What You Need to Know
Key takeaway #1
The United States and United Kingdom are actively focused on Russia sanctions evasion and diversion efforts and are designating companies all over the world for Russia-related diversion. Companies knowingly doing business with Russia or that are at risk of indirectly being part of a Russian supply chain should very carefully analyze that business for designation risk pursuant to current U.S. and UK authorities and scrutinize its dealings to ensure it complies with all U.S. and UK controls.
Key takeaway #2
Financial institutions—defined broadly to capture banks, (re)insurers, and other financial service market participants—in particular face increased sanctions designation risk as a result of the U.S. changes, which expanded the scope of the sanctions designation authority to authorize the imposition of sanctions on persons transacting with any party that is already sanctioned under the primary Russia-related designation authority due to being more closely tied to Russia's military industrial base.
Key takeaway #3
The U.S. and UK designation of the Russian National Settlements Depositary (NSD) as well as the Russian stock exchange (MOEX) align them with the EU and create sanctions risks for anyone transacting in Russian securities or non-Russian securities held by Russian parties through custodial accounts via the NSD.
Key takeaway #4
The U.S. changes include a particular focus on IT, with a new ban on IT Consulting (mirroring those previously implemented in the EU and UK) as well as new export controls on IT and software-related activity to Russia. U.S. companies, companies located in the U.S., and non-U.S. persons using U.S. software, should review their IT infrastructure and policies to ensure there is no improper provision to Russia of IT support services, cloud-based services, or controlled software.
Key takeaway #5
BIS's new list of parties identified as exporting to Russia will create a de facto new export control list against which exporters and banks will be expected to screen as part of their overall controls to limit Russia-related diversion risks.
On June 12, 2024, the U.S. Department of the Treasury's Office of Foreign Asset Control (OFAC) and the U.S. Department of Commerce's Bureau of Industry and Security (BIS) announced additional sanctions and export restrictions in response to Russia's continued aggression in Ukraine. The next day, the UK announced additional sanctions designations.
Overview
OFAC took three major steps. First, OFAC expanded secondary sanctions for foreign financial institutions by broadening the definition of parties supporting Russia's "military-industrial base" for which the processing of "significant" transactions can trigger sanctions. The expanded definition now also includes all persons blocked pursuant to Executive Order 14024. OFAC also sanctioned new Indian, Chinese, and Kyrgyz locations of five already-sanctioned Russian banks.
Second, OFAC imposed sanctions on hundreds of individuals and entities for ties to Russia's financial services sector, military-industrial complex, and LNG industry, as well as 90 individuals and entities in China, Türkiye, and a variety of other countries for engaging in evasion of U.S. sanctions and export controls.
Third, OFAC issued a new determination under Executive Order 14071, prohibiting U.S. persons from providing certain IT consulting and support services (including cloud-based services) to any person in the Russian Federation.
BIS concurrently announced a series of additional export restrictions aimed to degrade Russia's ability to continue waging war against Ukraine. Broadly, these included:
- Targeting shell companies that engage in export control evasion
- Imposing controls on the export to Russia and Belarus of certain management and design software and over 500 other items
- Designating more Chinese and Russian entities on the Entity List and Denied Persons List. BIS also confirmed that it notified 130 U.S. distributors of "high priority" items of additional restrictions on select shipments to Russia.
On June 13, 2024, the UK released 50 new Russia sanctions designations. The new designations include the UK's first sanctions targeting vessels in Russia's so-called 'shadow fleet' (vessels with obscure ownership thought to be transporting Russian oil in violation of the G7 price cap), as well as additional asset-freezing sanctions targeting (among others) entities in the financial system, suppliers to the Russian military complex, and entities involved in or supporting the Russian LNG sector.
Summary of New Controls
An overview of the latest restrictions and prohibitions by both U.S. agencies and the UK is presented in the table below:
| Agency | Brief Description | Key Points |
|---|---|---|
| OFAC | Expansion of the Risk of Secondary Sanctions |
OFAC broadened the definition of parties supporting Russia's "military-industrial base" (for which the processing of "significant" transactions can trigger sanctions) to also include persons blocked under Executive Order 14024. This expands the list of entities that can trigger such sanctions to include an additional 555 individuals and entities. |
| 300+ Individuals and Entities Designated on the Specially Designated Nationals and Blocked Persons List (SDN List) |
OFAC designated over 300 additional individuals and entities in 16 countries. Of those, the following are a few of the key designations. U.S. persons are prohibited from dealing with such persons, as well as any entity they own 50% or more.
