Russia/Ukraine Crisis: U.S. Announces Hundreds Of New Designations And Additional Controls

On June 12, 2024, in connection with the 50th G7 summit, the United States announced yet another tranche of significant sanctions and export restrictions targeting Russia. The U.S. government also published an advisory, Updated Guidance to Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia's Military-Industrial Base, to underscore the risks to non-U.S. financial institutions that support Russia, and to highlight key diligence expectations.

Sanctions Designations

The new sanctions target "more than 300 individuals and entities both in Russia and outside its borders—including in Asia, the Middle East, Europe, Africa, Central Asia, and the Caribbean—whose products and services enable Russia to sustain its war effort and evade sanctions."¹

Russian Financial Infrastructure

In a press release, the U.S. Department of the Treasury explained that one aim of the new designations is to target "the architecture of Russia's financial system, which has been reoriented to facilitate investment into its defense industry and acquisition of goods needed to further its aggression against Ukraine."² To this end, the Office of Foreign Assets Control ("OFAC") imposed sanctions on the Moscow Exchange ("MOEX"), the operator of "Russia's largest public trading markets for equity, fixed income, derivative, foreign exchange, and money market products, as well as two MOEX subsidiaries: Russia's National Clearing Center ("NCC") and the Non-Bank Credit Institution Joint Stock Company National Settlement Depository ("NSD")."³ According to Treasury, Russia has sought to use MOEX to attract "investments in Russian sovereign debt, Russian corporations, and leading Russian defense entities," many of which are already sanctioned (and largely off-limits to Western counterparties).⁴ As such, these designations are plainly intended to target non-U.S., non-Russian parties that continue to lend financial support to Russia.

In addition to the MOEX sanctions, OFAC announced that it has updated Specially Designated Nationals and Blocked Persons list ("SDN List") to provide additional information on the foreign subsidiaries of sanctioned Russian banks, to emphasize that such subsidiaries are subject to the same restrictions.

Sanctions Evaders

In a similar vein, OFAC announced sanctions targeting more than 90 non-financial institutions engaged in evasion and circumvention efforts. The newly designated parties span nearly a dozen countries and include entities involved in attempting to obtain machine tools, a Russian-affiliated intelligence network, a group involved in attempting to procure microelectronics, and gold launderers, among others.

Military-Industrial Base Sanctions

OFAC also designated more than 100 entities determined to "operate or have operated in the defense and related materiel, manufacturing, technology, transportation, or financial services sectors of the Russian economy."⁵ And, observing that "Russia has transformed into a war economy in which companies across the spectrum of Russia's industry contribute to Russia's war effort," Treasury announced that its interpretation of Russia's military-industrial base has expanded to include all parties blocked pursuant to Executive Order 14024. Notably, this interpretative shift increases secondary sanctions risk for non-U.S., non-Russian financial institutions, which may face sanctions for conducting or facilitating a significant transaction or transactions, or providing any service, to or involving Russia's military-industrial base.⁶

LNG Sanctions

Many of the Western sanctions announced to date have included carveouts for certain transactions involving Russian energy products. However, as part of a G7 commitment "to limit Russia's future energy revenues and impede Russia's development of future energy projects," the June 12 sanction designations include parties involved in three liquefied natural gas ("LNG") projects: Obsky LNG, Arctic LNG 1, and Arctic LNG 1.⁷ In total, seven entities and seven vessels were sanctioned for their support of these energy projects, possibly portending a more aggressive sanctions approach toward Russia's energy sector.

General Licenses

OFAC issued three general licenses, all of which focus on authorizing the wind-down of transactions with newly designated parties:

• Pursuant to General License No. 98, parties have through 12:01 am EDT on June 27, 2024 to wind down transactions with 15 identified sanctions targets, including a range of Chinese and other non-Russian entities.
• Pursuant to General License No. 99, parties have through 12:01 am EDT on August 13, 2024 to wind down transactions involving debt or equity of, or derivative contracts involving, MOEX, NCC, or NSD.
• Pursuant to General License No. 100, parties have through 12:01 am EDT on August 13, 2024 to divest (to non-U.S. persons) debt or equity of, or to convert currencies involving, MOEX, NCC, or NSD.

OFAC also published updates to existing general licenses related to (1) agricultural commodities, medicines, medical devices, COVID-19, and clinical trials (General License No. 6D); (2) transactions related to energy (General License No. 8J); and (3) transactions related to telecommunications and certain internet-based communications (General License No. 25D).

New Services Prohibition

Executive Order 14071, issued in April 2022, prohibits "the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person" of any category of services subsequently identified by the U.S. government as impermissible.

