On May 19, 2023, the Department of Commerce’s Bureau of Industry and Security (“BIS”) announced new export controls and Entity List additions during President Biden’s G7 visit in Japan.  In conjunction with the G7 meetings, BIS stated these new restrictions are designed to better align U.S. controls with those of its partner and ally countries, who have committed to further restricting Russia’s ability to obtain items needed to support Russia’s military in its war efforts against Ukraine.  Under Secretary of Commerce for Industry and Security Alan F. Estevez indicated that the Global Export Control Coalition “will continue to impose costs on the Kremlin for continuing this war both by further restricting their access to additional items, as well as through aggressive enforcement in concert with our allies and partners.”

In addition, BIS added 71 entities to its Entity List and issued a joint supplemental alert with the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) urging additional due diligence by U.S. financial institutions against Russia’s evasion efforts.  Separately, the Treasury’s Office of Foreign Assets Control (“OFAC”) issued more than 300 sanctions against Russian individuals and companies and others aiding Russia’s war efforts, which we discuss in full here.

This latest round of export controls includes (1) additional items added to Supplement Nos. 4, 6, and 7 to Part 746 of the Export Administration Regulations (“EAR”); (2) expansion of the Russia/Belarus Foreign-Direct Product (FDP) Rule to add the temporarily occupied Crimea region of Ukraine; and (3) clarifications on licensing requirements, review policies, and a new de minimis exception.  Further, the 71 additions to the Entity List were added under the destinations of Russia, Armenia, and Kyrgyzstan.  The full list of these Entity List additions can be found here.  The effective date for all of these new rules is May 19, 2023. Further detail on the new rules is set forth below.

Supplement No. 4 to Part 746 of the EAR

BIS revised Supplement No. 4 to Part 746 to add 1,224 new HTS-6 codes relating to industrial items that will now require a license for export, reexport, and transfer (in-country) to or within Russia or Belarus.  These industrial items include various electronics, instruments, agricultural machinery, and advanced fibers to reinforce composite materials, including carbon fibers.  Importantly, the latest additions mean that the Supplement No. 4 restrictions now cover three entire harmonized system chapters to include all of the HTS-6 codes in Chapters 84, 85, and 90.  Despite the additional restrictions, “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.”  The complete list of the 1,224 new HTS-6 codes can be found here.

Supplement No. 6 to Part 746 of the EAR

BIS added several chemicals to the list of chemicals controlled under Supplement No. 6 to Part 746, 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).  BIS also revised paragraph (f) of Supplement No. 6 to add the text “and consumable ‘materials’”.  BIS stated this change is to clarify that consumables for certain types of equipment listed in paragraph (f) are controlled under paragraph (f) regardless of whether the item is considered “equipment” or “material” under the EAR, an interpretation BIS notes it already held.  Items identified in Supplement No. 6 require a license for export, reexport, and transfer (in-country) to or within Russia or Belarus pursuant to § 746.5(a)(1)(iii) of the EAR.  Similar to above, BIS will review applications for items that are predominantly agricultural or medical in nature on a case-by-case basis.

Supplement No. 7 to Part 746 of the EAR

BIS added one item to its recently created Supplement No. 7 to Part 746, which imposes a license requirement on any listed HTS-6 code when destined to Iran pursuant to § 746.7 and when destined to Russia or Belarus under § 746.8.  Specifically, BIS added HTS-6 Code 8548.00 (“Electrical Parts of Machinery or Apparatus, NESOI”), which BIS stated it inadvertently omitted from the original iteration of Supplement No. 7 to Part 746.  On February 24, 2023, BIS had created Supplement No. 7 to Part 746 to restrict items used by Iran to manufacture Unmanned Aerial Vehicles (“UAVs”) for eventual supply to the Russian and Belarussian industrial bases.

Replacement Licenses for Newly Added Items

BIS stated that exporters who previously had received licenses for transactions involving any of the newly added HTS-6 Codes or items described in Supplement No. 6 to part 746 will need to obtain replacement licenses to cover the newly controlled items.  However, BIS will review these license applications on a case-by-case basis.

