This morning brought a flurry of export controls and sanctions activity from the U.S. Departments of Treasury, Commerce, and State. Below is a brief overview.
OFAC has added 83 entities and 22 individuals to its Specially Designated Nationals and Blocked Persons (SDN) List, effectively barring U.S. companies and individuals from transacting with them. However, these designations are also relevant for non-U.S. companies, because OFAC issued the sanctions under Executive Order 14024. Therefore, non-U.S. companies should view these designations as having secondary sanctions implications. Here is a link to the full list of newly sanctioned persons. It includes financial institutions (see below), alleged sanctions evaders, and companies involved in e.g., Russia’s technology, electronics, and aerospace sectors.
Additional Russian financial institutions added to the SDN List
Before today’s action, Russian banks representing over 80% of total Russian banking sector assets were already subject to U.S. and international sanctions. Today, OFAC designated over a dozen financial institutions in Russia, including Credit Bank of Moscow Public Joint Stock Company, one of the top-ten largest banks by asset value. Companies that are still legally exporting to Russia or winding down past transactions, where payments still need to be made, should ensure that their payment chain does not include any sanctioned bank. Needless to say, it is getting increasingly difficult to make payments in Russia without violating U.S. sanctions. There had been some chatter in the press leading up to today that some of the remaining Western banks or their Russian branches would get sanctioned, but fortunately, today’s sanctions have not included such designations. OFAC has issued some relevant general licenses for some banking transactions—more on that below.
Metals and mining sanctions
OFAC published a new determination, which authorizes sanctions on any person determined to operate or have operated in Russia’s metals and mining sector. OFAC has clarified that this action also has secondary sanctions implications for non-U.S. persons.
- Scope: OFAC intends to issue regulations that will define the term “metals and mining sector” to include “any act, process, or industry of extracting, at the surface or underground, ores, coal, precious stones, or any other minerals or geological materials in the Russian Federation, or any act of procuring, processing, manufacturing, or refining such geological materials, or transporting them to, from, or within the Russian Federation.” It is also not clear yet how broadly OFAC will interpret the term “geological materials” and whether, for instance, helium or other gases extracted in Russia and sold to Western companies will be affected by the new mining sanctions.
- Not an automatic sanction: It is important to note that not everyone who currently operates in Russia’s metal or mining sector has now automatically been sanctioned. Instead, this determination gives OFAC a legal basis to essentially add entities and individuals to the SDN List that operate in the Russian metals and mining sector.
- Implications: These new sanctions will not only have repercussions for companies exporting equipment or services to Russian mines that are added to the SDN List (or whose owners are added to the SDN List) but also for Western companies buying or transporting Russian-sourced natural resources that fall under metals and mining sanctions if someone in the chain—from the seller to the company extracting the metals or materials—is subject to the SDN List. Buyers will need to screen their entire supply chain up to the company that owns and operates the particular mine in Russia to ensure that no one is designated on the SDN List or owned 50% or more, collectively or individually, directly or indirectly, by one or more persons on the SDN List.
- Exceptions:OFAC has clarified that it does not intend to target persons for operating in the metals and mining sector where the provision of goods or services is solely for the safety and care of personnel, protection of human life, prevention of accidents or injuries, maintenance or repair necessary to avoid environmental or other significant damage, or activities related to environmental mitigation or remediation. Examples of such goods include personal protective equipment, safety devices, ventilation systems, and alarm systems; examples of such services include rescue and accident response services, cleaning, and safety inspections.
OFAC has issued exemptions, so-called General Licenses, to allow some transactions that would otherwise be sanctioned. For example, General License (GL) 60, authorizes the wind-down and rejection of transactions involving nine of today’s sanctioned banks through 12:01 a.m. EDT, May 25, 2023, including Credit Bank of Russia. In addition, OFAC has issued Russia-related GL 61, authorizing the wind-down of some securities and derivatives transactions involving some of the designated banks through 12:01 a.m. EDT, May 25, 2023. OFAC also issued amended an GL 8F, adding certain of these financial institutions to the authorization to process energy-related transactions.
Clarification that the payment of Russia’s “exit tax” is not exempt from U.S. sanctions
As of December 2022, the Russian Government may require the payment of a so-called “exit tax” payment prior to the divestment of assets located in Russia. Given that those payments could involve the sanctioned Russian Central Bank or the Russian Ministry of Finance, Western companies had hoped that paying this “exit tax” would fall under GL 13D. OFAC has now clarified that such payments are not authorized because the “exit tax” is not considered ordinarily incident and necessary to day-to-day operations in Russia.
Entity list additions
Through two separate rules that are available here and here, the Department of Commerce’s Bureau of Industry and Security (BIS) added 86 entities under 89 entries (due to some entities operating in multiple countries) to its Entity List, mainly supporting “Russia’s defense-industrial sector and war effort.” Interestingly, some of the entities BIS just added to its Entity List were already on OFAC’s SDN List, such as Joint Stock Company Elektron Optronik and Technopark Skolkovo. Those Entity List additions will hardly have any effect. U.S. companies that comply with U.S. sanctions would have stopped transacting with them once they were added to the SDN List months ago. Foreign companies tend to enforce the SDN List over the Entity List unless their product is subject to the EAR. There are, however, some entities that had not been previously sanctioned, such as the Canadian company, CPUNTO, and other European, Chinese, and Russian entities flagged as sanctions evaders.
Seventy-nine of the entities were added under the country heading of Russia, five under the country heading of China, two under Canada, and one each under France, Luxembourg, and the Netherlands. Some of these entities are Chinese- or Russian-owned. In BIS’s typical recent fashion of Entity List designations, the “unpublished” rule with the designations was issued today. Both rules will officially be published on February 27, but they are effective as of today. Companies should ensure that these entities are blocked on their ERP system, as some sanctions screening tools can take some time to update. Both Entity List rules include Saving Clauses (i.e., “grandfathering provisions”) that are very tight, as is typical with Entity List designations. The export must have been en route aboard a carrier to a port of export, reexport, or transfer (in-country) today, “pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination.”