On June 12, OFAC announced prohibitions on two new categories of services (effective September 12, 2024):

• Information technology ("IT") consultancy and design services.
  • OFAC defines "IT consultancy services" to include providing advice or expert guidance on technical matters related to information technology including hardware and software requirements and procurement, systems integration, systems security, and expert testimony.⁸
  • OFAC defines "IT design services" to include designing the structure and/or writing the computer code necessary to create and/or implement a software application.⁹
• IT support services and cloud-based services for enterprise management software and design and manufacturing software.
  • OFAC defines "support services" consistent with the United Nations' Central Product Classification (CPC) Code 83132, to include providing technical expertise in using software, hardware, or computer systems, as well solving specialized problems for use in a computer system.¹⁰
  • OFAC defines "cloud-based services" as "the delivery of software via the internet or over the cloud, including through Software-as-a-Service (SaaS)."¹¹
  • OFAC defines "enterprise management software" to include "enterprise resource planning (ERP), customer relationship management (CRM), business intelligence (BI), supply chain management (SCM), enterprise data warehouse (EDW), computerized maintenance management system (CMMS), project management, and product lifecycle management (PLM) software."¹²
  • OFAC defines "design and manufacturing" software to include "building information modelling (BIM), computer aided design (CAD), computer-aided manufacturing (CAM), and engineer to order (ETO) software."¹³

As a result, the exportation, reexportation, sale, or supply, directly or indirectly, from the United States or by a U.S. person (wherever located) of the above services to any person located in Russia will be prohibited, as of September 12. Consistent with prior services prohibitions, the new prohibitions exempt (1) services provided to entities in Russia that are directly or indirectly owned by U.S. persons; and (2) services provided in connection with the wind down or divestiture of an entity in Russia that is not directly or indirectly owned by a Russian person or persons. A third exemption is available for the provision of services for software that are (1) licensed or otherwise authorized under the Export Administration Regulations ("EAR"); or (2) would be eligible for a license exception or other authorization (if the item was subject to the EAR).

Foreign Financial Institution Advisory

As noted above, OFAC also issued a new advisory, titled Updated Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia's Military-Industrial Base (the "Advisory").¹⁴ The Advisory reminds foreign financial institutions that OFAC has the authority to designate non-U.S. banks to the SDN List for conducting or facilitating transactions, or providing services in support of, Russia's military-industrial base (which now includes all parties sanctioned under Executive Order 14024). The Advisory emphasizes that a range of activities—including maintaining accounts for sanctioned Russian parties, maintaining accounts for parties that are themselves transacting with sanctioned Russian parties, facilitating transactions that support the Russian military, and helping companies structure transactions and/or evade sanctions—could expose non-U.S. financial institutions to sanctions (and risk of being cut off from the U.S. financial system).

The Advisory sets forth a list of steps that foreign financial institutions may take to mitigate the risk of engaging in activity involving Russia's military-industrial base. including

• Conducting robust restricted party screening of customers, counterparties, and any "associated parties;"
• Undertaking customer reviews to assess whether any customers are (1) engaged in sectors of concern (e.g., technology, defense, construction, aerospace, manufacturing) or transactions with sanctioned Russian parties; or (2) involved in the sale, supply, or transfer of critical items to Russia or countries that present heightened diversion risk;
• Communicating compliance expectations to customers on a risk basis;
• Sending questionnaires, on a risk basis, to higher-risk customers;
• Using open-source information and past transactional activity to assess which customers are higher risk and deserve additional scrutiny;
• Obtaining attestations from high-risk customers that they do not engage in problematic transactions involving Russia;
• Taking actions in respect of customers that refuse to comply with expanded compliance procedures (including restricting accounts or exiting relationships); and
• Implementing enhanced trade finance controls with respect to key items.

While helpful from a compliance strategy perspective, these examples also establish a rigorous baseline against which OFAC may assess non-U.S. banks' activities from an enforcement perspective.

Export Restrictions

The U.S. Department of Commerce's Bureau of Industry and Security ("BIS") also announced seven new measures aimed at further restricting exports of concern to Russia, as summarized below.¹⁵

Shell Company Designations

BIS announced a new regulatory framework for identifying on the Entity List addresses that present elevated risk of unlawful diversion. As explained by BIS, the goal is to "make it harder for shell companies, who can easily change their names or use multiple corporate identities, to find a corporate services provider willing to lend the use of their address for unlawful trade."¹⁶ In connection with a final rule published by BIS implementing the June changes,¹⁷ BIS announced the designation of eight Hong Kong-based addresses to the Entity List. While announced in the context of Russia-related restrictions, this novel expansion of the Entity List may portend broader efforts by BIS to target shell companies and diversion risk (which would, in turn, escalate diligence obligations for industry).

