United States: House NDAA would ban federal contracts with businesses operating in Russia

On July 14, 2022, the U.S. House of Representatives passed the National Defense Authorization Act for Fiscal Year 2023 (“NDAA”). One of the amendments included in the House-passed version of the NDAA is a revised version of the “Federal Contracting For Peace And Security Act.” The amendment would prohibit the federal government from entering into, extending, or renewing contracts with contractors that conduct business operations in Russia during its war against Ukraine, with certain exceptions and exemptions as summarized below.

Summary

Based on the version of the amendment that was submitted to the House Rules Committee on July 11, 2022, the proposal would enact the following legislative changes:

• Prohibition on new, extended, or renewed federal contracts with contractors conducting business operations in Russia during its war against Ukraine

The amendment formally establishes that “[i]t is the policy of the Federal Government not to conduct business with companies that undermine United States national security interests by continuing to operate in the Russian Federation during its ongoing war of aggression against Ukraine.”

The amendment prohibits federal government agencies from entering into, extending, or renewing a “covered contract” with any company that conducts “business operations” in territory internationally recognized as the Russian Federation during the “covered period.”

• “Business operations” are defined as engaging in commerce in any form, including acquiring, developing, selling, leasing, or operating equipment, facilities, personnel, products, services, personal property, real property, or any other apparatus of business or commerce.  
• A “covered contract” is defined as a prime contract entered into by an executive agency with a company conducting business operations in territory internationally recognized as the Russian Federation during the covered period.
• The “covered period” is defined as the period of time beginning 90 days after the date of the enactment of the law and ending on a date that is determined by the Secretary of State based on steps taken by the Russian Federation to restore the safety, sovereignty, and condition of Ukraine, or 10 years after the date of the enactment of the law, whichever is sooner.
• Exceptions and exemptions

The amendment excludes business operations that:

• benefit the country of Ukraine;
• serve humanitarian purposes to meet basic human needs, including through a hospital, school, or non-profit organization;
• provide products or services for compliance with legal, reporting, or other requirements of the laws or standards of countries other than the Russian Federation;
• journalistic and publishing activities, news reporting, or the gathering and dissemination of information, informational materials, related services, or transactions ordinarily incident to journalistic and publishing activities;
• support the suspension or termination of business operations for the duration of the covered period, including:
  • an action to secure or divest from facilities, property, or equipment;
  • the provision of products or services provided to reduce or eliminate operations in territory internationally recognized as the Russian Federation or to comply with sanctions relating to the Russian Federation; and
  • activities that are incident to liquidating, dissolving, or winding down a subsidiary or legal entity in Russia through which operations had been conducted.

Further, the amendment includes the following exemptions:

• Good Faith Exemption:  the Office of Management and Budget, in consultation with the General Services Administration, may exempt a contractor from the prohibition if it is determined that the contractor has:
  • pursued and continues to pursue all reasonable steps in demonstrating a good faith effort to comply with the requirements of the amendment; and
  • provided to the executive agency a reasonable, written plan to achieve compliance with such requirements.
• Permissible Operations:  the prohibition shall not apply to business operations in Russia if they are authorized by a license issued by the Office of Foreign Assets Control or the Bureau of Industry and Security, or are otherwise allowed to operate notwithstanding the imposition of sanctions.
• Individual Contracts:  the prohibition shall not apply to any contract that is:
  • for the benefit, either directly or through the efforts of regional allies, of the country of Ukraine; or
  • for humanitarian purposes to meet basic human needs.
• National Security and Public Interest Waivers

The amendment permits waivers when they are for the national security of the United States or in the public interest of the United States.

Specifically, the head of an executive agency is authorized to waive the prohibition with respect to a covered contract if the head of the agency certifies in writing to the President that such waiver is for the national security of the United States or in the public interest of the United States, and includes in such certification a justification for the waiver and description of the contract to which the waiver applies.

If the agency head issues such a waiver, they must also submit the associated certification to the Committee on Homeland Security and Governmental Affairs of the Senate and the Committee on Oversight and Reform of the House of Representatives.

• Implementation and Enforcement

The amendment grants emergency rulemaking authority to implement its prohibition.

Specifically, not later than 60 days after the date of the enactment of the amendment, the Director of the Office of Management and Budget, in consultation with the Administrator of General Services and the Secretary of Defense, shall promulgate regulations for agency implementation of the amendment using emergency rule-making procedures, while considering public comment to the greatest extent practicable that includes the following:

• A list of equipment, facilities, personnel, products, services, or other items or activities, the engagement with which would be considered business operations, subject to the prohibition.
• A requirement for a contractor or offeror to represent whether such contractor or offeror uses any of the items on this list.
• A description of the process for determining a “good faith exemption” described above.

Next Steps

The U.S. Senate is still considering its version of the NDAA for Fiscal Year 2023. It is anticipated that the Senate version of the NDAA will be brought to the floor for consideration in September. Currently, there is no companion measure to this amendment in the Senate. If similar language is ultimately not contained in the Senate-passed version of the NDAA, a compromise will need to be worked out in conference committee, at which time the committee will decide to retain, modify, or remove the amendment. As such, it is still unclear whether the present version of the amendment will be enacted or changed. Further attention must be paid to determine its final form and business ramifications.

Key Takeaways

• This measure could potentially create a business risk for any company that contracts with the U.S. government and conducts business in Russia. As a result, upon the NDAA’s passage, such companies should conduct a business assessment to determine whether current operations are in compliance with the amendment, or whether any mitigation or other measures are warranted.
• Because of the fluctuating nature of this proposal and its potential business impact, it will be necessary to monitor its development and final form, if it is included in the version of the NDAA signed into law. We will continue to monitor updates to the language contained in the NDAA for this amendment.  Please reach out to us with any questions.