Clarification and expansion of BIS lists restricting EAR99 items for Russia and Belarus
BIS has expanded the scope of the Russian and Belarusian industry sector restrictions (oil and gas production; commercial and industrial items; chemical and biological precursors) and the “luxury goods” sanctions “to better align them with the controls that have been implemented by U.S. allies and partners imposing substantially similar controls on Russia and Belarus.“
What does this mean from a practical perspective?
Anything described on the Commerce Control List has been export-controlled for Russia and Belarus since the spring of 2022, barring some limited exceptions. Short of an embargo, BIS has not imposed a ban on EAR99 items. However, (re-)exporters and in-country transferors of EAR99 items must ensure that the items are not described in Supplements 2, 4, 5, or 6 to Part 746 of the EAR.
In the new rules, BIS essentially (1) clarifies the Supplements 2, 4, and 5 descriptions by replacing the U.S. Schedule B customs code descriptions with the internationally common HTS codes and descriptions and (2) expands the list of restricted goods by adding more customs entries in the respective supplements. From a practical perspective, (re-)exporters and in-country transferors of EAR99 items to Russia and Belarus will need to carefully search Supplements 2, 4, and 5 for applicable HTS codes. Supplement 6 continues to not include customs codes. Instead, suppliers of chemicals, biological precursors, laboratory equipment, chromatography and spectrometry components, parts, accessories, and other lab products listed in Supplement 6 will need to continue reviewing the specific descriptions in Supplement 6 to determine whether their products are caught. Below is a more detailed description of the relevant changes:
- Changing the methodology for identifying items by replacing the U.S. Schedule B descriptions with the international HTS-6 Codes and HTS Description. Given that all export control classifications, other than EAR99, are controlled for Russia and Belarus, BIS has used customs codes to identify EAR99 items that are controlled in Supplements 2, 4, 5, or 6 to Part 746 of the EAR. The EU and other U.S. allies have issued similar lists, which are not identical. For example, the U.S. has used Schedule B customs codes to identify restricted EAR99 items, while U.S. allies have used HTS codes. In today’s rule, BIS is changing the methodology for identifying items by using the HTS-6 Code and HTS Description “to make it easier to align with U.S. allies’ and partners’ controls.” This will be a welcomed change for U.S. companies with European affiliates that try to bridge and internally harmonize the U.S. and EU restrictions.
- Expansion of EAR99 Items that are caught in Supplement 2 (Oil and Gas Production). BIS has expanded Supplement 2 to Part 746 by clarifying that this supplement includes any modified or designed parts, components, accessories, and attachments for the items identified in Supplement 2. For example, spare parts for an EAR99 pump that is described in Supplement 2 are now also caught. Supplement 2 will not restrict fasteners (e.g., a screw, bolt, nut, nut plate, stud, insert, clip, rivet, pin), washers, spacers, insulators, grommets, bushings, springs, wires, or solders. This follows the approach taken thus far in Supplement 4.
- Various more EAR99 commercial and industrial products now caught in Supplement 4. Today, BIS has significantly expanded the list of commercial and industrial EAR99 products that are listed in Supplement 4. It added 322 additional HTS-6 Code entries corresponding to 322 industrial items that will require a license for export or reexport to or transfer within Russia or Belarus under § 746.5(a)(1)(ii). The items added include a variety of electronics, industrial machinery, and equipment, such as flat-rolled iron, lead-acid storage batteries, or bow-molding machines for working rubber or plastic.
- Expansion of Bio and Laboratory Equipment Restrictions in Supplement 6. Supplement 6 restricts certain chemicals, biological precursors, and related lab equipment, chromatography and spectrometry components, and other equipment, parts, and components. Those entries are based on descriptions and not HTS codes. We continue to find it highly problematic that BIS restricts lab equipment to Russia that is used, e.g., in surgeries to measure the heparin level in blood. BIS views heparin as a chemical substance. Life-saving medical devices that fall under this restriction continue to require a BIS license. We have discussed the issue with BIS, and they are firm on this point. This restriction was expanded by clarifying that the terms components, parts, and accessories (even) include consumables.
New export controls on Iran to address the use of Iranian UAVs by Russia
Today, BIS imposed license requirements for a subset of generally low-technology (EAR99) items, including semiconductors that are destined for Iran, regardless of whether a U.S. person is involved in the transaction. One could question why this restriction was needed if OFAC already maintains a full embargo against Iran. For the uninitiated, the EAR actually do not restrict the export of all EAR99 items to Iran (OFAC essentially does). Today, BIS established a new list (Supplement No. 7 to part 746) identifying certain EAR99 items by HTS-6 Code to allow BIS and other U.S. government agencies to track and quantify these exports. BIS also created a new “Iran Foreign Direct Product (FDP) Rule” specific to Iran for items in certain categories of the Commerce Control List and EAR99 items identified in the new supplement. BIS has also revised the existing Russia/Belarus FDP rule to cover EAR99 items that have been found in UAVs containing parts and components branded U.S. or U.S.-origin (although they may not actually be U.S. branded or U.S.-origin), which is supposed to help to ensure that U.S. products are not available for shipment to Iran for use in the manufacture of UAVs being used by Russia in Ukraine.
One practical effect of BIS’s efforts that duplicate OFAC’s SDN designations and its administration of the Iranian Transactions and Sanctions Regulations is that BIS will now have both administrative and criminal authority to investigate and enforce the new Entity List and Iran rule actions.