Please see below our discussion on the new sanctions and export control measures that the US government imposed against Russia on May 19, 2023.
The SDN Designations
Pursuant to Executive Order (“EO”) 14024, the Office of Foreign Assets Control (“OFAC”) designated 22 individuals and 104 entities, and the US State Department designated almost 200 individuals, entities, vessels, and aircraft to the Specially Designated Nationals and Blocked Persons (“SDN”) List. As such, in terms US primary sanctions, a US person would be prohibited from engaging in virtually any transaction directly or indirectly involving any of these SDNs (and entities owned at 50% or more, directly or indirectly, by them) unless otherwise authorized. Further, EO 14024 authorizes sanctions on any person, including any non-U.S. person, who is determined to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person designated as an SDN under EO 14024. Therefore, interacting with any of these designated entities and individuals would lead to the risk of exposure to US secondary sanctions (including designation as an SDN itself) if OFAC determined that the interaction provides “material support” to the designated entity or individual, even where there is no U.S. nexus involved in the transaction. This is a highly discretionary, fact-specific determination.
A full list of the designations from May 19, 2023, is available here. In summary, the designations include:
In addition, OFAC issued Frequently Asked Question (“FAQ”) 1129, clarifying that, with respect to the designation of Polimetall AO, (i) this blocking action applies only to this entity and any entities in which it owns, directly or indirectly, a 50 percent or greater interest; (ii) OFAC has not designated this entity’s ultimate parent company, Jersey-based Polymetal International PLC, which is publicly traded; and (iii) based on information available to OFAC, Polymetal International PLC is not owned 50 percent or more by blocked persons or otherwise considered the blocked property of any blocked persons.
Other Measures by OFAC
- New Restrictions on Certain Sectors/Services
In support of the G7 Leaders’ commitment to further target those operating in sectors key to Russia’s military-industrial base, OFAC published a Determination Pursuant to Section 1(a)(i) of EO 14024 and a Determination Pursuant to Section 1(a)(ii) of EO 14071.
Relatedly, OFAC (i) issued new FAQs 1126-1128; (ii) removed FAQs 964, 1037, and 1085, which were incorporated into the aforementioned new FAQs; and (iii) amended FAQs 1059 and 1061-1062. The first two sets of changes consolidated OFAC’s general guidance pertaining to Russia-related sector and service determinations.
The first determination—effective May 19, 2023—designates the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian economy under EO 14024, which creates legal basis for imposition of secondary sanctions on any person found to “operate in” those sectors (even if the activity has no US nexus). FAQ 1126 provides clarifications regarding the scope of the restricted sectors.
The second determination—effective 12:01 a.m. EDT on June 18, 2023—introduces primary US sanctions restrictions on two new types of targeted services. Specifically, it prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the US, or by a US person, wherever located, of architecture services or engineering services to any person located in Russia, with the exclusions pertaining to (i) an entity located in Russia that is owned or controlled, directly or indirectly, by a US person or (ii) 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. FAQ 1128 provides clarifications regarding the scope of the restricted services.
- Updated/New General Licenses
OFAC issued four new General Licenses (“GLs”). The details about these GLs are as follows:
General License 13E:
It replaces GL 13D, which authorized US persons and entities owned or controlled (directly or indirectly) by a US person to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations, or certifications, to the extent such transactions are prohibited by EO 14024 Directive 4—which applies to the Central Bank of Russia (“CBR”), Russia’s Ministry of Finance, and Russia’s National Wealth Fund—provided that such transactions are ordinarily incident and necessary to the day-to-day operations in Russia of such US persons or entities. The only change made is that the deadline was extended from June 6, 2023, 12:01 a.m. EDT to August 17, 2023, 12:01 am EDT.
General License 66:
It authorizes the wind down of transactions involving Public Joint Stock Company Polyus (“Polyus”), or any entity in which Polyus owns, directly or indirectly, a 50 percent or greater interest through 12:01 a.m. EDT, August 17, 2023, provided that any payment to a blocked person must be made into a blocked account in accordance with the Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587 (“RuHSR”).
General License 67:
It authorizes through 12:01 a.m. EDT, August 17, 2023 (1) transactions that are ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity of Polyus, or any entity in which Polyus owns, directly or indirectly, a 50 percent or greater interest, purchased prior to May 19, 2023 (“covered debt or equity”), to a non-US person; (2) transactions that are ordinarily incident and necessary to facilitating, clearing, and settling trades of covered debt or equity that were placed prior to 4:00 p.m. EDT, May 19, 2023; and (3) transactions that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. EDT, May 19, 2023 that (i) include a blocked person described above for GL 67 as a counterparty or (ii) are linked to covered debt or equity, provided that any payments to a blocked person are made into a blocked account in accordance with the RuHSR.
