U.S. targets entities dealing with Russia and Russia’s architecture, engineering and other sectors

In coordination with the G7 and other international partners, the United States again expanded its sanctions and trade restrictions on Russia in response to its war against Ukraine. On May 19, 2023, the Office of Foreign Assets Control (OFAC) announced a range of restrictions designed to undermine Russia’s war efforts, including sanctions on 22 individuals and 104 entities, spanning over 20 countries and jurisdictions. [1] The State Department concurrently blocked nearly 200 individuals, vessels, and aircraft. The sanctions demonstrate the Administration’s continued focus on procurement networks and facilitators of sanctions evasion, as well as its willingness to target non-Russian entities that supply materials and technology to the Russian government. In addition to targeting individuals and entities, the new measures require U.S. persons to report to OFAC any property in their possession or control in which Russia’s Central Bank, National Wealth Fund, or Ministry of Finance has an interest, designate Russia’s construction, engineering, architecture, manufacturing, and transportation sectors for sanctions, and will prohibit the export, reexport, sale, or supply of architecture and engineering services to Russia. The sanctions announced on May 19 reflect joint commitments made at the recent G7 Leaders’ Summit and align with sanctions packages recently announced by the United Kingdom and European Union.[2]

In conjunction with the new round of sanctions, the Commerce Department’s Bureau of Industry and Security (BIS) issued new rules expanding export control restrictions against Russia and released a joint supplemental alert (the Supplemental Alert) with the Financial Crimes Enforcement Network (FinCEN) urging financial institutions to be vigilant against Russia’s evasion of export controls.[3] The Supplemental Alert, which builds on a previous alert on export control evasion that the agencies released last year, provides further evidence that regulators will increasingly scrutinize institutions’ sanctions and export control compliance frameworks. As highlighted in our March 2023 client update on the Russia sanctions, which can be found here, the U.S. Department of Justice and financial regulators are adopting a more proactive enforcement posture, which presents a growing compliance challenge for industry stakeholders as the sanctions and trade restrictions against Russia continue to expand.

Strategic designations and reporting requirements

OFAC and State Department focus on procurement, facilitators, and financing

In the round of sanctions announced on May 19, OFAC and the State Department collectively designated nearly 300 individuals, entities, vessels, and aircraft, cutting across numerous sectors and jurisdictions.[4] Consistent with the Administration’s broader strategy, the new sanctions focus on Russia’s sources of supply for advanced technology, materials, and financing for its war efforts, and they similarly reflect the Administration’s increasing focus on facilitators of sanctions evasion. In this regard, the latest measures are notable for their broad international scope, as OFAC and the State Department targeted individuals and entities across 20 different jurisdictions, including Germany, India, Liechtenstein, the Netherlands, Finland, Estonia, the United Arab Emirates, Cyprus, Hong Kong, Malta, Singapore, and the UK, among others. This is in line with the Administration’s previous statements indicating its willingness to target third-country actors that supply technology and materials to Russia,[5] and aligns with the UK and the EU, which have similarly targeted third-country facilitators of sanctions evasion (in a notable departure from their usual stance on extraterritorial application of sanctions).[6]

In addition to targeting entities and individuals in a wide range of jurisdictions, OFAC has targeted entities in several different industries relevant to Russia’s access to financing, research, and technology. The targets include entities alleged to have facilitated Russia’s procurement of sensitive technology and research; individuals and entities involved in the importing, shipping, and/or distribution of foreign-made technology such as semiconductors and other microelectronics to Russia; energy-related research and educational institutes; metal and mining companies; entities that supply equipment for or invest in Russia’s energy sector; and financial institutions.[7]

New reporting requirements under Directive 4

Consistent with a similar measure adopted by the European Union, OFAC amended Directive 4 under E.O. 14024 (Directive 4) [8] to require persons subject to U.S. jurisdiction to report to OFAC any property in their possession or control in which the Russian Central Bank, National Wealth Fund, or Ministry of Finance has an interest. Directive 4 prohibits U.S. persons from participating in any transaction, including any transfer of assets or foreign exchange transaction, involving these entities.[9] The Treasury Department stated that the new requirements are intended to allow OFAC to better identify and quantify immobilized Russian government assets held by U.S. persons and reflect a commitment made by the G7 to “fully map holdings of Russia’s sovereign assets that will remain immobilized in G7 jurisdictions until Russia pays for the damage it has caused to Ukraine.”[10] OFAC has not yet issued public guidance on the scope and applicability of the new reporting requirements, including whether they extend to Russian sovereign debt.

Reports under Directive 4 must include key information such as the name and address of the person in possession or control of the property, the name of the blocked individuals or entities, a description of the property, and the value of the property, among other details. Reports must be submitted to OFACreport@treasury.gov on or before June 18, 2023, and annually thereafter by June 30, in each case reflecting property held as of May 31 of the relevant year.

