US further expands Russia and Belarus sanctions and export controls

The US government recently released a new tranche of sanctions against Russia and Belarus in coordination with the G7. This tranche is a coordinated move across the US Department of the Treasury, Office of Foreign Assets Control (OFAC), US Department of Commerce, Bureau of Industry and Security (BIS) and US Department of State to further address the ongoing war in Ukraine.

In addition, BIS and the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) published a joint supplemental alert reminding financial institutions to remain vigilant against attempts to circumvent sanctions, particularly for high priority items like certain controlled circuits and capacitors.

The alert also provides further examples of transactional and behavioral red flags, building on guidance issued by BIS, OFAC and the US Department of Justice, discussed in our previous briefing, "US agencies release tri-seal sanctions and export control anti-evasion guidance."

New Russia-related sector and services determinations pursuant to EO 14024 and EO 14071

OFAC announced two determinations targeting new sectors of the Russian economy and Russia's access to certain categories of services by US persons.

The first OFAC determination, made pursuant to EO 14024 (Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation), authorizes OFAC to impose sanctions on any person (including non-US persons) who is determined to operate in the architecture, engineering, construction, manufacturing and transportation sectors of the Russian economy. This determination took effect immediately. OFAC expects to promulgate regulations that define all of these terms consistent with the definitions set out in FAQ 1126.

The second OFAC determination, made pursuant to EO 14071 (Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression), prohibits the exportation, re-exportation, sale or supply, directly or indirectly, from the United States, or by a US person, wherever located, of architecture services or engineering services to any person located in Russia. This determination is not effective until 12:01 a.m. EDT, June 18, 2023. Note that these prohibitions do not apply to (1) any entity located in Russia that is owned or controlled, directly or indirectly, by a US person; and (2) any service in connection with the wind down or divestiture of an entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person. OFAC expects to promulgate regulations that define all of these terms consistent with the definitions set out in FAQ 1128.

Importantly, as OFAC explained in FAQ 1127, while a sector determination pursuant to EO 14024 exposes persons that operate or have operated in an identified sector to sanctions risk, it does not automatically impose sanctions on all persons who operate or have operated in the sector. Only persons determined, pursuant to EO 14024, by the Secretary of the Treasury in consultation with the Secretary of State, or by the Secretary of State in consultation with the Secretary of the Treasury, or their delegates, to operate or have operated in the specified sectors are subject to sanctions.

New reporting requirement under Directive 4 of EO 14024

OFAC's announcement included amendments to Directive 4 of EO 14024 to require US persons to submit annual reports to OFAC detailing any property in their possession or control in which a Directive 4 entity (Central Bank of Russia, National Wealth Fund, Ministry of Finance of Russia) has an interest of any nature whatsoever, direct or indirect. US persons must submit the first report identifying direct and indirect assets of Directive 4 entities held by US persons as of May 31, 2023 by June 18, 2023. As noted in FAQ 998, this is separate from the requirement for US financial institutions to report rejected transactions with Directive 4 entities.

There remains a fair amount of uncertainty regarding the scope of the reporting requirement. For example, it is not clear whether OFAC would perceive the Directive 4 entities as having an "interest" in Russian sovereign bonds that would trigger the reporting requirement.

Increased blocking sanctions and licenses

OFAC designations and licenses

OFAC announced designations of 104 entities and 22 individuals in more than 20 countries and jurisdictions pursuant to EO 14024, targeting Russia's energy and metal industries. These sanctions target not only industrial actors such as equipment companies and entities investing in the Russian energy sector but also certain Russian universities and energy research institutions. The announcement also includes new designations targeting procurement networks based in Russia, Lichtenstein and the Netherlands, as well as major Russian technology suppliers and facilitators in Russia, Finland, Poland, Germany and Estonia.

Of particular note was the designation of the largest gold mining company in Russia, Polyus (although certain wind-down transactions are authorized through August 17, 2023).

Concurrent with these designations, OFAC published three additional general licenses.

State Department designations

The State Department imposed economic sanctions pursuant to EO 14024 against numerous entities and persons involved in Russia's future energy sources, the Russian military-industrial base and the technology sector of the Russian economy; Russian officials and elites; and sanctions evaders. The announcement included an annex of 77 aircraft blocked as a result of sanctions on a Russian military logistics entity.

Expanded export controls and Entity List designations

BIS published two final rules that (i) expand export controls to additional items in alignment with international partners and allies (the "export control final rule") and (ii) add 71 entities to the Entity List, primarily for supporting Russia's military and defense sectors.

The export control final rule made four major changes. These changes are as follows:

• All HTS-6 Codes in Chapters 84, 86 and 90 of Supplement No. 4 to Part 746 of the EAR are now controlled and require a license for export regardless of their control status. This addition includes 1,224 categories of industrial items, including electronics, instruments, advanced fibers and numerous medical devices classified in HTS heading 90.
• Certain chemicals were added to Supplement No. 6 to Part 756 of the EAR. These chemicals include those that might be considered useful for Russia's industrial capabilities or activities of concern.
• One HTS for a foreign-produced item in Supplement No. 7 to Part 746 was added to include a variety of electrical parts of machinery, particularly those used in unmanned aerial vehicles. These items now require a license for export, re-export or in-country transfer to Russia, Belarus and Iran. This is an expansion of the February 24, 2023 rule.
• The Russia/Belarus Foreign-Direct Product (FDP) Rule was expanded to apply to the Crimea region of Ukraine. The existing FDP rule is intended to prevent foreign-produced items that are the direct products of certain US-origin software or technology from being exported from abroad to Russia or Belarus. The new final rule expands the FDP rule so that it also applies to items destined for the temporarily occupied Crimea region of Ukraine. This is intended to make it more difficult for items to be procured for Russia's use in Crimea in support of its war against Ukraine.

Of the 71 entities added to the Entity List, 69 are Russian, one is Armenian and one is Kyrgyzstani. The 69 Russian entities are designated as "footnote 3" Military End Users (MEUs). This means they will be subject to the Russia/Belarus-Miliary End User FDP Rule. The Armenian and Kyrgyzstani entities were added for conduct that prevented the successful accomplishment of an end-use check. Moreover, the entities presented a risk of diverting items subject to the EAR to Russia. These entities are now subject to an EAR license requirement for all CCL items and a license review policy of presumption of denial.

Practical considerations

As the US continues to strengthen and implement Russian sanctions, companies should evaluate their compliance and diligence processes to ensure these ever-evolving changes to US export control and sanctions regulations are incorporated into their compliance policies and procedures. Transactions with a US nexus, including US persons or US-origin products, related to Russia are becoming ever more challenging and compliance programs should be enhanced accordingly.