U.S. Government Expands Trade Controls and Issues Updated Financial Industry Guidance to Counter Russian War Efforts

May 23, 2023 – On May 19, 2023, the U.S. government announced a significant expansion of export controls and sanctions targeting Russia, intended to align U.S. trade controls with those of the rest of the G7 and other governments countering the Russian war effort. In particular, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) issued two new export control rules aimed at degrading Russian military capability, and also jointly released with the Financial Crimes Enforcement Network (“FinCEN”) an alert aimed at informing financial institutions about the evolving regime of trade controls targeting Russia and helping to identify Russian export control evasion. Separately, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) and the U.S. Department of State (“State Department”) also exercised their sanctions authorities to target, among other things, Russian sanctions evasion networks and additional sectors of the Russian economy.

The trade controls announced on May 19, 2023 build on previous actions announced February 24, 2023, which we previously summarized. Like those earlier actions, the May 19 controls involve a high degree of coordination between U.S. government agencies and consistency among allied governments. The May 19 actions also reflect apparent “lessons learned” by the U.S. government in tracking and combatting sanctions evasion, for example through multi-agency groupings like “Operation Kleptocapture” and the “Disruptive Technology Strike Force” (which we have also previously summarized).

BIS Actions

Industry Sector Sanctions and Additional Export Controls

BIS issued a new rule expanding previous lists of items regulated by BIS as part of its Russian and Belarusian Industry Sector Sanctions, and closing other gaps in U.S. export controls on Russia. The main provisions of the rule include:

Expansions to Supplements No. 4, 6, and 7 to Part 746 of the Export Administration Regulations (“EAR”) 

Based on a review of items sought by Russia to further its military objectives, the rule expands Supplement 4 to part 746 (the Russian and Belarusian Industry Sector Sanctions pursuant to § 746.5(a)(1)(ii)), a list of relatively low-tech items potentially useful for the Russian war effort, to include 1,224 additional harmonized tariff schedule (“HTS”) code entries. The new entries consist of all HTS-6 codes found in Chapters 84, 85, and 90 of the harmonized system schedule, and include a variety of electronics, instruments, and advanced fibers for the reinforcement of composite materials, including carbon fibers. Exports, reexports, and transfers (in-country) to or within Russia or Belarus of items identified in Supplement 4 to part 746 are subject to a license requirement.

The rule expands Supplement No. 6 to part 746 (the Russian and Belarussian Industry Sector Sanctions) pursuant to § 746.5(a)(1)(iii), a list of chemicals that may be useful for Russia’s chemical and biological weapon production capacities, to include a number of new industrial chemicals. Exports, reexports, and transfers (in-country) to or within Russia or Belarus of items identified in Supplement 4 to part 746 are subject to a license requirement. 

The rule also corrects Supplement No. 7 to part 746, a list of relatively low-tech items related to unmanned aerial vehicles (“UAVs”) supplied to Russia via Iran, to add one catchall item that was inadvertently omitted when the controls were first issued on February 24, 2023: Electrical Parts of Machinery of Apparatus, Not Elsewhere Specified, classified under HTS Code 854800. The Russian/Belarus and Iran foreign direct product (“FDP”) rules at § 734.9(f) and (j), respectively, include items identified in Supplement No. 7 to part 746 as part of the criteria for what foreign made items are subject to the EAR.

Expansion to the Russian/Belarus FDP Rule

The rule expands the “destination scope” of the Russia/Belarus FDP rule at § 734.9 of the EAR to add Russian-occupied Crimea. As a result, a foreign-produced item will meet the destination scope of the Russia/Belarus FDP Rule if there is knowledge that the item is destined to Russia, Belarus, or Crimea, or will be incorporated into or used in the production or development of items identified in Supplement No. 6 or 7 to part 746. The rule also makes numerous conforming changes through part 746.

Entry List Additions

BIS issued a separate rule adding seventy-one new parties from Russia, Armenia, and Kyrgyzstan to the Entity List. Sixty-nine of the entities were added for allegedly “providing support to Russia’s military and defense sector” and two for “engaging in conduct that prevented the successful accomplishment of an end-use check.” The additions to the Entity List are effective May 19, 2023. 