Software Export Restrictions

BIS imposed additional licensing obligations for exporters seeking to export, reexport, or transfer (in-country) to or within Russia or Belarus any software within a number of categories, even if the software is classified as EAR99 (i.e., not subject to product-specific controls). Categories of software now restricted for export to Russia (and Belarus) include "[e]nterprise resource planning (ERP); customer relationship management (CRM); business intelligence (BI); supply chain management (SCM); enterprise data warehouse (EDW); computerized maintenance management system (CMMS); project management software; product lifecycle management (PLM); building information modelling (BIM); computer-aided design (CAD); computer-aided manufacturing (CAM); and engineering to order (ETO)."¹⁸

These restrictions should be read in conjunction with the new prohibition on information technology services that OFAC contemporaneously issued, the objective of which is to "make it harder for Russia's and Belarus's military industrial base to operate with a modern software infrastructure."¹⁹

Additional Harmonized Tariff System Controls

Since Russia's invasion of Ukraine, BIS has imposed broad-ranging restrictions on the export, reexport, or transfer (in-country) of hundreds of categories of otherwise non-controlled items for export, reexport, or transfer (in-country) with respect to Russia and Belarus. These items, which include various industrial products and luxury goods, are identified based on Harmonized Tariff Schedule ("HTS") numbers. On June 12, BIS added controls on more than 500 additional HTS codes, in categories such as mineral products, base metals, and arms and ammunition. The impact of the broad-ranging HTS-based controls is that a wider and wider array of transactions involving Russia and Belarus now require export licensing, including for products that are not considered sensitive for export to most jurisdictions.

Modification to License Exception Consumer Communications Device (CCD)

License Exception CCD authorizes the export, reexport, or transfer (in-country) of certain commodities and software to Cuba, Russia, and Belarus, in keeping with general U.S. trade policy of seeking not to impair civilian internet access and communications. On June 12, BIS narrowed the scope of License Exception CCD for Russia and Belarus, such that certain items—e.g., mobile phones, memory devices, certain information security equipment, digital cameras, batteries, and TV receivers—are no longer eligible for export to Russia or Belarus pursuant to the license exception.

Additions to the Entity List and Temporary Denial Orders

BIS designated four Chinese parties and one Russian party to the Entity List. The new Chinese additions to the Entity List were designated for their efforts to help ship controlled products to Russia and/or procure components for use in developing Shahed-series UAVs for use by Russia in Ukraine. BIS also imposed Temporary Denial Orders against "two Russian procurement networks facilitating exports of aircraft parts to Russia through third countries in violations of U.S. export controls."²⁰

"Is Informed" Outreach

Finally, BIS announced that it "recently informed over 130 U.S. distributors of additional restrictions on shipments to known suppliers in Russia" in order to "disrupt[] the flow of U.S. and foreign-produced electronic components destined to Russia through intermediaries."²¹ BIS's ability to impose exporter- and counterparty-specific restrictions is informally referred to as the "is informed" process, and BIS's assertive use of this authority indicates that the agency is employing all available tools to restrict exports of items subject to the EAR to Russia.

Conclusion

Last week's designations and announcements further complicate an already extremely challenging compliance landscape for parties who seek to transaction with Russia (as well as Belarus). In addition, the new measures illustrate the fluidity of trade-focused restrictions, and underscore the need to constantly refresh prior sanctions and export control analyses to account for intervening new restrictions.

Footnotes

1 Press Release, U.S. Dep't of the Treasury, As Russia Completes Transition to a Full War Economy, Treasury Takes Sweeping Aim at Foundational Financial Infrastructure and Access to Third Country Support (June 12, 2024), https://home.treasury.gov/news/press-releases/jy2404.

2 Id.

3 Id.

4 Id.

5 Id.

6 Id.

7 Id.

8 See OFAC FAQ #1,187.

9 Id.

10 Id.

11 Id.

12 Id.

13 Id.

14 Advisory, OFAC Updated Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia's Military-Industrial Base (June 12, 2024), https://ofac.treasury.gov/media/932436/download?inline.

15 Press Release, U.S. Dep't of Commerce, Department of Commerce Announces Additional Export Restrictions to Counter Russian Aggression (June 12, 2024), https://www.bis.gov/press-release/department-commerce-announces-additional-export-restrictions-counter-russian [hereinafter "BIS Press Release"].

16 Id.

17 Implementation of Additional Sanctions Against Russia and Belarus Under the Export Administration Regulations (EAR) and Refinements to Existing Controls, 89 Fed. Reg. 51,644 (June 12, 2024) [hereianfter "BIS Rule"],.

18 Id. at 51,645.

19 BIS Press Release.

20 Id.

21 Id.

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