alerts & publications
United States Further Expands Economic Sanctions and Export Controls Targeting Russia As War in Ukraine Continues5월 22, 2023
The United States, in coordination with allies and international partners, is implementing additional economic sanctions and export controls targeting Russia with the goal of further undermining Russia’s ability to wage war in Ukraine. In a joint statement on Ukraine, the leaders of the G7 announced their intention to “further restrict Russia’s access to [G7] economies,” “to starve Russia of G7 technology, industrial equipment and services that support its war machine,” and to take “appropriate steps to limit Russia’s energy revenue and future extractive capabilities.” Concurrently, the Treasury Department’s Office of Foreign Assets Control (“OFAC”), the Commerce Department’s Bureau of Industry and Security (“BIS”), and the State Department each implemented new restrictions on transactions and trade with Russia, and Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and BIS supplemented their existing guidance to financial institutions.
These new actions build upon earlier rounds of sanctions issued since the launch of Russia’s invasion in Ukraine in February 2022, discussed in our prior alerts: United States Expands Sanctions Targeting Russia in Response to Russia’s Purported Annexation of Regions of Ukraine; U.S. Economic Sanctions and Export Controls on Russia and Belarus Expand, with Further Measures Likely, Biden Administration Further Expands Sanctions on Russia as War in Ukraine Continues, United States Expands Sanctions Against Russia’s Defense-Industrial Sector and Russian Elites, United States Adds New Sanctions Targeting Russia, United States Expands Sanctions on Russia to Target Energy Sector, Biden Administration Continues to Broaden Economic Sanctions on Russia in Response to Ongoing Aggression in Ukraine, Biden Administration Issues Second Set of Sanctions on Russia Broadly Targeting the Financial and High-Tech Sectors, and Biden Administration Issues Initial Set of Sanctions in Response to Russian Invasion of Eastern Ukraine.
Consistent with existing measures, this newest round of sanctions is designed to maximize pressure on Russia’s economy and its ability to generate revenue to fund the ongoing war in Ukraine. These new measures focus in particular focus on third-parties assisting Russia to circumvent and evade existing restrictions designed to cut-off Russian access from goods and technology from G7 countries and their international partners. We expect to see a related increase in criminal and civil enforcement actions against such third-parties. Companies engaged in business in Russia or in the production and sale of items sought by Russia should take extra precautions to ensure compliance with the expanded sanctions and export controls.
New Economic Sanctions
The United States imposed economic sanctions on more than 300 individuals, entities, vessels, and aircraft engaged in activities to circumvent or evade sanctions, military-industrial supply chains, and future energy revenues. The designated entities include Russia-based technology and electronic component suppliers, drilling and mining companies, Russia’s state-owned dredging company, and Russia’s largest gold producer. Notably, the sanctions targets are located not only in Russia, but in more than 20 countries, including procurement networks in Europe, and Russia-Iran maritime logistics networks.
In addition, the United States expanded the scope of its services ban on Russia by prohibiting U.S. persons from exporting, selling or supplying architecture or engineering services to Russia, beginning on June 18, 2023. Per OFAC Guidance, Architecture services are defined to include advisory services; pre-design services; design services, including schematic design, design development, and final design; contract administration services; combined architectural design and contract administration services; including post construction services; and all other services requiring the expertise of architects. Also, per OFAC Guidance, engineering services are broadly defined to cover assistance, advisory, consultative, design, and recommendation services concerning engineering matters or during any phase of an engineering project, including the construction of foundations and building structures (i.e., structural engineering); mechanical and electrical installations for buildings; the construction of civil engineering works; industrial processes and production; or other engineering designs, such as those for acoustics, vibration, traffic control systems, or prototype development for new products. “Engineering services” also includes geotechnical, groundwater, and corrosion engineering services; integrated engineering services, such as those for transportation infrastructure or other projects; engineering-related scientific and technical consulting services, including geological, geophysical, geochemical, surface or subsurface surveying, and map making services; testing and analysis services of chemical, biological, and physical properties of materials or of integrated mechanical and electrical systems; and technical inspection services.
Importantly, as with other services bans, the architecture and engineering services bans do not apply to entities in Russia owned or controlled by U.S. persons, or services provided to facilitate the wind down or divestment of an entity in Russia.
