (NATO). After that, US lawmakers had been pressing the President to impose sanctions on Turkey for the transaction. Congress ultimately stepped in and made the determination in Section 1241 that Turkey’s acquisition of the System constitutes “a significant transaction” that would trigger sanctions under CAATSA §231.  CAATSA §231 authorizes and requires the President to impose sanctions against persons who knowingly engage in “a significant transaction” with the defense or intelligence sectors of the Russian government.   

In fact, prior to the enactment of the NDAA 2021, on December 14, 2020, the Trump Administration announced sanctions pursuant to CAATSA §231 against Turkey’s Presidency of Defense Industries, Turkey’s primary defense procurement entity, for its role in the acquisition of the System.  Please see our prior blog post for more details about the sanctions.

Section 1241 of the NDAA 2021 clarifies that the authorities and requirements to impose sanctions do not include sanctions on the importation of goods.  Section 1241 allows the President to terminate the sanctions if the President submits to Congress a certification that Turkey no longer possesses the System, no System is operated/maintained in Turkey by Russian nationals or persons acting on behalf of the Russian government, and that the President has received Turkey’s assurance that it will not pursue to reacquire the System by engaging in any activity subject to CAATSA sanctions.

Sanctions Against the Nord Stream 2 and TurkStream Pipeline Projects

Section 1242 of the NDAA 2021 expands existing sanctions against the Nord Stream 2 and TurkStream pipeline projects under the Protecting Europe’s Energy Security Act of 2019.  Specifically, Section 1242:

  • Expands the scope of targeted vessels to also include vessels that engaged in “pipe-laying activities” for the construction of the two projects. “Pipe-laying activities” is defined to mean “activities that facilitate pipe-laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe.”
  • Expands the scope of targeted activities by foreign persons to also include:
    • facilitating selling, leasing, or providing targeted vessels,
    • providing for targeted vessels underwriting services or insurance/reinsurance essential for the completion of the two projects;
    • providing essential services or facilities for technology upgrades or installation of welding equipment for targeted vessels, and
    • providing services for the testing, inspection, or certification essential for the completion or operation of the two projects.

The NDAA 2021’s expansion of sanctions against the Nord Stream 2 and TurkStream pipeline projects is yet another measure taken by the US that seeks to thwart the progress of the two projects. In July 2020, the US Department of State updated its guidance regarding the implementation of CAATSA §232 to target certain investments and other activities related to the two projects. Please see our prior blog post for details about this updated guidance.

Measures Concerning China

  • Reporting on Chinese Military Companies

Section 1260H of the NDAA 2021 requires the Secretary of State to identify “Chinese military companies” and submits annual reports to Congress listing these “Chinese military companies.” This supplements Section 1237 of the National Defense Authorization Act for Fiscal Year 1999 (“Section 1237”), which requires the Secretary of State to identify “Communist Chinese military companies” (“CCMCs”) (which have been subject to securities-related sanctions as described in our prior blog posts here and here). The definition of “Chinese military companies” in Section 1260H is similar to but broader than the definition of CCMCs in NDAA 1999 Section 1237. Specifically, in addition to entities that are owned or controlled by the People’s Liberation Army (the “PLA”), the definition of “Chinese military companies” also includes entities that are “beneficially owned by or … acting as an agent of or on behalf of” the PLA, “any other organization subordinate to the Central Military Commission of the Chinese Communist Party”, and “military-civil fusion contributors” to the Chinese defense industrial base. “Military-civil fusion contributors” is defined as entities that have any of several enumerated government linkages such as “receiving assistance, operational direction or policy guidance” from the Chinese government or the Chinese Communist party.   It is yet to be seen whether and what restrictions will be imposed on dealing with “Chinese military companies” identified pursuant to Section 1260H.

  • Export Controls for Hong Kong

Section 1252 of the NDAA 2021 modifies the existing prohibition on the commercial export of covered munitions items to the Hong Kong Police Force. Specifically, Section 1252 clarifies that the prohibition on commercial export applies not only to covered munitions items but also to crime control items.  

  • Restrictions and/or Requirements Regarding Academic Institutions

The NDAA 2021 contains several provisions that seek to protect US intellectual property, controlled information, key personnel, science, and technologies (collectively as “the US innovation base”). For example, Section 1299C requires the Secretary of Defense to establish an initiative to work with higher education institutions that perform defense research and engineering activities to protect the US innovation base. The proposed initiative is required to have, among other things, a list of Chinese and Russian academic institutions that “have a history of improper technology transfer or intellectual property theft” or “pose a serious risk of improper technology transfer of data, technology, or research that is not published or publicly available.”

Author

Ms. Contini focuses her practice on export controls, trade sanctions, and anti-boycott laws. This includes advising US and multinational companies on trade compliance programs, risk assessments, licensing, review of proposed transactions and enforcement matters. Ms. Contini works regularly with companies across a wide range of industries, including the pharmaceutical/medical device, oil and gas, and nuclear sectors.

Author

Meghan (Meg) Hamilton is a member of the International Commercial Practice Group and the International Trade Compliance Sub-Practice Group in Baker McKenzie, Chicago, where she has been an associate since 2015. Meg regularly assists multinational companies on sanctions, customs and export control compliance as well as other international trade matters, including commercial agreements and anti-boycott regulations. She is active in civic activities throughout Chicago, serving on the Young Professional Board of the Center for Disability and Elder Law as well as the Auxiliary Board of the Chicago Legal Clinic.

Author

Iris Zhang is an associate in the Firm's International Commercial & Trade Practice Group. Iris regularly assists multinational companies on sanctions, customs and export control compliance as well as other international trade matters. Before joining the Firm, Iris worked in a Chinese law firm in Beijing on regulatory compliance and risk controls relating to Chinese anti-bribery laws and US Foreign Corrupt Practices Act.