Dual Use Export Controls

The UK updated its dual use export control regulations to remove Russia as a permitted destination from open general export licenses, including licenses involving the export of chemicals, cryptographic development, and oil and gas exploration. The UK has also suspended approval of new export licenses for exports of dual-use items to Russia. The moves align the UK’s approach with the broad dual use export control restrictions imposed by the United States, EU, and other allies in recent days.

Sanctions: Asset Freezes & Financial Restrictions

Matching sanctions imposed by other countries, the UK imposed asset freeze restrictions on the Russian Direct Investment Fund, its CEO, Kirill Alexandrovich Dmitriev, VEB.RF, Bank Otkritie, and Sovcombank in Russia. The UK also imposed sanctions on JSC 558 Aircraft Repair Plant and JSC Integral in Belarus and four Belarusian individuals. All accounts, and other funds or economic resources, and any funds owned or controlled by designated individuals and entities in the UK must be frozen and UK persons must refrain from dealing with frozen funds or assets unless authorized. As with U.S. blocking restrictions, reporting and anti-circumvention requirements apply.

The UK also imposed financial and investment restrictions on PJSC Sberbank limiting, among other things, the ability of UK credit or financial institutions to process sterling payments involving Sberbank.

The latest UK sanctions can be found here, here, here, and here.

The White House separately announced yesterday that the Russian Direct Investment Fund (RDIF) would be subject to full U.S. blocking sanctions. The RDIF operates as a sovereign wealth fund and holds stakes in an array of businesses in Russia.

The sanctions landscape continues to rapidly evolve. Companies with exposure to the Russian market should continue to monitor these developments.

Feb. 27, 2022 Update: Japan will also adopt these measures.

The full joint statement is below the break.

Joint Statement on further restrictive economic measures

This past week, alongside our diplomatic efforts and collective work to defend our own borders and to assist the Ukrainian government and people in their fight, we, as well as our other allies and partners around the world, imposed severe measures on key Russian institutions and banks, and on the architects of this war, including Russian President Vladimir Putin.

As Russian forces unleash their assault on Kyiv and other Ukrainian cities, we are resolved to continue imposing costs on Russia that will further isolate Russia from the international financial system and our economies. We will implement these measures within the coming days.

Specifically, we commit to undertake the following measures:

First, we commit to ensuring that selected Russian banks are removed from the SWIFT messaging system. This will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally.

Second, we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.

Third, we commit to acting against the people and entities who facilitate the war in Ukraine and the harmful activities of the Russian government. Specifically, we commit to taking measures to limit the sale of citizenship—so called golden passports—that let wealthy Russians connected to the Russian government become citizens of our countries and gain access to our financial systems.

Fourth, we commit to launching this coming week a transatlantic task force that will ensure the effective implementation of our financial sanctions by identifying and freezing the assets of sanctioned individuals and companies that exist within our jurisdictions. As a part of this effort we are committed to employing sanctions and other financial and enforcement measures on additional Russian officials and elites close to the Russian government, as well as their families, and their enablers to identify and freeze the assets they hold in our jurisdictions. We will also engage other governments and work to detect and disrupt the movement of ill-gotten gains, and to deny these individuals the ability to hide their assets in jurisdictions across the world.

Finally, we will step up or coordination against disinformation and other forms of hybrid warfare.

We stand with the Ukrainian people in this dark hour. Even beyond the measures we are announcing today, we are prepared to take further measures to hold Russia to account for its attack on Ukraine.

As background, PEESA directs the State Department, in consultation with the Treasury Department, to identify (1) vessels engaged in certain pipe-laying activities for the Nord Stream 2 and Turkstream pipeline projects, as well as any successor projects; and, (2) foreign persons that knowingly facilitated those projects who:

• sold, leased, or provided, or facilitated selling, leasing, or providing, those vessels for the construction of such a project;
• facilitated deceptive or structured transactions to provide those vessels for the construction of such a project;
• provided for those vessels underwriting services or insurance or reinsurance necessary or essential for the completion of such a project;
• provided services or facilities for technology upgrades or installation of welding equipment for, or retrofitting or tethering of, those vessels if the services or facilities are necessary or essential for the completion of such a project; or
• provided services for the testing, inspection, or certification necessary or essential for the completion or operation of the Nord Stream 2 pipeline.

Companies that service vessels and operate in the Russian energy sector should carefully review PEESA, the new E.O., and an OFAC general license that narrowly authorizes certain dealings with Russia’s Federal State Budgetary Institution Marine Rescue Service. It is possible that the Biden Administration may take further action to oppose the construction of energy pipelines, like Nord Stream 2, and target entities and individuals that are involved in their construction.