The United States imposed new export controls targeting Russia by adding 71 entities to the Entity List and issuing new rules restricting Russian access to goods, software, and technology subject to U.S. jurisdiction. Most of the 71 entities are located in Russia and were determined to be providing support to Russia’s military and defense sector. As a result of their designation on the Entity List, all items subject to the Export Administration Regulations now require a license for export to those entities, subject to a review policy of denial.
These new export restrictions expand the scope of the Belarus and Russia industry sector sanctions by imposing a licensing requirement on all EAR99 classified items listed in Chapters 84 (machinery and mechanical applies, electrical equipment), 85 (electrical machinery), and 90 (optical, photographic, cinematographic, measuring, checking, precision instruments) of the Harmonized Tariff System (“HTS”), as well as certain chemicals, biologics and related equipment. Over 2,000 industrial items that are classified as EAR99 now require license to export to Russia.
Finally, the new restrictions expand the so-called “Foreign Direct Product” rule to cover exports and re-exports to the temporarily occupied Crimea region of Ukraine. See our prior alert - Biden Administration Issues Second Set of Sanctions on Russia Broadly Targeting the Financial and High-Tech Sectors - for background on that rule and its significance for items manufactured with U.S. technology.
BIS and FinCEN Guidance
Parallel to these new rules, the Biden Administration has provided detailed guidance on compliance and due diligence expectations for firms operating internationally. BIS and FinCEN issued a joint supplemental alert to financial institutions urging vigilance for potential Russian export control evasion attempts. The alert, building on an initial joint alert issued in June 2022, provides financial institutions with guidance on the current state of export controls on Russia and Russia’s use of third-party intermediaries and transshipment points to evade those controls. Notably, the joint supplement alert “strongly encourage[s]” financial institutions to conduct due diligence when encountering one of nine specific HTS codes to identify possible intermediaries and evasion. The nine HTS codes identify critical U.S. components that Russia relies on for its weapons systems, and the joint alert identifies potential red flags arising from these codes and customer activities in relation to February 24, 2022, the first day of Russia’s invasion of Ukraine.
|HS Code||HS Description and Representative Part|
||Electronic integrated circuits: Processors and controllers, such as
||Electronic integrated circuits: Memories, such as SRAM|
||Electronic integrated circuits: Amplifiers, such as op amps|
||Electronic integrated circuits: Other, such as FPGAs|
||Machines for the reception, conversion and transmission or regeneration of
voice, images, or other data, such as wireless transceiver modules
||Radio navigational aid apparatus, such as GNSS modules|
||Multilayer ceramic capacitors|
|8548.00||Electrical parts of machinery or apparatus, not specified or included elsewhere, such as EMI filters|
BIS and FinCEN affirmatively request that financial institutions conduct due diligence when opening accounts for new customers. Significantly, BIS and FinCEN “urge” due diligence for new customers that are engaged in trade, especially countries known to be transshipment points to Russia: Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates, and Uzbekistan. Specifically, BIS and FinCEN urge financial institutions to review red flags including:
- Whether the customer was organized after February 24, 2022;
- Evaluating the end-user and end-user of the item, and whether it is consistent with the customer’s line of business;
- The physical location of the customer;
- Whether the customer received exports prior to February 24, 2022;
- Whether the customer received items classified under one of the nine HTS codes;
- Whether there was a significant spike in receipt of such products after February 24, 2022.
The guidance cautions that financial institutions that ignore red flags or assist third-party sanctions and export control evasion (knowingly or unknowingly), are at risk of violating the applicable rules and regulations and becoming the target of enforcement actions themselves.
As the war in Ukraine continues, the United States and its allies are further expanding economic sanctions and export controls on Russia, while continuing to hold-off on imposing a full-scale embargo. Companies that continue to conduct business in Russia or with business partners that have significant interests in Russia may need to assess whether these new measures impact that business and future plans in-country, and whether further compliance measures are merited. As well, companies that sell or produce items targeted by these new economic sanctions and export control measures, in particular products with military uses, as well as financial institutions engaged in trade finance, will want to examine these new measures to assess whether they are identifying red flags and conducting sufficient diligence to ensure that their sales and services do not ultimately further Russian interests that are inconsistent with U.S. law.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Greta Lichtenbaum, an O’Melveny partner licensed to practice law in the District of Columbia, AnnaLou Tirol, an O'Melveny partner licensed to practice law in California, and David J. Ribner, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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