On May 19, 2023, the United States, in coordination with the G7 and other international partners, imposed significant new sanctions on Russia aimed to further degrade the Russian Federation's capacity to wage war against Ukraine. In a significant interagency effort, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) and the U.S. Department of State designated over 300 individuals, entities, vessels and aircraft and the U.S. Department of Commerce's Bureau of Industry and Security (BIS) added 71 entities to the Entity List and expanded export controls restrictions. Together these measures are intended to disrupt Russia's ability to acquire critical technology by targeting global procurement and technology transfer networks, its future energy extraction capabilities, and its financial services sector.
Additionally, OFAC expanded its sanctions authorities to target new sectors of Russia's economy and sever Russia's access to new categories of services.
Finally, on the same day, Treasury's Financial Crimes Enforcement Network (FinCEN) and Commerce's Bureau of Industry and Security (BIS) issued a joint supplemental alert urging financial institutions to exercise continued vigilance for potential Russian export control evasion, building on a previous June 28, 2022 joint alert. The supplemental alert details further evasion typologies and identifies additional transactional and behavioral red flags to assist financial institutions.
OFAC's Expansion of Sanctions Authorities and Prohibition on Certain Services
OFAC has expanded its sanctions authorities to now include the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation economy, as identified pursuant to section 1(a)(i) of Executive Order (EO) 14024. The Agency can now impose sanctions on any individual or entity determined to operate or have operated in any of those sectors. This action goes well beyond the existing sanctions and authorities against individuals and entities that operate or have operated in the metals and mining, quantum computing, accounting, trust and corporate formation, management consulting, aerospace, marine, electronics, financial services, technology, defense, and related material sectors of the Russian Federation economy.
Further, OFAC issued a determination pursuant to E.O. 14071 prohibiting the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of architectural services or engineering services to any person located in the Russian Federation effective June 18, 2023.
In conjunction with these determinations, OFAC issued new guidance.
Reporting Requirements for Assets Blocked Pursuant to Directive 4 Issued under E.O. 14024
OFAC amended Directive 4 under E.O. 14024, entitled "Prohibitions Related to Transactions Involving the Central Bank of the Russian Federation, the national Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation." Directive 4 will now require U.S. persons to 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 has an interest.
Targeted Efforts to Disrupt Circumvention of U.S. Sanctions
Given concerns of circumvention, there are renewed efforts aimed at disrupting Russia's ability to acquire foreign-made semiconductors and other microelectronics, which are necessary for the maintenance and development of Russia's military-industrial complex. The agency specifically noted common tactics used for sanctions evasion, also detailed in the March 2023 Tri-Seal Compliance Note, including using third-party intermediaries or transshipment points to circumvent restrictions, disguising the involvement of persons on the SDN List or entities on the Entity List in transactions, and obscuring the true identities of Russian end-users.
BIS Expansion of Restrictions
Concurrent with the OFAC changes, BIS also implemented additional restrictions against Russia and Belarus under the Export Administration Regulations (EAR), which build upon the substantial controls already in place. The additional controls likewise target Russia's industrial and commercial, chemical and biological, and other sectors that can support Russia's defense industrial base and/or be diverted to such uses through Belarus. The updated rules include the following notable changes:
- The inclusion of all Harmonized Tariff System (HTS) codes in Chapters 84, 85, and 90 to the industrial and commercial controls listed in Supplement No. 4 to Part 746 of the EAR, such that every HTS under these three chapters is now export controlled. Items added as a result of the updated rule include a variety of electronics, instruments, and advanced fibers for the reinforcement of composite materials, including carbon fibers. The goal is to further restrict Russia's access to items of potential military application while also simplifying the compliance decisions for persons trading in these items, since all items in these chapters now require a license to Russia and Belarus;
- They expanded the list of foreign-produced items in Supplement No. 7 to Part 746 of the EAR that require a license when destined to Russia, Belarus, and Iran to make the EARs controls stronger, more effective, and easier to understand, and further limit Iran's ability to support Russia's military aggression against Ukraine by providing unmanned aerial vehicles or UAVs; and,
- The application of the Russia/Belarus Foreign Direct Product (FDP) Rule to the temporarily occupied Crimea region of Ukraine, thereby making it more difficult for items to be procured for Russia's use in Crimea to support its ongoing military aggression in Ukraine.
Given this significant expansion, companies, including transportation and other service providers, with potential touchpoints with Russia are advised to redouble their compliance efforts. This includes screening all Russian entities involved in such dealings and ensuring that adequate compliance controls are in place to identify possible circumvention tactics and risk factors. Further, companies are advised to make and retain a comprehensive inventory of any goods or services they may be exporting, directly or indirectly, to Russia to determine whether a license from BIS is required.
Moreover, companies operating in newly identified sectors should closely review and consider their U.S. and international operations to determine potential sanctions risks. OFAC's expanded authorities to impose sanctions on individuals and entities operating in these sectors are a clear signal that OFAC is willing and able to consider secondary sanctions on persons it determines to be directly or indirectly aiding Russia's war efforts.