BIS/FinCEN Alert

Expanding on a June 2022 alert on export control compliance by BIS and FinCEN and a March 2023 note on export control and sanctions compliance published by BIS, OFAC, and the Department of Justice (“DOJ”), on May 19, 2023 BIS and FinCEN published a second joint alert for financial institutions and exporters with updated export control guidance. The most recent alert includes additional information on export restrictions introduced since June 2022, descriptions of enforcement actions updated through the first part of May 2023, and observations about trends in export control evasion. The alert identifies specific new fact patterns and red flags not described in previous alerts to focus the due diligence efforts of financial institutions.

OFAC Sanctions

OFAC announced new sanctions in a May 19, 2023 press release in coordination with partner governments and as part of the U.S. government’s commitments made at the G7 Summit. Specifically, OFAC imposed sanctions on 22 individuals and 104 entities. The designations include, among others:

• Actors in various international networks helping Russia evade sanctions and export controls to procure technology and items for Russia’s defense industry. 
• Actors involved in the supply of quantum and semiconductor technologies and other electronics for Russia’s defense industry.
• Russian research institutes where new energy extraction technologies are developed.
• Russian companies that facilitate drilling and mining operations, and firms that attract and advise on investment in Russia’s energy industry.
• Persons operating in Russia’s financial services sector.
• The Foreign Intelligence Service of the Russian Federation.

Separately, OFAC expanded its sanctions authorities to target additional sectors of Russia’s economy. Specifically, OFAC issued a Determination Pursuant to Section 1(a)(i) of E.O. 14024 that identifies architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation economy, effective May 19, 2023. This determination will allow sanctions targeting any individual or entity determined to operate or have operated in any of those sectors.

OFAC also issued a Determination Pursuant to Section 1(a)(ii) of 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 architecture services or engineering services to any person located in the Russian Federation, matching restrictive measures previously imposed by the United Kingdom and the European Union. This prohibition will go into effect June 18, 2023. OFAC also made numerous related changes to its Frequently Asked Questions (“FAQs”), notably including the publication of three new FAQs:

• FAQ 1126, listing all the sectors of Russia’s economy that have been identified as subject to sanctions pursuant to Section 1(a)(i) of E.O. 14024 as of May 19, 2023;
• FAQ 1127, explaining the effect of a determination of a sector pursuant to E.O. 14024; and
• FAQ 1128 defining the categories of services subject to prohibitions pursuant to Section 1(a)(ii) of E.O. 14071 as of May 19, 2023.

Furthermore, OFAC amended Directive 4 under E.O. 14024 to require U.S. persons to report to OFAC any property in their possession or control in which any “Directive 4 entity” (i.e., the Russian Central Bank, the National Wealth Fund, or Ministry of Finance) has an interest, effective June 18, 2023. OFAC updated several FAQs to reflect this amendment. Notably, FAQ 999 clarifies that existing licenses or authorizations issued by OFAC pursuant to the prior version of Russia-related Directive 4 remain in effect. This action is consistent with a similar measure adopted by the European Union

A full list of sanctions targets and other OFAC actions from May 19, 2023 (including several General Licenses) can be found at OFAC's May 19, 2023, recent action notice.

State Department Sanctions

In addition to OFAC’s actions, on May 19, 2023, the State Department separately exercised its authority under Executive Order (“E.O.”) 14024 to designate or identify as blocked property almost 200 individuals, entities, vessels, and aircraft. The State Department’s actions targeted individuals and entities for sanctions evasion, involvement in Russia’s war effort, and supporting Russia’s future energy revenue sources. The State Department also designated targets involved in the Russian military industry and persons and entities participating in the war in Ukraine, the theft of Ukrainian grain, and the deportation of Ukrainian children.

For a full list of sanctioned individuals, entities, and blocked property, see the State Department’s May 19, 2023 Press Release.

Conclusion

The most recent restrictions announced by BIS, FinCEN, OFAC, and the State Department have once again expanded export controls and sanctions targeting Russia, largely in keeping with measures introduced by allied governments, with a particular focus on the products and services necessary to maintain Russia’s military capability, alongside sources of revenue to fund the war effort. A significant recurrent theme is the U.S. government’s continuing focus on evasion. The May 19 actions are further notable for setting out the U.S. government’s diligence expectations for suppliers. Companies whose businesses are potentially implicated by Russia-related trade controls should be particularly sensitive to red flags, including those presented in the recent export control prosecutions brought by the Disruptive Technology Strike Force on May 16, 2023.