US issues new guidance on Nord Stream 2 sanctions authorities

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US issues new guidance on Nord Stream 2 sanctions authorities

US issues new guidance on Nord Stream 2 sanctions authorities

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April 16, 2021

On April 9, 2021, the US Department of State issued updated guidance on how it plans to implement the high profile statutory sanctions authority targeting the Nord Stream 2 pipeline and the Turkstream pipeline.

What you need to know

The amendments to the Protecting Europe’s Energy Security Act of 2019 (“PEESA”) and public guidance send a strong message that the United States government is serious about targeting Russian energy projects such as Nord Stream 2 and Turkstream - and is retaining discretion on whether and how to impose sanctions on project participants. Accordingly, those engaged in activities relating to Nord Stream 2, Turkstream, or their successor pipeline projects should review the new guidance and their transactions to ensure they do not face new obligations or risks as a result.

Background

On April 9, 2021, the State Department unveiled new guidance on PEESA, as amended by the Protecting Europe’s Energy Security Clarification Act (“PEESCA”), clarifying the scope of sanctionable conduct, excepted activities, and the wind-down provision set forth under that authority.

PEESA, as originally enacted, required the President to identify for the imposition of sanctions vessels engaged in pipe-laying at depths of 100 feet or more below sea level for the construction of the Nord Stream 2, the Turkstream, or any successor pipeline projects. This original authority also required that the President identify foreign persons that (1) sold, leased, or provided such vessels; and (2) facilitated deceptive or structured transactions to provide such vessels.

Since its enactment, US authorities have expanded the scope of PEESA twice.

First, in October 2020, the State Department issued guidance that in effect expanded the scope of sanctions to entities providing services, facilities, and/or funding for “upgrades or installation of equipment” for vessels working on the Nord Stream 2 and Turkstream projects.¹

Second, on January 1, 2021, Congress amended the statute via PEESCA, which was incorporated into and enacted as Section 1242 of the National Defense Authorization Act for Fiscal Year 2021 (“FY2021 NDAA”). In so doing, Congress expanded PEESA to reach foreign persons who not only sell, lease, or provide vessels but also foreign persons who facilitate such sale, lease, or provision. In addition, PEESA, as amended, contains further authorities to target persons engaged in “pipe-laying activities,” which it defines to include “activities that facilitate pipe‑laying, including site preparation, trenching, surveying, placing rocks, backfilling, stringing, bending, welding, coating, and lowering of pipe.”

Furthermore, PEESA now also covers certain persons who support the construction of the named pipeline projects, including foreign persons that provide underwriting services, insurance, or reinsurance for vessels engaged in pipe-laying activities for the two pipelines; services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels for such pipelines; or services for the testing, inspection, or certification necessary for, or associated with the operation of the Nord Stream 2 pipeline.

Beyond expanding the scope of targeted persons and activities, the amended statute also requires the President to consult with European allies, namely the governments of Norway, Switzerland, the United Kingdom, and member countries of the European Union, prior to imposing sanctions. The President is further required to include in his report to Congress a description of his consultation with these European countries, as well as any concerns raised by them. The amended statute also excepts from PEESA’s reach the governments of these countries and any entity of the European Union or a government listed that is not operating as a “business enterprise,” a term which both the statute and guidance leave unclear.

Finally, the statute provides for a wind-down provision that allows foreign persons to engage in good faith efforts to wind down operations that would otherwise subject the person to sanctions under PEESA amendments without a risk of sanctions, for a period of thirty days after the effective date of such amendments.

Updated Guidance

The guidance makes clear that the State Department can use the sanctions authority under PEESA to target persons who knowingly sell, lease, or provide vessels engaged in the construction of covered projects, or facilitate such sale, lease, or provision, including by financing. The statute also covers any persons who have facilitated deceptive or structured transactions to provide vessels for the construction of the named projects, provided those vessels underwriting services or insurance or reinsurance necessary or essential for the completion of such projects; provided services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels if the services or facilities are necessary or essential for the completion of such projects; or provided services for the testing, inspection, or certification necessary or essential for the completion or operation of the Nord Stream 2 pipeline.²

Furthermore, the guidance also addresses the implementation of the wind-down provision of PEESA, as amended. To benefit from the wind-down period, “persons that were knowingly engaged in conduct subject to sanctions under the amendments to PEESA would have needed to cease construction-related activity or engage in good faith efforts to wind down sanctionable activity no later than 30 days after PEESA, as amended, became effective” -- in other words, by January 31, 2021. Accordingly, the Secretary of State “is required to impose sanctions on those foreign persons that are determined to meet” PEESA sanctions criteria and are not otherwise excepted after January 31, 2021. The guidance further explains that the wind-down authorization provided in the amendments to PEESA does not apply to activities that were already subject to sanctions prior to such amendments.

Finally, the guidance outlines certain of the exceptions in PEESA, as amended. Excepted persons include, among others, those providing provisions to vessels identified under PEESA “if such provisions are intended for the safety and care of the crew aboard the vessel, the protection of human life aboard the vessel, or the maintenance of the vessel to avoid any environmental or other significant damage.” PEESA, as amended, also excepts, among others, persons “engaged in activities necessary for or related to the repair or maintenance of, or environmental remediation with respect to” the named projects, as well as the governments and governmental entities named above.