Addition of the Crimea Region of Ukraine to the Russia/Belarus FDP Rule

BIS expanded the destination scope of the Russia/Belarus FDP rule to add the temporarily occupied Crimea region of Ukraine.  BIS stated this change was made to make it more difficult for items to be procured for Russia’s use in Crimea in support of Russia’s ongoing war effort in Ukraine.  As a result of this change, certain foreign-produced items which are the product of or produced using U.S.-origin technology or software will now require a license for export, reexport, or transfer (in-country) to the Crimea region of Ukraine.

De Minimis Exclusion Added for Items Identified in Supplements Nos. 2, 4, and 6 for Supplement No. 3 Countries

BIS also added a de minimis exclusion in § 746.5(a)(3) of the EAR which applies to Supplement No. 2, 4 and 6 items produced outside the US.  With this change, US-origin content incorporated into any such items is disregarded for de minimis calculation purposes when the foreign-produced item is exported or reexported to Russia or Belarus from a country described in Supplement No. 3 to the EAR (provided that the incorporated US origin content is not otherwise excluded by one of Supplement No. 3’s Scope column limitations).

Entity List Additions

BIS also added 71 entities from Russia, Armenia, and Kyrgyzstan to its Entity List.  BIS added 69 Russian entities for providing support to Russia’s military and defense sector.  In addition, BIS determined these entities all qualify as military end-users under § 744.21 (g) of the EAR.  Because of this determination, these entities received a Footnote 3 designation, which further restricts these entities under the Russia/Belarus-Military End User FDP rule in § 734.9(g).  These 69 entities are subject to a license requirement for all items subject to the EAR and a license review policy of denial for all items subject to the EAR, except for food and medicine designated as EAR99, which BIS will review on a case-by-case basis.

Further, BIS added Medisar, LLC under the destination of Armenia for preventing the successful completion of an end-use check.  Finally, BIS added Tro.Ya LLC under the destination of Kyrgyzstan for both preventing the successful completion of an end-use check and for posing a risk of diversion of items subject to the EAR to Russia.  Both entities carry a license requirement for all items subject to the EAR and a license review policy of presumption of denial.

Savings Clause

The new restrictions and Entity List additions are subject to a savings clause authorizing shipments that are en route aboard a carrier to port, and that would now otherwise be prohibited by these new restrictions, to proceed to the final destination provided the export, reexport, or transfer (in-country) is completed by June 20, 2023.

BIS and FinCEN Urge Additional Due Diligence by U.S. Financial Institutions

Following their original Joint Alert in June 2022, BIS and FinCEN issued a Joint Supplemental Alert “strongly encouraging” U.S. financial institutions to perform additional diligence on transactions and activities involving items described in nine (9) specific HS codes listed in Supplement No. 7 to Part 746 of the EAR.  BIS and FinCEN targeted these “High Priority Items” for additional scrutiny after reviewing electronic components contained within Russian weapon systems recovered from battlefields in Ukraine. The alert recommends that financial institutions “conduct due diligence when encountering one of the nine listed HS codes to identify possible third-party intermediaries and attempts at evasion of U.S. export controls.”  The alert also advises that financial institutions look for the relevant HS codes in trade documents, such as “commercial invoices, packing slips, airway bills, sea bills, or other supporting trade documentation.”

If a financial institution knows, suspects, or has reason to suspect a transaction involves any export controls evasion involving any of these High Priority Items, then the financial institution must file a Suspicious Activity Report (“SAR”) in accordance with FinCEN reporting requirements.  FinCEN also requests that financial institutions submitting a SAR reference this alert by including the key term “FIN 2022-RUSSIABIS”. The full alert can be read here.

These latest export controls and Entity List additions build on the comprehensive package of export controls, sanctions, and import restrictions levied by the Biden Administration in February to mark the one-year anniversary of Russia’s invasion of Ukraine.  Our articles discussing those restrictions can be found here, here, and here.

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