It explicitly does not authorize:
US persons to sell, or to facilitate the sale of, covered debt or equity to, directly or indirectly, any person whose property and interests in property are blocked; or
US persons to purchase or invest in, or to facilitate the purchase of or investment in, directly or indirectly, covered debt or equity, other than purchases of or investments in covered debt or equity ordinarily incident and necessary to the divestment or transfer of covered debt or equity as described above for GL 67.
General License 68:
It authorizes the wind down of transactions involving one or more of the following blocked persons through 12:01 a.m. EDT, July 18, 2023, provided that any payment to a blocked person must be made into a blocked account in accordance with the RuHSR:
Federal State Budgetary Educational Institution of Higher Education Grozny State Oil Technical University Named After Academician M.D. Millionshchikov;
Federal State Budget Educational Institution of Higher Education Saint Petersburg Mining University;
Federal State Budgetary Educational Institution of Higher Education Sergo Ordzhonikidze Russian State University for Geological Prospecting;
Federal State Budgetary Educational Institution of Higher Vocational Education Gubkin Russian State University of Oil and Gas;
State Budgetary Educational Institution of Higher Education Almetyevsk State Oil Institute; or
Any entity in which one or more of the above persons own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest.
- New Reporting Requirements Related to Central Bank of Russia, the National Wealth Fund, and the Ministry of Finance
To gather additional information and fidelity on the Russian sovereign assets immobilized in US jurisdiction, OFAC issued new EO 14024 Directive 4, as amended, which imposes an additional reporting requirement on US persons to identify assets of entities subject to EO 14024 Directive 4, as amended (i.e., CBR, Russia’s Ministry of Finance, and Russia’s National Wealth Fund), which US persons may hold. In short, US persons who are in possession or control of property in which these entities have an interest must submit a report to OFACreport@treasury.gov on or before June 18, 2023, and annually thereafter, with the following information:
- The name and address of the person in possession or control of the property;
- The date the property came into the possession or control of such person;
- The entity or entities subject to the prohibitions of this Directive having an interest in the property;
- A description of the property and its location in the United States or otherwise, including any relevant account types, account numbers, reference numbers, dates, or other information necessary to identify the property;
The actual, or if unknown, estimated value of the property in U.S. dollars as of May 31, 2023, for the initial report, and annually thereafter as of May 31; and
- A copy of the most recent relevant account statement or other documentation to support the estimated value of the property.
This reporting requirement does not appear to apply to taxes, duties, fees, penalties, and other payments made to accounts at the CBR held by undesignated Russian government ministries or agencies, such as the Ministry of Health or Rospatent, as US persons would not appear to be in possession or control of property in which an EO 14024 Directive 4 entity has an interest.
In connection with EO 14024 Directive 4, as amended, and/or GL 13E, OFAC made corresponding updates to FAQs 998-1002, 1004-1005, and 1118. OFAC additionally clarifies on its webpage that existing licenses or authorizations issued by OFAC pursuant to the prior version of Russia-related Directive 4 remain in effect.
Designations by BIS
The Bureau of Industry and Security (“BIS”) added 71 entities to the Entity List because the US government determined that these entities have been involved, are involved, or pose a significant risk of being or becoming involved in activities contrary to the national security or foreign policy interests of the United States.
Of these 71 entities, 69 are located in Russia, and these Russian entities are also deemed as military end users (“MEUs”) and are receiving a footnote 3 designation, thereby applying the Russia/Belarus-Military End User Foreign Direct Product (“FDP”) rule to them. With respect to these additions, all Export Administration Regulations (“EAR”) items would require a license, and the applicable license review policy for these items is a policy of denial, except for EAR99 food and medicine which will be reviewed on a case-by-case basis.
Further, BIS added an Armenian entity to the Entity List for engaging in conduct that prevented the successful accomplishment of an end-use check and a Kyrgyz entity that prevented the successful accomplishment of an end-use check and posing a risk of diversion to Russia. There is a license requirement for all EAR items and a license review policy of presumption of denial with respect to these two additions.
For more details, please refer to this link.
Expansion of Items Requiring a BIS License and Other Clarifications
BIS issued a final rule that is effective on May 19 and scheduled for publication on May 23. The final rule makes the following amendments:
Adds 1,224 additional HTS-6 Code entries corresponding to 1,224 types of industrial items— including a variety of electronics, instruments, medical devices, and advanced fibers—to supplement no. 4 to part 746 pursuant to the Russian and Belarusian Industry Sector Sanctions (and makes conforming changes). And of note, BIS will be controlling three entire harmonized system chapters, which are Chapters 84, 85, and 90, in supplement no. 4 to part 746 through this rule.
These items now require a license for export or reexport to or transfer within Russia or Belarus under § 746.5(a)(1)(ii). BIS will generally review license applications for certain items that are predominantly agricultural or medical in nature on a case-by-case basis, consistent with the pre-existing exceptions to the policy of denial described in §§ 746.5 and 746.8 of the EAR.