The most significant change announced today is the State Department’s decision to add Russia to the International Traffic in Arms Regulations’ (ITAR) list of “proscribed countries,” commonly known as the Section 126.1 list. Countries on this list are subject to a policy of denial for license applications, so the change will effectively subject Russia to a U.S. arms embargo, prohibiting the export of most ITAR-controlled defense articles and defense services to Russia. Limited exceptions to the policy of denial will be made for exports in support of government space cooperation. The State Department will also review licenses related to commercial space launches on a case-by-case basis, but only for six months, after which license requests related to commercial space launches will face a presumption of denial. As noted below, the Commerce Department has announced corresponding changes to its licensing policy regarding exports related to commercial space flight activities in Russia. Additionally, certain transactions with 126.1 countries are subject to mandatory disclosures to the DDTC, instead of the general rule that violations are subject to voluntary disclosures to the agency.

Below is a summary of the actions taken by other key U.S. regulators today, including the Treasury, State, and Commerce Departments:

• New SDNs: OFAC added seven Russian government officials and three entities to the Specially Designated Nationals (SDN) List and imposed new sanctions on existing Russian SDNs;
• Entity List Additions: The Commerce Department added 14 entities in Russia, Switzerland, and Germany to its Entity List due to their connection to WMD and chemical weapons production, barring exports of items subject to the Export Administration Regulations (EAR) to the designated entities.
• Dual Use Export Control License Restrictions: The Commerce Department will limit the availability of certain license exceptions and licenses for exports of NS-controlled items to Russia. Commerce indicated that exports of NS-controlled items to Russia will no longer be eligible for license exceptions Service and Replacement of Parts and Equipment (RPL), Technology and Software Unrestricted (TSU), and Additional Permissive Reexports (APR). Commerce will reverse its existing licensing policy and replace it with a presumption of denial to license requests related to exports of NS-controlled items for commercial end-users related to civil end-uses in Russia. In six months, Commerce will also adopt a policy of denial for license requests involving exports of NS-controlled items to Russia related to commercial space flight activities.
• Secondary Sanctions: The State Department added six scientific institutes to its Section 231 List of persons known to operate for or on behalf of the Russian defense or intelligence sectors. As a result of the designations, non-U.S. persons that conduct significant transactions with these parties could be subject to U.S. secondary sanctions in the future.

These changes, which are largely effective on June 29, 2020, will create additional hurdles in transactions with China, Russia, and Venezuela. Many transactions that were previously authorized under a general license will now require a specific license from BIS. Even transactions that may still be completed without a specific authorization may require significant additional due diligence steps, particularly to ascertain end-users and end-use in China. If your company is currently doing business in these markets, it is important to determine whether these rule changes affect your business and, if so, how to comply with the new regulations.

Final rule increasing restrictions on transactions involving products for military end-use and end-users in China, Russia, and Venezuela

Second, the final rule expands the scope of the military end-use restriction, which will apply to all three of China, Russia, and Venezuela. Currently, end-use restrictions apply to transactions in which the item is for the use, development, or production of military items. The final rule expands the scope of this restriction to include an item that “supports or contributes to the operation, maintenance, repair, overhaul, refurbishing, development, or production” of military items. This is designed to capture items that may have a relatively limited supporting role for a military item, where the current restriction can be interpreted to require a more robust relationship between the item involved in a transaction and a military item.

Last, this final rule adds nearly twenty additional Export Control Classification Numbers (“ECCNs”) to Supplement 2, and expands the coverage related to some ECCNs already covered, which currently includes approximate 30 ECCNs, adding ECCNs covering materials processing, telecommunications, and information security, among others.[2]

This rule becomes effective on June 29, 2020.

Final Rule Removing License Exception CIV

BIS stated in the final rule that additional guidance regarding the rule is forthcoming. This rule also becomes effective on June 29, 2020.

Proposed Rule Modifying License Exception APR

BIS requests comments regarding how the proposed rule would potentially impact companies and other stakeholders who currently use or plan to use the License Exception APR. BIS is particularly interested in the volume of transactions and time necessary to complete to future transactions affected by the proposed change, as well as other potential business impact. Comments must be submitted to BIS by June 29, 2020.

These significant new restrictions are primarily aimed at and will especially impact trade with China.[6] At a minimum, these new rules will significantly increase due diligence burdens on transactions with China, as the U.S. responds to “civil-military integration” in that market. Parties engaged in transactions with China may be required to seek additional certification from their business partners that items exported will violate the expanded end-use and end-user restrictions.

