OFAC and BIS Significantly Extend Sanctions and Export Control Restrictions Against Russia and Belarus

Key Notes:

• New sanctions and export controls on Russia and Belarus became effective June 12, 2024.
• New OFAC prohibition on certain IT and software services to Russia begins September 12, 2024.
• Hundreds of individuals and entities designated as SDNs for supporting Russia's war efforts.
• New license requirements for certain software exports to Russia and Belarus become effective September 16, 2024.
• BIS narrows License Exception Consumer Communications Devices (CCD) for Russia and Belarus.
• BIS adds high-risk addresses and more entities to Entity List, enhancing screening and export control evasion prevention.
• Over 500 HTS codes added to license requirement lists for Russia and Belarus.

Introduction

On June 12, 2024, the Office of Foreign Assets Control (OFAC) and the Bureau of Industry and Security (BIS) announced new sanctions and export control restrictions on Russia and Belarus. These measures have significant implications for companies that do business with or in these regions, as they may face new licensing requirements, limitations, or prohibitions on their transactions and operations.

OFAC Sanctions

OFAC announced new sanctions to increase pressure on Russia over its war against Ukraine. These measures include the following:

• Broader Secondary Sanctions: Foreign financial institutions face a greater risk of secondary sanctions. Foreign financial institutions already risked being sanctioned for conducting or facilitating significant transactions or providing any service involving any person who is part of Russia’s military-industrial base. OFAC has broadened the definition of “Russia's military-industrial base” to include all persons blocked pursuant to Executive Order (E.O.) 14024. OFAC has also updated the Specially Designated Nationals and Blocked Persons List (SDN List) for five sanctioned Russian financial institutions to include the addresses and aliases of their foreign locations to help clarify the sanctions risk for foreign financial institutions.
• Software and IT-Related Services: OFAC has issued a new determination under E.O. 14071, which prohibits providing to any person in Russia (1) IT consultancy and design services and (2) IT support services and cloud-based services for enterprise management software and design and manufacturing software. The determination will take effect on September 12, 2024. This means that starting from that date, U.S. persons will be prohibited from providing these services to Russia. OFAC also issued FAQs Nos. 1184, 1185, 1186, 1187 and 1188 to clarify what activities are considered prohibited.
  • Excluded from the covered services (and therefore, not prohibited under this determination) are:
    • Service to an entity that is owned or controlled, directly or indirectly, by a U.S. person.
    • Service in connection with the wind-down or divestiture of any entity located in Russia that is not owned or controlled, directly or indirectly, by a Russian person.
    • Service for software that is (i) subject to the EAR and licensed or otherwise authorized by the Department of Commerce or (ii) not subject to the EAR, but it would be if conditions were different, would be eligible for a license exception or otherwise authorized by the Department of Commerce.
  • FAQ #1188 clarifies that the determination does not prohibit U.S. persons from providing services to entities outside of the Russian Federation owned or controlled by Russian persons as long as the services are not indirectly exported to someone located in Russia. It provides examples of prohibited scenarios, such as designing software for a third-country company that intends to supply it to a Russian parent company, and scenarios that are not prohibited, like assisting a U.S. subsidiary of a Russian company with IT upgrades that will not be exported or reexported to the Russian parent company.

• New Designations: OFAC designated as SDNs hundreds of individuals and entities both within Russia and outside its borders. These include:
  • Sanctions Evasion Networks: Russia-based and other foreign persons designated for their roles in complex schemes and supply chains aimed at evading sanctions and supporting Russia's war efforts.
  • Russia's War Economy: Russia-based persons within the defense, manufacturing, technology, transportation and financial services sectors contributing to the country’s war economy.
  • Limiting LNG Revenue: Persons involved in key Russian liquefied natural gas (LNG) projects and related construction and manufacturing, in line with G7 commitments to restrict Russia’s future energy revenues.