Adds certain chemicals, including lithium chloride (CAS 7447-41-8); lithium chloride hydrate (CAS 85144-11-2); lithium chloride monohydrate (CAS 16712-20-2); and lithium carbonate (CAS 554-13-2), to supplement no. 6 to part 746 pursuant to the Russian and Belarusian Industry Sector Sanctions (and makes conforming changes).
- Adds one HTS-6 Code entry covering a variety of electrical parts of machinery or apparatus, not elsewhere specified or indicated (“NESOI”) to supplement no. 7 to part 746 that will require a license under § 746.7 when destined to Iran and under § 746.8 when destined to Russia or Belarus. This change was to address an inadvertent omission in the Iran unmanned aerial vehicles (“UAVs”) rule that became effective on February 24, 2023.
- Additionally applies the Russia/Belarus FDP rule to the temporarily occupied Crimea region of Ukraine and makes conforming EAR changes.
Please see below other corrections and clarifications in the BIS final rule:
- Clarification that US-origin controlled content that meets the criteria in new § 746.5(a)(3) is also excluded from de minimis calculations when identifying controlled US-origin content;
- Conforming change clarifying that deemed exports and deemed reexports are excluded from license requirements under § 746.5(a)(1)(i) through (iii) for consistency with the deemed export and deemed reexport exclusion from the license requirements set forth in § 746.8(a)(1);
- Clarifications to BIS licensing policy and the scope of existing licenses that were issued prior to additional HTS-6 Codes and items being added or that will be added to supplements nos. 2, 4, and 6 to part 746 by this rule or in subsequent rules;
- Conforming change to add License Exception AVS eligibility to § 746.5(c)(3) for consistency with § 746.8(c)(5);
- Addition of ECCN 5A991 to the exclusion that applies to items controlled under ECCNs 5A992 or 5D992 under §§ 746.8 and 746.10(a)(1);
- Clarifying change to supplement no. 4 to part 746 in areas of the table that mention parts related to one or more numerical headings; and
- Removal of Schedule B and Schedule B Description and addition of HTS-6 Codes under supplement no. 5 to part 746 for consistency with other supplements related to the EAR’s Russian and Belarusian Industry Sector Sanctions.
For more details, please refer to this link.
Supplement Alert by BIS and FinCEN
The alert issued by BIS and Financial Crimes Enforcement Network (“FinCEN”) on May 19, 2023, supplementing their first joint alert from June 2022, (i) provides financial institutions additional information with respect to new BIS export control restrictions relating to Russia, (ii) reinforces ongoing US government engagements and initiatives designed to further constrain and prevent Russia from accessing needed technology and goods to supply and replenish its military and defense industrial base, (iii) details evasion typologies and identifies additional transactional and behavioral red flags to assist financial institutions, and (iv) requests that financial institutions continue to use the existing Suspicious Activity Report (“SAR”) code (FIN-2022-RUSSIABIS) when submitting SARs specific to Russian export control evasion and reminds them of their Bank Secrecy Act (“BSA”) reporting obligations.
Of note, the joint alert notes these nine new transactional and behavioral red flags:
- Transactions related to payments for defense or dual-use products from a company incorporated after February 24, 2022, and based in a country that is not a member of the Global Export Control Coalition (“GECC”; for more details, please see this Commerce Department webpage).
- A new customer whose line of business is in trade of products associated with the nine Harmonized System (“HS”) codes—8542.31, 8542.32, 8542.33, 8542.39, 8517.62, 8526.91, 8532.21, 8532.24, and 8548.00—is based in a non-GECC country, and was incorporated after February 24, 2022.
- An existing customer who did not receive exports associated with the nine HS codes prior to February 24, 2022, but who is receiving such items now.
- An existing customer, based outside the United States, received exports associated with one or more of the nine HS codes prior to February 24, 2022, and requested or received a significant increase in exports with those same codes thereafter.
- A customer lacks or refuses to provide details to banks, shippers, or third parties, including about end users, intended end-use, or company ownership.
- Transactions involving smaller-volume payments from the same end user’s foreign bank account to multiple, similar suppliers of dual-use products.
- Parties to transactions listed as ultimate consignees or listed in the “consign to” field do not typically engage in business consistent with consuming or otherwise using commodities (e.g., other financial institutions, mail centers, or logistics companies).
- The customer is significantly overpaying for a commodity based on known market prices.
- The customer or its address is similar to one of the parties on a proscribed parties list, such as the BIS Entity List, the SDN List, or the US Department of State’s Statutorily Debarred Parties List.
Companies should continue to review their business activities and compliance procedures regularly to ensure they comply with applicable new restrictions. Hogan Lovells lawyers can assist you with assessing the potential impact of these and other trade restrictions on the global operations of your company.
Please contact any of the listed Hogan Lovells lawyers for further information or assistance.
Authored by Aleksandar Dukic, Ajay Kuntamukkala, Ari Fridman, and Hao-Kai Pai.