Further, many exports that would have previously been permissible without specific authorization from BIS will now be subject to BIS licensing requirements. This change may create delays as parties go through the licensing process, and BIS is likely to refuse to authorize transactions where there is insufficient clarity on the national security and foreign policy implications of the proposed transaction. Companies exporting covered items to China, or using License Exceptions CIV and/or APR should immediately begin preparation to comply with these rules to minimize disruption.

Please contact us if you have questions regarding this rule making or if you would like to discuss compliance strategies.

[1] 15 C.F.R. § 744.21. A military end-user is “the national armed services (army, navy, marine, air force, or coast guard), as well as the national guard and national police, government intelligence or reconnaissance organizations, or any person or entity whose actions or functions are intended to support 'military end uses'.” 15 C.F.R. § 744.21(g).

[2] The complete list of ECCNs added to the supplement as part of the rule is 2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 5B991, 5A992, 5D992, 6A991, 6A996, and 9B990.

[3] See 15 C.F.R. Part 740, Supp. No. 1 (Countries include: Armenia, Azerbaijan, Belarus, Cambodia, China, Georgia, Iraq, Kazakhstan, Kyrgyzstan, Laos, Libya, Macau, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Vietnam. The exception specifically excludes North Korea.

[4] License Exception CIV authorized exports for approximately 30 ECCNs. These are identified by “CIV: Yes” under the ECCNs heading on the Commerce Control List.

[5] See 15 C.F.R. Part 740, Supp. No. 1.

[6] Venezuela is already subject to significant economic sanctions administered by the U.S. Office of Foreign Assets Control (“OFAC”), and OFAC recently increased those restrictions.

The first round of sanctions, which are expected to come into force on or around August 22, will prohibit many exports and reexports of goods, software, or technology to Russia controlled for national security reasons under the dual use Export Administration Regulations. Such items include gas turbine engines, encryption items, electronics components, optical equipment, lasers, sensors, electronic components, materials, and certain unmanned systems, among many others. National security controlled items currently require a license to be exported to Russia, but the new rules will require the Commerce Department to apply a ‘presumption of denial’ to future license requests in many instances. In a briefing announcing the new sanctions, the State Department indicated that certain exceptions will be made, including those related to joint space activities, aviation safety, and the activities of U.S. and other foreign companies in Russia. While the scope of the sanctions has yet to finalized, the State Department suggested that up to half of all licensed exports to Russia are controlled for national security reasons. If the sanctions are fully enforced, the impact could be substantial – based on 2016 figures over $1 billion in trade could be impacted.

The first round of sanctions will also include limitations on U.S. foreign aid, arms sales, and U.S. government credit and financial assistance.

A second round of much broader sanctions is also possible if Russia is unable to provide certain assurances within three months. If the President does not certify to Russia’s compliance, the CBW Act requires the application of at least three of the following sanctions:

• A bar on financial assistance to Russia by international financial institutions;
• A bar on U.S. banks making any loans or providing credit to the Russian government, with limited exceptions;
• An export embargo, prohibiting the export of all other goods and technology to Russia;
• An import ban on Russian origin articles;
• A downgrade in diplomatic relations; and/or
• Limitations on air travel between Russia and the United States.

Companies doing business in Russia should carefully monitor developments in this area and consider their exposure under the first and second rounds of sanctions.

It is not yet clear what effect this initiative will have on EU companies. The current language in the blocking statute allows each EU member state to “determine the sanctions to be imposed in the event of breach of any relevant provisions” as long as such sanctions are “effective, proportional and dissuasive.” This could mean dealing with multiple different approaches in Europe.

In addition to the EU blocking action, on May 14, 2018, the Russian Parliament introduced new legislation in retaliation for U.S. sanctions against Russia. The proposed law would function like a blocking statute, imposing criminal liability for compliance with U.S. and other foreign sanctions against Russian parties. So far, the Duma (the lower house of Russia's parliament) approved the first of three readings of the proposed law. It will also need to be endorsed by the Federation Council (the upper house of parliament) and signed by the Russian president before publication.

While the Office of Foreign Assets Control (OFAC) sometimes works with companies when blocking statutes are in place, the agency has also enforced U.S. sanctions irrespective of another country’s blocking statute. In 2013, for example, OFAC fined American Express over $5 million for apparent violations of the U.S. embargo on Cuba because its foreign branch offices and subsidiaries issued thousands of tickets for travel between Cuba and countries other than the United States. OFAC noted in its decision that many of the tickets were issued to countries in the EU, which had adopted “antidote” measures (i.e., blocking statutes) prohibiting compliance with the U.S. embargo on Cuba.