BIS Export Control Restrictions

The BIS issued a final rule that imposes additional export control measures against Russia and Belarus under the Export Administration Regulations (EAR) that affect exports, reexports and transfers (in-country) to or within Russia and Belarus. The changes include:

• Software Export Restrictions: BIS is imposing license requirements on the export, reexport or in-country transfer of certain EAR99-designated “software,” including enterprise management and design software, to Russia and Belarus. These license requirements will become effective on September 16, 2024.
  • Software Types: The following EAR99 software will require a license when destined to or within Russia or Belarus: 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 software, product lifecycle management (PLM); building information modeling (BIM); computer-aided design (CAD); computer-aided manufacturing (CAM); and engineering to order (ETO) (“Covered Software”).
  • Software Updates: The final rule specifies that the license requirement also includes software updates of the Covered Software. This “will enhance the effectiveness of this control because of the need for regular software updates to ensure proper software functionality.”
  • Exclusion: Exports to entities exclusively operating in the medical or agricultural sectors are excluded from this Covered Software license requirement.
• Narrowing License Exceptions: The scope of License Exception Consumer Communications Devices (CCD) has been narrowed. CCD is no longer available for Russia and Belarus for the following items:
  • Consumer disk drives and solid-state storage equipment classified under ECCN 5A992 or designated EAR99.
  • Graphics accelerators and graphics coprocessors designated EAR99.
  • Modems, network interface cards, routers, switches and Wi-Fi access points, designated EAR99 or classified under ECCNs 5A992.c or 5A991; drivers, communications and connectivity software for such hardware designated EAR99 or classified under ECCN 5D992.c.
  • Network access controllers and communications channel controllers classifiedunder ECCN 5A991.b.4, 5A992.c or designated EAR99.
  • Memory devices classified under ECCN 5A992.c or designated EAR99.
  • Digital cameras (including webcams) and memory cards classified under ECCN 5A992 or designated EAR99.
  • Television and radio receivers, set top boxes, video decoders and antennas classified under ECCNs 5A991,
    5A992 or designated EAR99.
  • Recording devices classified under ECCN 5A992 or designated EAR99.
• Entity List: BIS is implementing a new regulatory framework to list high-risk addresses on the Entity List, making it difficult for shell companies to engage in unlawful trade. As of today, BIS added eight address-only designations in Hong Kong to the Entity List. In addition, five entities in Russia and China are being added to the Entity List, restricting exports, reexports and transfers (in-country) involving these entities.
• Expanded List of Goods: BIS added over 500 additional Harmonized Tariff System (HTS) codes to lists of items requiring a license if destined to Russia and Belarus, covering 22 entire chapters of HTS codes. These include certain oil and gas equipment, aerospace and defense products and chemicals. By making these additions, BIS expects to minimize situations where persons could seek to circumvent export license requirements by changing the classification of an item that requires a license to the classification of an item in a similar HTS code that does not require a license.
• Single Section for Russia & Belarus: BIS has streamlined its export control regulations regarding Russia and Belarus by consolidating multiple sections into a single, expanded section § 746.8 of the EAR. This reorganization aims to simplify compliance and enhance clarity amidst the complex and evolving sanctions landscape following Russia's military actions in Ukraine.
• Fasteners: Finally, BIS clarified that the exclusion for fasteners for the “parts,” “components,” “accessories” and “attachments” does not apply to fasteners that are specified under one of the HTS-6 codes that are specified in the respective supplements to part 746 of the EAR.
• Temporary Denial Orders: BIS has issued two Temporary Denial Orders TDO 1 and TDO 2) against Russian procurement networks for exporting aircraft parts to Russia through third countries in violation of U.S. export controls, affecting several companies and individuals involved in hundreds of shipments.

Conclusions and Implications for Companies

These new sanctions and export control restrictions on Russia and Belarus pose significant challenges and risks for companies. Companies should review their existing and potential transactions, contracts and relationships with persons or entities that may be subject to the new measures and ensure that they have the necessary licenses, authorizations or exemptions to comply with the U.S. regulations.

• Secondary Sanctions: Companies should assess and manage risks associated with secondary sanctions affecting foreign financial institutions.
• IT and Software: Companies must understand and adhere to prohibitions on providing certain IT and software services to Russia. Businesses must also assess BIS license requirements for specific software exports to Russia and Belarus.
• License Exception Changes: Companies should review and adjust to the narrowed License Exception CCD for compliance.
• Entity List Screening: Enhanced screening is required due to including additional address-only designations to the Entity List.
• HTS Code Monitoring: Over 500 HTS codes added to license requirement lists necessitate careful monitoring of product classifications subject to BIS license requirements.
• Proactive Measures: Companies should proactively review and update compliance programs, given the new sanctions and export control measures. Ongoing monitoring of OFAC and BIS updates is essential to maintaining compliance with the evolving regulatory landscape.
• Legal Consultation: Engaging with legal counsel can help companies navigate these complex sanctions and export control requirements.

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OFAC and BIS Significantly Extend Sanctions and Export Control Restrictions Against Russia and Belarus (Download)