Key Takeaways:

• Effective June 18, 2023, OFAC has prohibited the provision of architecture and engineering services from the United States or by a U.S. person, wherever located, to any person located in Russia.
• OFAC and the U.S. Department of State sanctioned over 300 entities, individuals, vessels, and aircraft. Industries targeted include gold, energy, education and research institutions, technology, and financial services.
• OFAC imposed a new annual reporting requirement on U.S. persons who possess or control property in which the Russian Central Bank, Ministry of Finance, or National Wealth Fund have any interest.
• The U.S. Commerce Department extended certain export controls imposed on Russia and Belarus to the Crimea region of Ukraine, and further restricted exports to Russia, Belarus, and Iran.

On May 19, 2023, the United States along with other members of the G7 and other allied countries imposed additional sanctions and export controls meant to further restrict Russian economic activity and degrade Russia’s ability to continue to prosecute its war against Ukraine.

Economic Sanctions

Pursuant to Section 1(a)(ii) of Executive Order 14071, OFAC prohibited the export, re-export, sale or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of architecture services or engineering services to any person located in the Russian Federation. This action aligns with similar measures taken by the United Kingdom and the European Union and will take effect beginning at 12:01 eastern daylight time on June 18, 2023.

OFAC also made a determination pursuant to Section 1(a)(i) of Executive Order 14024, authorizing the imposition of sanctions against the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation economy. Any individual or entity determined by the Secretary of the Treasury, in consultation with the Secretary of State (or vice versa) to operate or have operated in the identified sectors are subject to sanctions. OFAC provided examples of activities that would fall under architecture and engineering services in FAQ 1128.

In amending Directive 4 under Executive Order 14024, OFAC imposed a new reporting requirement specifying that by June 18, 2023, U.S. persons must report to OFAC any property in their possession or control in which the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation (“Directive 4 entity”) has any direct or indirect interest. Going forward, such reports will be due annually by June 30th.

Also on May 19, 2023, OFAC and the State Department sanctioned more than 300 persons including 194 entities, 78 aircraft, 46 individuals, and 5 vessels from more than 20 jurisdictions. OFAC targeted entities and individuals related to gold, energy, education and research institutions, technology, and financial services. Of note are comprehensive sanctions against Public Joint Stock Company Polyus (“Polyus”), the largest gold miner in Russia, and Gazprom Vniigas OOO, PJSC Gazprom’s main research center. PJSC Gazprom itself has avoided comprehensive sanctions largely due to European reliance on Russian natural gas, and it is unclear if OFAC’s action signals that PJSC Gazprom could itself be placed on the SDN List in the near future. OFAC also sanctioned the Foreign Intelligence Service of the Russian Federation.

OFAC issued various General Licenses to authorize certain prohibited activities in connection with the May 19th designations. Until 12:01 eastern daylight time on August 17, 2023, U.S. persons are authorized to engage in transactions incidental and necessary for the purposes below. 

• Wind down of any transaction involving Polyus, or any entity in which it holds, directly or indirectly, a 50 percent or greater interest (General License No. 66);
• Divestment or transfer to a non-U.S. person (or the facilitation of the divestment or transfer) of debt or equity of Polyus, or any entity in which it owns, directly or indirectly, a 50 percent or greater interest (General License No. 67), so long as the debt or equity interest was purchased prior to May 19, 2023; and
• Extending until 12:01 a.m. eastern daylight time, August 17, 2023, a general license for U.S. persons to pay taxes, fees, or import duties and purchase or receive permits, licenses, registrations or certifications to or from a Directive 4 entity (General License 13E).

In addition, OFAC authorized transactions ordinarily incident and necessary to the wind-down of any transactions involving listed five blocked universities and research institutions (all mining and oil/gas technical universities, including, for example, the St. Petersburg Mining University and the Russian State University of Oil & Gas) until 12:01 eastern daylight time, July 18, 2023 (General License No. 68). 

