The purpose of the Act is to prevent the United States from “conduct[ing] business with companies that undermine United States national security interests and international law by continuing to operate in the Russian Federation during its ongoing war of aggression against Ukraine.” The Act takes a bold and broad-sweeping stance to prohibit federal agencies from entering into new contracts, as well as requiring the termination of existing contracts, with any company that is doing business in Russia.
First, the Act, in its current form, will prohibit agencies from entering into or continuing any “covered contract” with any company that “conduct[s] business operations in territory internationally recognized as the Russian Federation.” Under the Act, the term “covered contract” means “a prime contract entered into by an executive agency and any major subcontract of that contract (as that term is defined by the rulemaking...) with a company (including any parent, subsidiary, successor entity, or beneficial owner of such company) conducting business operations in territory internationally recognized as the Russian Federation during the covered period.” The Act’s prohibitions broadly cover the following: (1) award of new contracts, (2) continued performance on an existing contract, (3) extending the period of performance of an existing contract – such as through the exercise of an option year or modification, or (4) renewing an existing contract through, for example, a bridge contract or procurement award. The Act defines the term “business operations” in Russia broadly to mean “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” (emphasis added). The Act excludes, however, business operations that benefit Ukraine, provide humanitarian assistance, provide legal assistance for compliance with laws other than Russia, and journalism. Based on the Act’s definition of “covered contract,” the prohibition on conducting business operations in Russia appears to apply beyond just the contracting company, and also applies to any parent, subsidiary, successor entity, or beneficial owner of such company. The prohibition will also apply to subcontractors.
Second, the Act, as currently drafted, directs federal agencies to “initiate termination proceedings” on all covered contracts with companies still doing business in Russia. The Act does not specify whether such termination would be for the government’s convenience – which would allow contractors to be paid for work performed up through the date of termination – or whether the termination would be for default. In general, termination proceedings must be initiated within 60 days after passage of the legislation; but such proceedings may be extended for an additional 30 or 60 days by an agency head upon a contractor’s provision of a plan to demonstrate compliance with the Act and a good faith and satisfactory effort to comply with the Act and the plan.
The Act exempts and does not require the termination of contracts that benefit Ukraine or contracts for humanitarian purposes to meet basic human needs. The Act also would not apply to companies that have suspended or terminated business operations in Russia. The Act also permits an agency to waive the prohibition on contract awards and renewals and on the contract termination requirement if the head of an agency certifies that the 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.” Notably, this certification cannot be delegated to a contracting officer, and it must be submitted to the Senate Committee on Homeland Security and Governmental Affairs and to the House Committee on Oversight and Reform.
As to the specifics, the Act raises more questions than answers, and it defers clarity to a subsequent promulgation of rules to be issued by the Office of Management and Budget (OMB) at a later date. To the extent that Congress passes this bill and it ultimately becomes law, the final bill and subsequent regulations will need to clarify the following in order to ensure consistent application and compliance:
- Whether agencies and contractors must comply with the Act during the “covered period” but before the OMB issues a final rule to implement the requirements of the Act.
- Clarify the actions that will constitute prohibited business operations in Russia. For example, whether a company must have a physical presence in Russia to implicate the Act; or whether a mere online transaction with a customer in Russia – such as through an e-commerce merchant – would trigger applicability.
- What is meant by “major subcontract” under the Act.
- Whether offerors will be required to certify compliance with the Act in proposals for new contracts, and whether Contracting Officers and Prime Contractors are entitled to rely on such certifications. And, along the same lines, whether there is any obligation to update such certification either before or after the contract award.
- Whether there will be penalties for false representations by a contractor or subcontractor.
- Whether termination proceedings, as required by the Act, must be for the government’s convenience or for the contractor’s default. And, if for the contractor’s default, whether agencies will first be required to amend existing contracts to impose compliance with the Act as a mandatory provision.
The Act also raises a number of questions regarding its interplay with broader sanctions against Russia. For example, it is unclear how the proposed legislation would implicate U.S. companies operating under general license exceptions to those sanctions requirements, as well as foreign companies that are not subject to the U.S. sanctions but that may be subject to the Act due to their status as federal government contractors. The U.S. sanctions against Russia apply to U.S. persons, including U.S. incorporated entities and their foreign branches (but not foreign subsidiaries). The Act’s prohibitions would extend beyond U.S. persons to any federal government contractor conducting “business operations” in Russia, as well as any parent, subsidiary, successor entity, or beneficial owner of such company, regardless of whether the parent, subsidiary, etc., is a U.S. person. This may present significant confusion and compliance challenges, including whether U.S. contractors may provide support to foreign parents or affiliates engaging in business in Russia.
Given the issues in this version of the bill and the bill’s early stage, we will be tracking the legislation as it moves through Congress and will provide updates as it progresses.
In-depth 2022-112