According to a press release from the EC, the current aim is for the blocking statute to come into force before August 6, 2018 – the date on which the first set of U.S. secondary sanctions on Iran are scheduled to be re-imposed. If the EC implements legislation on this timeline, EU companies will face a difficult choice between complying with local law and risking significant penalties from OFAC. Given the significant uncertainty regarding the snapback of U.S. sanctions and the potential legislation in the EU and Russia, companies with a significant presence in Europe or Russia should monitor developments carefully and develop a plan to deal with potential conflicts.

Non-U.S. companies should remain on notice that the U.S. government retains the ability to sanction non-U.S. firms for dealings with the Russian military and intelligence sectors, should the administration choose to exercise that authority in the future.

The new sanctioned parties are a sign of continuing U.S. pressure on Russia to implement the Minsk agreements and help end the conflict in Ukraine. The designations also came just before today’s statutory deadline to implement new sanctions on Russia, which include the release of the “Kremlin Report” or "oligarch list" that will name Kremlin-connected Russian nationals and their overseas assets and business interests. We will provide an update when and if that list is released.

The new rules, which apply to projects initiated on or after January 29, 2018, will bar persons subject to U.S. jurisdiction from providing goods, services, or technology in support of exploration or production for deepwater, Arctic offshore, or shale oil anywhere in the world if a party subject to Directive 4 sectoral sanctions has a 33 percent or more ownership interest or owns a majority of the voting interests in the project.

It’s important to note that the 33 percent ownership rule applies to the project at issue and not necessarily to the parties involved in a transaction. Frequently Asked Questions released by OFAC with the updated version of the Directive include the helpful examples below on how the 50 percent rule and 33 percent ownership requirement apply in a Directive 4 context:

Example 1: An SSI entity listed under Directive 4 (“Entity A”) has a 33 percent ownership interest in a deepwater, Arctic offshore, or shale project initiated on or after January 29, 2018 that has the potential to produce oil (“Project X”). The prohibition of subsection 2 of Directive 4 applies to Project X. Consequently, U.S. persons are prohibited from providing goods, services (except for financial services), or technology in support of exploration or production for Project X.

Example 2: Instead of holding a direct interest in Project X, Entity A now owns 50 percent of Entity B, and Entity B holds a 33 percent interest in Project X. As a result of OFAC’s 50 percent rule, Entity B is subject to Directive 4. Because Entity B is subject to Directive 4 and owns a 33 percent or greater interest in Project X, the prohibition of subsection 2 of Directive 4 applies to Project X. Consequently, U.S. persons are prohibited from providing goods, services (except for financial services), or technology in support of exploration or production for Project X.

Example 3: Entity A now owns only 33 percent of Entity B, and Entity A is the only SSI entity that owns any interest in Entity B. Entity B holds a 100 percent ownership interest in Project X. Entity A owns less than 50 percent of Entity B, and so, in accordance with the 50 percent rule, Entity B is not subject to Directive 4. The prohibition of subsection 2 of Directive 4 would therefore not apply to Project X, even though Entity B owns an interest in the project that is 33 percent or greater.

OFAC’s FAQs also include useful definitions on key terms used in the Directive, including that a project is “initiated” when a relevant government authority first grants exploration, development, or production rights to any party.

According to State Department guidance, whether a transaction is “significant” will depend on a number of factors, including the significance of the transaction to U.S. national security and foreign policy interests, the nature and magnitude of the transaction, and the relation and significance of the transaction to the Russian defense or intelligence sector. During the initial phase of implementation, enforcement will apparently focus on parties that conduct transactions of a “defense or intelligence” nature with the listed firms. For now the State Department does not expect to sanction parties that conduct transactions related to goods or services with purely civilian end uses and/or end users that do not relate the Russian intelligence sector.

Secondary sanction penalties could include restrictions on accessing the U.S. financial system, seizure and blocking of a sanctioned party’s property, barring the entry of corporate officers to the United States, sanctions on principal executive officers, U.S. government procurement restrictions, and export licensing restrictions, among other penalties.