New sector designations and services prohibitions

Executive Order 14024 authorizes OFAC to designate sectors of the Russian economy for sanctions, and since February 2022 OFAC has used this authority to target sectors that are key to Russia’s war efforts in Ukraine.[11] On May 19, OFAC issued a determination adding the Russian architecture,[12] engineering,[13] construction,[14] manufacturing,[15] and transportation[16] sectors to the list of sectors targeted under E.O. 14024.[17] The designation of these sectors does not automatically impose sanctions on all persons who operate or have operated in those sector, but rather authorizes OFAC to sanction specific persons determined to operate, or have operated, in those sectors.[18] OFAC’s order follows the agency’s recent designation of the Russian metal and mining sectors in February 2023[19] and aligns with the Administration’s broader strategy of limiting Russia’s access to key services and materials that may support its war efforts.

The definitions of all five sectors are broad and include not only the provision of services but also the receipt of goods, services, or technology to, from, or involving each sector. While the authority is very broad, ultimately the imposition of sanctions is a discretionary policy matter; effectively, these designations give OFAC broad authority to designate entities undermining U.S. policy interests.

On May 19, OFAC also issued a determination under Executive Order 14071[20] prohibiting the “exportation, reexportation, sale, or supply directly, or indirectly from the U.S., or by a U.S. person, wherever located,” of architecture and engineering services to any person located in the Russian Federation.[21] The definition of architectural services generally aligns with the definition of the architecture sector,[22] while engineering services are broadly defined to include, among other things, “assistance, advisory, consultative, design, and recommendation services concerning engineering matters or during any phase of an engineering project,” as well as engineering-related scientific and technical consulting services and technical inspection services.[23] The determination will take effect beginning at 12:01 a.m. eastern daylight time on June 18, 2023.

Similar to the existing prohibitions on accounting, trust and corporate formation, management consulting, and quantum computing  services,[24] the prohibitions on architecture and engineering services do not apply to (i) services provided to entities in Russia that are owned or controlled, directly or indirectly, by U.S. persons, or (ii) any service in connection with the wind down or divestiture of an entity located in the Russian Federation that is not owned or controlled, directly or indirectly, by a Russian person. These carve outs present some of the same issues for non-U.S. based multinational corporations that arose with respect to the prior services bans, however, as the carve outs do not make allowances for U.S. subsidiaries of such corporations to provide services to their Russian affiliates absent specific authorization from OFAC.  

Export control restrictions

On May 19, 2023, BIS released two rules (in coordination with U.S. allies) that amend existing export control restrictions and add 71 entities to the Entity List. First, BIS issued a rule[25] that adds 69 Russian entities and two non-Russian entities to the Entity List for providing support to Russia’s military and defense sector and undermining export control restrictions. Second, BIS issued a rule[26] that adds licensing requirements for additional items exported to Russia. The new rule adds the remaining HTS-6 Codes under three entire harmonized tariff system chapters (Chapters 84, 85, and 90) to the industrial and commercial controls listed in Supplement No. 4 to Part 746 of the EAR, resulting in the imposition of controls on goods falling within any HTS-6 Code under these three chapters.[27] The items include certain electronics, instruments, and advanced fibers for the reinforcement of composite materials, including carbon fibers. License applications for items in these categories generally are subject to a policy of denial, although BIS will continue to grant licenses for certain types of exports (including of items that are predominantly agricultural or medical in nature) on a case-by-case basis. The rule also expands the destination scope of the Russia/Belarus Foreign-Direct Product Rule by applying it to the Crimea region of Ukraine.

New compliance alert

Concurrently with the latest round of export control restrictions, FinCEN and BIS released the Supplemental Alert, which urges financial institutions to be vigilant in detecting and reporting violations of export controls targeting Russia. The Supplemental Alert builds on FinCEN’s and BIS’s first joint alert[28] released in June 2022 and follows other regulatory guidance on this issue, including a joint compliance note released by the Justice Department, BIS, and OFAC in March 2023.[29] The Supplemental Alert, among other things, describes the export control restrictions that have been implemented since the first alert, identifies evasion typologies and transactional and behavioral red flags, and reminds institutions of their compliance and reporting obligations.[30] More broadly, the Supplemental Alert provides further evidence that regulators are increasingly targeting sanctions and export control evasion and will scrutinize the compliance controls maintained by the private sector. The DOJ, BIS, and OFAC made clear in their March 2023 compliance note that they expect financial institutions and other stakeholders to maintain appropriate risk-based controls, and the agencies stated their willingness to take action in response to violations and compliance failures. Financial institutions and industry stakeholders may find compliance increasingly difficult as the sanctions and trade restrictions imposed on Russia expand in both scope and complexity.

Summer Associate Daria Nonnemaker contributed to this update.