Export Controls

On May 19, 2023, the Department of Commerce's Bureau of Industry and Security (“BIS”) enhanced export controls against Russia and Belarus under the Export Administration Regulations (the “EAR”) in order to align with controls imposed by U.S. allies and partners.

BIS added 71 entities to its Entity List in connection with their support for Russia’s defense industry and war effort. These included 69 entities in Russia, as well as an entity in Armenia and one in Kyrgyzstan connected with potential diversion/evasion risks.

The Commerce Department broadened the scope of the EAR’s Russian and Belarusian Industry Sector Sanctions. Under the changes made to Supplement No. 4 to part 746, 1,224 types of industrial items (classified as EAR99), such as electronics, instruments, and advanced fibers for reinforcement of composite material, now require a license for export to, reexport to, or transfer within Russia or Belarus under Section 746.5(a)(1)(ii). Likewise, additional chemicals and related equipment and material are further regulated under Supplement No. 6 to part no. 746.

The Commerce Department also expanded the Foreign Direct Product Rule to apply to the temporarily occupied Crimea region of Ukraine.

Lastly, a license is now required if certain foreign-produced electrical parts of machinery or apparatus for Unmanned Aerial Vehicles are destined for Iran, Russia or Belarus.

BIS and FinCEN Joint Supplemental Alert

Also on May 19, 2023, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and BIS issued a joint alert to supplement a joint alert from June 2022, providing additional guidance to financial institutions on complying with export control restrictions related to Russia. Because financial institutions may be involved in providing financing, processing payments or performing other services, FinCEN and BIS recommended that financial institutions use appropriate risk-mitigation measures to meet export control and Bank Secrecy Act obligations.

BIS, the European Union, the United Kingdom, and Japan identified nine items that Russia has been relying on for its weapons systems and added them to the High Priority Items List. While the list is not exhaustive, the particular items listed there, described by their Harmonized System Codes (“HS Codes”), now require a license to be exported to Russia, Belarus, the Crimea region of Ukraine, or Iran. FinCEN and BIS advised that financial institutions conduct due diligence when encountering transactions involving items on the High Priority Items List in order to identify intermediaries who may be aiding sanctions evasion. BIS identified three factors for financial institutions to consider when evaluating financial transactions for risk related to diversion involving non-Global Export Control Coalition (“GECC”) countries (countries other than the 39 who have joined together to impose sanctions and export controls on Russia since its invasion of Ukraine in February 2022): (i) whether the company received exports prior to February 24, 2022, (ii) whether the company received exports that did not include any of the nine HS Codes prior to February 24, 2022, and (iii) whether the company received exports involving the nine HS Codes prior to February 24, 2022, but also saw a significant spike in exports of such items thereafter.

Likewise, FinCEN and BIS also requested that financial institutions conduct heightened due diligence, especially when opening accounts, for new customers engaged in transactions with, and/or those located in, non-Global Export Control Coalition (“GECC”) countries. As part of initial due diligence for the onboarding of a new customer, they urged financial institutions to consider the new customer’s date of incorporation, end user and end use of the item, physical location and red flags on public-facing websites. For existing customers, they added that financial institutions should be on the lookout for any anomalous spike in the volume or value of orders, and, for any transaction, should scrutinize the reported end user and end use of the item(s). The alert also outlined new transactional and behavioral red flags.

Lastly, when submitting a Suspicious Activity Report (“SAR”) related to the topics addressed in the supplemental alert, FinCEN requested financial institutions use “FIN 2022-RUSSIABIS” in SAR field 2 to reference the joint alert dated May 19, 2023, and check box 38(z) and note “Russia Export Restrictions Evasion.” FinCEN also requested that financial institutions indicate in field 45(z) the appropriate North American Industry Code(s) for the involved product, or the appropriate financial instrument or payment mechanism in field 46.

Foley Hoag will continue to provide updates as the situation with respect to Ukraine develops.