On September 30, 2022, the United States instituted new sanctions to address the ongoing Russian-Ukraine conflict. The new sanctions follow the Leaders of the Group of Seven’s (“G7”) statement condemning Russia’s referendum to annex the Kherson, Zaporizhzhya, Donetsk, and Luhansk regions of Ukraine.¹ In support of the G7’s statement, the Department of Treasury Office of Foreign Assets Control (“OFAC”), the Department of Commerce Bureau of Industry and Security, (“BIS”) and the Department of State announced heightened sanctions and export control risks regarding international suppliers supporting Russia’s purported annexation of additional areas of Ukraine.²

Specifically, OFAC released FAQ 1091, which provides that it will now target activities outside of Russia that politically or economically support Russia’s defense sector. These activities include:

• “Providing material support for the organization of Russia’s sham referenda or annexation, as well as economic or other activity that seeks to legitimize Russia’s sham referenda or annexation;
• Providing material support to Russia’s military and defense industrial base, including significant transactions by entities in third countries that provide material support to Russia’s military, defense industrial base, and designated entities and persons operating in Russia’s defense industrial base;
• Attempting to circumvent or evade U.S. sanctions on Russia and Belarus; and
• Providing material support to Russian entities or individuals subject to certain blocking sanctions.”³

Notably, OFAC emphasizes that its sanctions do not intend to “target Ukraine or the Ukrainian people, including those living in areas occupied or purportedly annexed by Russia.”⁴ Nevertheless, OFAC’s latest sanctions send a strong message that international suppliers of sanctioned Russian entities and Russia’s defense sector run the risk of being sanctioned and that further Russian aggression toward Ukraine will result in OFAC responding with heightened measures.

Additionally, BIS issued a similar warning to entities and individuals operating outside of Russia that support Russia’s aggression toward Ukraine. Most recently, BIS added 57 Russian entities to its Entity List; however, BIS has made clear “that it is prepared to aggressively apply the export controls. . .both inside and outside of Russia.” To accomplish this, BIS has expanded the “military end user” controls in § 744.21 of the EAR to apply to entities in third countries, as well as extend application of the Russian/Belarusian-Military End User Foreign Direct Product Rule to entities operation in third countries. Going forward, these countries will have a “footnote 3” designation and require a license for a “party to any export, reexport, or transfer (in-country), e.g., as a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user,” involving not only U.S.-origin items or items located in the United States, but also foreign-produced items, that are:

• the “direct product” of any “software” or “technology” subject to the EAR and specified in any ECCN in product groups D or E items on the CCL, or
• produced by any plant or major component of a plant that is located outside the United States, when the plant or major component of a plant itself is a direct product of U.S.-origin “technology” or “software” that is specified in any ECCN in product groups D or E in any categories of the CCL. Any foreign-produced item meeting these criteria, including items that would be designated EAR99, would require a license.”⁵

Companies still navigating operations involving Russia may want to proceed with caution, especially to the extent their operations involve third-country entities. Companies may want to consider re-evaluating their policies and procedures—especially procedures for screening to ensure they are not doing business with any recently blocked individuals or entities. Additionally, companies should consider reviewing whether the BIS rule introduces additional license requirements impacting their supply chains. Furthermore, companies should consider additional due diligence related to actual end-users and utilization of traditional transshipment countries into Russia. Such due diligence should potentially include additional “know your customer” steps and considering “why” a product is being purchased by a foreign buyer. For example, if a company traditionally sold to Russia a certain product and then ceased due to the sanctions, the company may want to consider new buyers seeking the exact same product. Most importantly, companies should be mindful that the U.S.’s latest response indicates strict compliance and hefty penalties.

As the rippling effects of these new and potentially far-reaching sanctions are yet to be fully felt, Snell & Wilmer will continue to follow developments in the Russian-Ukraine conflict. Companies should consider reaching out to legal counsel to better understand the impact of the ever-changing economic sanctions, and the potential for additional sanctions, on their business opportunities and employee support as the military conflict continues and expands.

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Note:
[1] The G7 Leaders’ Statement is available at https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/23/g7-leaders-statement-3/.
[2] See U.S. Department of Treasury, Treasury Sanctions International Suppliers for Supporting Russia’s Defense Sector and Warns of Costs for Those Outside Russia who Provide Political or Economic Support for Russia’s Purported Annexation (Sept. 30, 2022) available at https://home.treasury.gov/news/press-releases/jy0981.
[3] See FAQ 1091 at https://home.treasury.gov/policy-issues/financial-sanctions/faqs/1091.
[4] Id.
[5] See Commerce Department FAQ available at https://www.bis.doc.gov/index.php/documents/about-bis/3145-2022-09-30-bis-faq-third-country-application-of-controls/file.