OFAC issued a general license (General License 98) that allows for the wind down of activities involving 15 of the sanctioned entities. |
|
| Prohibition on Software and IT-related services |
The Prohibition: Bringing the U.S. in line with earlier restrictions issued by the EU and the UK, U.S. persons are prohibited from exporting, reexporting, selling, supplying, directly or indirectly, to a person in Russia:
The prohibition takes effect on September 12, 2024. Exclusions:
General Licenses: OFAC also updated General Licenses 6D and 25D to account for certain exceptions involving agricultural and medical activities, and exchanges of communication over the Internet. |
|
| BIS | Cracking down on diversions through shell companies |
Listing Addresses on the Entity List: BIS now lists "high risk" addresses on the Entity List (as opposed to an address associated with a name). BIS will identify which items subject to the EAR require an export license if exported, reexported, or transferred to such addresses. Hong Kong Addresses: Eight addresses in Hong Kong will be added. The export, reexport, or transfer to any person at these addresses will require a license if the item is subject to the EAR and it is listed on the Commerce Control List, or Supplement No. 7 (Supplement No. 7 is a list of items controlled for export to Iran, Russia, and Belarus). |
| Restricting Export of Certain EAR99 Software to Russia and Belarus |
A license is now required to export, reexport, or transfer to Russia or Belarus EAR99 software if it is for:
There are certain exceptions for entities owned or controlled by U.S. persons, or persons from A:5 or A:6 countries, as well as software used for agricultural and medical purposes. |
|
| Restricting 500+ More Items for Russia |
A license is now required to export, reexport, or transfer to Russia the following items:
|
|
| Tightening availability of CCD license exception for Russia and Belarus | BIS restricted the use of License Exception Consumer Communications Devices (CCD) for Russia and Belarus, removing certain items that included low-level GPUs. | |
| Entity List additions |
BIS designated four Chinese companies and one Russian company, all within the defense sector, to the Entity List. It is prohibited to export, reexport, or transfer any item subject to the EAR to such persons. |
|
| Issuing TDOs against aviation exporters facilitating parts to Russia |
BIS issued Temporary Denial Orders (TDO) to two Russian procurement networks facilitating exports of aircraft parts to Russia through third countries. The TDOs cut off the right to export items subject to EAR from the U.S. as well as the rights to receive or participate in exports from the U.S. or reexports of items subject to the EAR |
|
| New List of High-Risk Non-U.S. Suppliers |
BIS explained that it reached out (privately) to over 130 U.S. distributors of BIS's "high priority" items and imposed additional restrictions when these distributors ship items to certain foreign suppliers identified on a list provided by BIS. BIS noted that these foreign suppliers are in turn supplying these items to Russia. Moving forward, BIS explained it will target Russian diversion efforts through Entity List additions, specifically targeting foreign companies that supply U.S.-branded products to Russia. |
|
| UK | 50 Asset-Freezing Designations and Ship Specifications |
The UK introduced a number of new asset-freezing designations. UK persons are prohibited from making funds or economic resources available to or for the benefit of asset-freeze targets, and from otherwise dealing with their funds or economic resources. The new designations include:
The UK also used powers to specify four vessels in Russia's shadow fleet and two vessels which have shipped weapons to Russia. So-called 'specified ships' are prohibited from entering UK ports, may be given a movement or a port entry direction, can be detained, and will be refused permission to register on the UK Ship Register or have its existing registration terminated. They also can not benefit from the oil price cap. |
What's Next?
- Look for how OFAC utilizes its increased secondary sanctions authority for dealings with the Russian military-industrial base, including for potential future designations. We will be particularly watching for the first time OFAC designates a non-U.S. financial institution pursuant to these new authorities to identify the facts that OFAC considers to rise to the level that merits designation. This will inform what level of dealings with Russian "military-industrial" parties is more likely to result in designation, and what controls OFAC expects to see from foreign financial institutions exposed to these risk areas.
- BIS may reach out to more U.S. (and non-U.S.) distributors still engaging indirectly with high-risk foreign suppliers likely to resupply goods to Russia. This could create a de facto new export-restricted party list. Similarly, we anticipate many banking institutions will treat the new BIS list in that way and decline payments for shipments to/from those listed.
- The European Union is expected to approve a new sanctions package at the end of June that will likely impose similar controls, including designations of non-EU entities for Russia-related diversion, as well as potentially extending EU jurisdiction to non-EU based entities that are owned/controlled by EU persons. The final details of that package will be important to review.
We would like to thank Kathryn Barbella and Trevor Outlaw, Summer Associates, for their contribution to this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.