List regarding the Russian defense sector:

• Admiralty Shipyard JSC
• Almaz-Antey Air and Space Defense Corporation JSC
• Dolgoprudny Research Production JSC
• Federal Research and Production Center Titan Barrikady JSC (Titan Design Bureau)
• Izhevsk Mechanical Plant (Baikal)
• Izhmash Concern JSC
• Kalashnikov Concern JSC
• Kalinin Machine Building Plant JSC (KMZ)
• KBP Instrument Design Bureau
• MIC NPO Mashinostroyenia
• Molot Oruzhie
• Mytishchinski Mashinostroitelny Zavod
• Novator Experimental Design Bureau
• NPO High Precision Systems JSC
• NPO Splav JSC
• Oboronprom OJSC
• Radio-Electronic Technologies (KRET)
• Radiotechnical and Information Systems (RTI) Concern
• Research and Production Corporation Uralvagonzavod JSC
• Rosoboronexport OJSC (ROE)
• Rostec (Russian Technologies State Corporation)
• Russian Aircraft Corporation MiG
• Russian Helicopters JSC
• Sozvezdie Concern JSC
• State Research and Production Enterprise Bazalt JSC
• Sukhoi Aviation JSC
• Tactical Missiles Corporation JSC
• Tikhomirov Scientific Research Institute JSC
• Tupolev JSC
• United Aircraft Corporation
• United Engine Corporation
• United Instrument Manufacturing Corporation
• United Shipbuilding Corporation

• Autonomous Noncommercial Professional Organization/Professional Association of Designers of Data Processing (ANO PO KSI)
• Federal Security Service (FSB)
• Foreign Intelligence Service (SVR)
• Main Intelligence Directorate of the General Staff of the Russian Armed Forces (GRU)
• Special Technology Center
• Zorsecurity

The firms and individuals involved were targeted because they were involved in the development of North Korea’s nuclear and missile programs, the North Korean energy sector, the export of North Korean laborers, and enabling North Korean entities to access the global financial system.

Written comments and testimony at the hearing will assist USTR in preparing its annual report to Congress on how Russia has done in meetings its WTO commitments. This will be USTR’s fifth such report to Congress pursuant to the Russia and Moldova Jackson-Vanik Repeal and Sergei Magnitsky Rule of Law Accountability Act of 2012, known as the Magnitsky Act. The Magnitsky Act marked the extension of permanent normal trade relations to goods and services from Russia and allowed the United States to recognize Russia as a new member of the WTO, which it had joined several months prior to the law’s enactment.

The Magnitsky Act has long been a controversial topic in U.S.-Russian relations. The law was named for Sergei Magnitsky, a Russian lawyer who died in prison after becoming involved in a massive tax fraud allegation against Russian officials. Congress responded with a provision in the Magnitsky Act barring high-level Russian bureaucrats and others tied to human rights abuses from entering the United States. In response to the Act, the Government of Russia banned U.S. citizens from adopting Russian children. At the time of its passage, President Putin called the law, “a purely political, unfriendly move.” The Magnitsky Act has recently garnered public attention again with the disclosure of a June 2016 meeting between Donald Trump Jr. and Natalia Veselnitskaya, a Russian lawyer who has been closely connected to lobbying for repeal of the Act.

Putting all this palace intrigue aside, USTR’s annual report to Congress – and the public comments that feed into the report – is an opportunity to provide an assessment of Russia’s performance on a number of key trade issues, including, for example, import and export regulation and taxation, subsidies, trade-related investment measures, intellectual property rights, government procurement, information technology, and other policies affecting trade. If USTR concludes that Russia has not met its WTO obligations in these areas, the agency must outline steps to improve Russia’s compliance. U.S. companies or industries with business ties to Russia should consider whether they can benefit from elevating those issues with USTR and Congress for action.

Please contact our export and sanctions team with any questions about the new law and its implications.

The legislation would make several big changes. First, the package would codify existing sanctions on Russia, which were imposed in the wake of the invasion of Crimea, into law. Codifying the sanctions would prevent the White House from unilaterally easing or lifting the sanctions, which the administration could do under current law without obtaining approval from Congress.

Second, the new legislation, if enacted into law, would require tough new sanctions on a variety of Russian actors, including those involved in corruption, evading sanctions, doing business with Russia’s defense or intelligence sectors, or cyber operations on behalf of the Russian government, among others. The bill would also authorize more sweeping economic sanctions against Russia’s economy, targeting state-owned mining, metals, shipping, and railroad industries. Implementing the broader economic sanctions would require action by the administration, so it is unclear whether they would ultimately be imposed.

Overall, the bill is an effort to assert more Congressional control over the United States relationship with Russia. The Senate bill does provide the President with discretion over certain aspects of the sanctions, but would mandate Congressional review if the White House tried to suspend or relax sanctions on Russia. In a Congressional hearing the day before the bill’s passage, Secretary of State Tillerson urged Congress “to ensure any legislation allows the president to have the flexibility to adjust sanctions to meet the needs of what is always an evolving diplomatic situation.”

The Russia sanctions, developed by a bipartisan group of Senators, were added to an Iran sanctions bill. The bill now goes to the House, where the timing and prospects for passage remain uncertain. If approved by the House, the bill would be sent to the President for signature.