United States Imposes Expanded Sanctions and Export Controls on Russia

The U.S. Department of Commerce's Bureau of Industry and Security (BIS) took a number of actions under the Export Administration Regulations (EAR) on May 19, 2023. Here are some of the key U.S. export control actions:

• Expansion of Items Requiring License for Export to Russia and Belarus. In coordination with other countries imposing similar restrictions (the Global Export Control Coalition or GECC), BIS significantly expanded the scope of items that may not be exported/reexported to Russia without a license, including a range of EAR99 items (not controlled on the Commerce Control List). In particular, the new restrictions include 1,224 groups of industrial items, including all items controlled under three Harmonized Tariff System (HTS or HS) Chapters – specifically, Chapter 84 (machinery and mechanical appliances), Chapter 85 (electrical machinery) and Chapter 90 (optical, photographic, measuring, medical and surgical instruments) (Supp. 4 to Part 746 of the EAR).
• Additional chemicals and related equipment usable in certain industries are further restricted (Supp. 6 to Part 746 of the EAR).
• Expansion of the list of items (including EAR99 items) that need a license to export to Iran, Russia or Belarus to include certain electrical parts and machinery under HTS Code 8548.00 that are important for Russian production of defense items, including drones. This list already included certain aircraft engines and parts, electronic integrated circuits, certain communications components, radio navigation equipment and certain types of capacitors (Supp. 7 to the Part 746 of the EAR).
• Expansion of Russia/Belarus Foreign Direct Product (FDP) Rule. Also expanded the Russia/Belarus FDP Rule to apply to Crimea, ensuring that even certain items not manufactured in the U.S. are subject to the existing, broad export controls targeting Crimea.
• FinCEN/BIS Alert. The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN), in conjunction with BIS, issued a joint alert on May 19, 2023, highlighting Russia's use of intermediaries in third countries to evade export controls and urging financial institutions to take appropriate due diligence measures, particularly with respect to high-priority items (identified below). The joint alert also identifies real world "red flags" of diversion risk. One "red flag" example is importers that started importing products in these HS codes only after imposition of sanctions on Russia.

High-Priority Item List

• Entity List Expansion. On May 19, 2023, BIS added 71 entities in Armenia, Kyrgyzstan and Russia to the Entity List, primarily for providing support for Russia's military/defense sector, including a number of aviation-related companies, with most of these entities also being designated as Military End-Users, which has additional implications with respect to the FDP Rule. In general, no person can export any item subject to the EAR to such persons absent a BIS authorization for exports, reexports and in-country transfers.
• Disruptive Technology Strike Force. Launched in February 2023, the mission of the Disruptive Technology Strike Force, co-led by the U.S. Department of Justice (DOJ) and Commerce Department, is to target illicit actors, strengthen supply chains and protect critical technological assets from being acquired or used by nation-state adversaries. On May 16, 2023, DOJ announced criminal charges in five cases and four arrests associated with the Disruptive Technology Strike Force. Two of the cases relate to procurement networks to assist the Russian military and intelligence services in obtaining technology in violation of U.S. laws.

How Have U.S. Economic Sanctions Been Expanded?

On May 19, 2023, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) took a number of actions:

• Executive Order No. 14024 authorizes the Treasury Department secretary, in consultation with other cabinet members, to impose blocking sanctions on any party determined to operate or have operated in designated sectors of the Russian economy. On May 19, 2023, OFAC expanded the scope of designated sectors to include those who "operate in" the architecture, engineering, construction, manufacturing and transportation sectors of the Russian Federation (other sectors including defense, aerospace, marine, metals and mining were previously identified). As such, any party operating in those sectors of the economy risks sanctions.
• OFAC expanded prohibitions on the types of services that U.S. persons can provide to persons in Russia to include architectural services and engineering services. OFAC previously prohibited U.S. persons from providing accounting, trust and corporate formation, quantum computing services and certain services related to maritime transport of crude oil and other petroleum products, except within the parameters of the price cap regime.
• OFAC modified Directive 4 under Executive Order 14024, which prohibits transactions with the Russian Federation's Central Bank, National Wealth Fund and Ministry of Finance, to require U.S. persons to report to OFAC any property that such entities have in their possession or control (e.g., circumstances where property is effectively immobilized). This is separate from U.S. financial institutions' duty to reject and report transactions involving such entities. U.S. persons holding property of the foregoing Russian entities must submit a report to OFAC on or before June 18, 2023, and annually thereafter by June 30 of a given year.
• 300-Plus Designations. OFAC and the U.S. Department of State designated over 300 individuals, entities, vessels and aircraft in more than 20 countries as Specially Designated Nationals (SDNs), subject to asset freezes, although OFAC issued wind-down or other general licenses in certain instances. These designated persons include:
  • individuals and entities in countries, including Liechtenstein, the Netherlands, Finland and Estonia, that the U.S. government identified as being part of the illicit procurement network used by the Russian military and intelligence services to procure prohibited technology, such as semiconductors and microelectronics
  • certain Russian educational and research institutes involved in extractive technologies development and training, as well as certain Russian drilling and mining companies
  • a number of Russian-made/Russian-registered aircraft operated by or on behalf of the Russian military, as well as certain vessels

What Are the Key Takeaways from the New Round of Sanctions?

• These new restrictions build on already complex and overlapping U.S., European Union (EU), United Kingdom (U.K.) and other country sanctions and export controls on Russia, creating compliance challenges and widely affecting international trade in many commodities because of the risk of diversion.
• The scope of items requiring a license for export to Russia (and Belarus) is very comprehensive and impacts nearly every industry. Although the new restrictions do not technically constitute an embargo on Russia, the nature and scope of the sanctions and export controls push the regulatory landscape ever closer to that de facto reality.
• For companies manufacturing, distributing or transporting items internationally on the high-priority list or otherwise identified as being at risk if diversion, it is critical to:
  • take additional due diligence steps in connection to vendors, suppliers, customers and other contract counterparties with any nexus to Russia, and work with trade partners to secure supply chains, and document all compliance and due diligence steps
  • provide training to logistics and other staff to identify red flags given the sophistication of evasion efforts by Russia
  • work in advance with financial institutions and be prepared to provide details regarding the end-user and end-use of products as financial institutions implement additional protocols in response to the recent and prior FinCEN alerts
• Companies should expect ramped-up enforcement by BIS, OFAC and DOJ. Those engaged in intentional efforts to divert goods to Russia may face criminal action. For those companies that unknowingly ship products that end up in Russia, be forewarned that the U.S. government may use its broad subpoena powers and investigations. Even if a company is ultimately exonerated, it can be expensive and create negative consequences.
• A number of countries, including the U.K., Australia and Canada, rolled out simultaneous sanctions and additional designations of individuals and entities. The EU's 11th round of sanctions imposing similar restrictions is expected to be enacted soon.
  • There may be material differences between sanctions regimes, including which entities are subject to asset freezes similar to U.S. designation on the SDN List. In addition, different regimes have different notice/reporting obligations.
  • Particularly in international transport of goods, the sanctions of several jurisdictions may come into play. For example, EU or U.K. insurers provide insurance cover for a substantial amount of cargo, vessels and aircraft involved in international trade.

For more information or questions regarding the expanded sanctions and export controls on Russia, contact the authors or another member of Holland & Knight's International Trade Group.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.