What Designating Russia as a State Sponsor of Terrorism Would Mean

According to recent reports, Ukrainian President Zelenskyy has directly requested that the United States designate Russia as a State Sponsor of Terrorism (“SST”), an action that the United States has been considering for some time. The designation would have far-reaching implications and would automatically trigger some of the most aggressive unilateral sanctions in the United States’ arsenal, including restrictions on financial transactions, defense exports and sales, and foreign aid. These would further ramp up pressure from even the existing slew of sanctions imposed on Russia and its oligarchs.

An SST designation would implicate other sanctions laws that penalize persons and countries engaging in certain trade with SSTs. The designation would also benefit U.S. victims of international terrorism by removing Russia’s immunity from U.S. jurisdiction for terrorism-related civil lawsuits, making Russian assets available for attachment in satisfaction of terrorism-related judgments, and by directing sanctions violators’ penalties into a fund designed to satisfy terrorism-related judgments against SSTs.

Currently, only four countries have been designated as SSTs: Iran, North Korea, Syria, and Cuba (which was listed, delisted, and recently relisted). Iraq, Libya, South Yemen, and Sudan were previously designated, but have since been delisted. In order to apply an SST designation, the Secretary of State must determine that a country has repeatedly provided support for acts of international terrorism pursuant to § 1754(c) of the National Defense Authorization Act for Fiscal Year 2019, § 40 of the Arms Export Control Act, and § 620A of the Foreign Assistance Act of 1961.

Sanctions

An SST designation comes with a heavy list of unilateral sanctions, including but not limited to:

• A ban on arms-related exports and sales;
• Controls over exports of dual-use items;
• Prohibitions on economic assistance;
• Requirement that the United States oppose loans by the World Bank and other international financial institutions for the benefit of the SST;
• Removal of sovereign and diplomatic immunity under the Foreign Sovereign Immunity Act’s (“FSIA”) terrorism exception, allowing terrorism victims and their families to file lawsuits against the SST in the United States;
• Denial of income tax credits for individuals and entities for income earned in the SST;
• Denial of duty-free treatment of goods exported to the United States;
• The authority (which must then be proactively utilized and does not take effect automatically) to prohibit any U.S. citizen from engaging in a financial transaction with the SST without a U.S. Department of Treasury Office of Foreign Asset Control (“OFAC”) license; and
• Prohibition of U.S. Department of Defense contracts exceeding $100,000.00 with companies controlled by SSTs.

Violation of these rules can come with hefty penalties, typically ranging up to ~$330,000 (adjusted for inflation) or twice the value of the transaction.  Moreover, the reputational costs of transacting with someone identified as a sponsor of terrorism often leads even non-U.S. companies to elect to decline otherwise permissible activity.

Terrorism Litigation and Recovery  

Although foreign sovereigns are typically immune from jurisdiction in the United States under the FSIA, an SST designation would remove this immunity for claims arising from personal injury or death that was caused by an act of torture, extrajudicial killing, aircraft sabotage, hostage taking, or the provision of material support or resources. Pursuant to 28 U.S.C. § 1605A(a)(2)(i)(I), the claim must arise from an act that occurred either at the time that a foreign state was designated as an SST or otherwise an act that led to the SST being so designated. If the United States does designate Russia as an SST, Russia would become subject to the jurisdiction of the United States for any claims brought by U.S. persons arising from acts of terrorism that Russia directly or indirectly facilitated.

Under this exception, thousands of victims of Cuban, North Korean, Syrian, and Iranian terrorism have successfully brought suit against SSTs and have obtained judgments in the tens of billions of dollars. These judgments can factor into diplomatic negotiations and stipulations for the eventual removal of a country from this list, as was most recently accomplished by Sudan in 2020. In the meantime, the designation would allow victims of terrorism who obtain judgments against Russia to pursue Russian assets located in the United States – even those blocked or frozen by OFAC – to satisfy their judgments pursuant to the Terrorism Risk Insurance Act of 2002 (“TRIA”).

Victims of other SSTs would also stand to benefit. The United States Victims of State Sponsored Terrorism Fund (“USVSST Fund”) was created by Congressional Act in 2015 and amended in 2019. The USVSST Fund provides compensation to victims of state-sponsored terrorism who have obtained federal district court judgments against an SST. It is set to exist until at least 2039 and pays eligible claimants a pro rata percentage of their judgments each year that it has collected enough funding to authorize a distribution. Funding arises primarily through the civil and criminal penalties assessed against violators of SST sanctions programs. Thus, if Russia is designated as an SST, penalties assessed against violators of the sanctions program will be used in part to satisfy the judgments of all eligible victims of terrorism.

Investors and victims of terrorism alike will be closely following any developments regarding the designation of Russia as a State Sponsor of Terrorism and the wide-reaching implications that such an action would have.