In response to the Russian invasion of Ukraine, the United States, European, and allied governments around the globe are imposing an array of financial and technology export-based sanctions, targeting broad sectors of the Russian, Belarusian, and occupied regions of Ukraine economies. These sanctions will have tremendous implications for the global operating environment. Regardless of size or industry, companies will need to be aware of these changes and adapt their operations to navigate risk and ensure they remain compliant with the latest regulation.
- The U.S. Commerce Department, through the Bureau of Industry and Security (“BIS”), issued a Final Rule on February 24, 2022 restricting Russian person access to U.S. items, including critical technologies and foreign items produced using U.S. content. The Rule also expands Military End Use/User Controls and adds numerous Russian entities to BIS’ entity list.
- The BIS Rule supplements numerous financial sanctions administered by the U.S. Office of Foreign Asset Control (“OFAC”) on the same date targeting Russian and Belarusian financial institutions, State Owned Enterprises (“SOE”), and individuals associated with the Russian government, including Russian President Putin.
- U.S. allies, including the European Union (“EU”), Japan, Australia, United Kingdom, Canada, South Korea, and New Zealand (among numerous others, including countries like Switzerland and Singapore which famously try to avoid such situtations) are imposing similar and in some cases, more stringent financial- and technology-based sanctions, including joint action to cut off multiple Russian financial institutions from access to the SWIFT financial messaging network and to freeze Russian foreign currency reserves.
- Additional sanctions are being issued by U.S. and allied authorities almost daily.
- In combination, these new sanctions will present enormous trade and sanctions risk impact for companies and persons of all nationalities doing business with or involving Russia, Belarus, or their citizens.
How does the BIS Rule affect export controls?
The BIS Rule implements the following export controls:
New Commerce Control List (CCL) Requirements
The Rule adds new license requirements (with a presumption of denial) for all Export Control Classification Numbers (ECCNs) in Categories 3-9 of the CCL. Impacted items not previously controlled for export to Russia include microelectronics, telecommunications items, sensors, navigation equipment, marine equipment, and aircraft components.
Expanded Military End User/Use Controls
The Rule expands restrictions on Russian ‘Military End Users’ and ‘Military End Uses’ (“MEUs”) to all items subject to the EAR, with certain exceptions for food and medicine designated as EAR99 and ECCN 5A992.c or 5D992.c items as long as they are not for Russian “government end users” or RussianSOE.
Imposed More Stringent Licensing Requirements
Applications for the export, reexport, or transfer (in-country) of items that require a license for Russia will be reviewed under a policy of denial. Applications related to safety and humanitarian efforts will be reviewed on a case-by-case basis.
Additionally, the Rule significantly restricts use of EAR license exceptions for Russian exports, reexports, and transfers (in-country). Specifically, only certain sections of the following license exceptions are available for exports to Russia: Temporary Imports, Exports, Reexports, and Transfers in Country (TMP); GOV, Technology and Software Unrestricted (TSU); Baggage (BAG); Aircraft, Vessels, and Spacecraft (AVS); Encryption Commodities, Software (ENC); and Technology, Consumer Communication Devices (CCD).
Expanded Foreign Direct Product Rule (“FDPR”)
The FDPR allows the U.S. Government to impose export controls on products made outside of the U.S. if they contain U.S. components or technologies, or were created using U.S. software or tools. The Rule adds FDPR provisions specific to Russia and Russian MEUs:
- Russia FDP Rule: Foreign produced items that are: (i) the direct product of certain U.S.-origin software or technology subject to the EAR; or (ii) produced by certain plants or major components which are the direct product of certain U.S.-origin software or technology subject to the EAR, will now require a license when destined to Russia. This includes items that will be incorporated into or used in the production or development of any part, component, or equipment produced in or destined to Russia. The scope of the Russia FDP rule does not include items designated EAR99
- Russia-MEU FDP Rule: Foreign produced items that are: (i) the direct product of any software or technology subject to the EAR that is on the CCL; or (ii) produced by certain plants or major components thereof which are themselves the direct product of any U.S.-origin software or technology on the CCL, will require a license if a MEU is a party to the transaction. Importantly, these restrictions apply to all items, including those designated EAR99.
BIS created an exclusion from both the Russia FDP Rule and the Russia-MEU FDP rule for those countries that will implement similar export controls including: Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom.
Expanded Entity List
49 entities have been added to the BIS Entity List including entities previously on the MEU List as well as new entries.
How has OFAC responded?
Acting pursuant to EO 14024, OFAC added numerous Russian and Belarusian financial institutions and numerous individuals associated with the Russian Government (including President Putin) to its Specially Designated Nationals (SDN) List. U.S. persons and non-U.S. persons in the United States (including financial institutions) are generally prohibited from engaging in any financial transaction involving an SDN without OFAC authorization, and are required to freeze any property belonging to SDNs.
OFAC issued a complementary directive prohibiting U.S. persons from engaging in transactions or issuing debt to a number of Russian State Owned Enterprises.
How have other governments responded with sanctions?
EU member states, as well as Japan, Australia, United Kingdom, Canada, and New Zealand (among others) are implementing similar (and in some cases, more restrictive) sanctions to the U.S. actions described above. For its part, Russia is considering countersanctions. Among other actions:
- The EU and UK issued new restrictions on the export of dual use products and technologies to Russia regardless of end-use or end user.
- A coalition of countries announced the expulsion of multiple Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) financial messaging network used by banks to send payment orders. The move effectively cuts off the Russian central bank’s access to foreign currency reserves.
- The UK banned all major Russian companies raising finance on UK markets and prohibiting the Russian state from raising sovereign debt on UK markets
- Norway announced that Sovereign Wealth Fund will divest its Russian assets and that the country will join the EU’s sanctions on Russa.
- Japan, South Korea, and Singapore announced that they also will join Western sanctions.
How will this new sanctions environment impact businesses globally?
Companies and organizations who do business with or employ Russian or Belarusian companies and persons (whether as customers, suppliers, or employees) should assess their exposure under the Rule. Specifically, entities need to assess their risk profile(s) in the following areas:
Technology Portfolio Risk
Companies and organizations need to review their technology and product portfolios to determine which are controlled under applicable U.S. and EU dual-use technology controls. Affected technologies and products will now require a license or exception (with presumption of denial) before they may be transferred to any Russian person (wherever located). This requirement will have enormous impact not only on the export of products to Russia, but also on the reliance on Russian persons as employees and service providers. Companies and organizations will need to carefully consider (among numerous other items) whether Russian persons may have access to their affected products and technologies via their IT supply chain, vendor, and employee relationships.
Transactions Involving Russian or Belarusian Persons
Companies, organizations, and institutions with existing or potential relationships with Russian or Belarusian entities (including customers, strategic partners, and suppliers) need to ensure they understand all parties involved in any transaction, including the risk of opaque beneficial ownership relationships. Additionally, as a result of the Russian FDP Rules, companies, organizations, and institutions involved in distribution or multi-step manufacturing processes abroad must increase their controls to ensure that affected foreign-produced items are not exported or re-exported to Russia.
Screening and Due Diligence
Now more than ever, robust and auditable assessment, screening, and due diligence processes are critical. Companies, organizations, and institutions need to deliberately review enterprise activities (including supply chain, customers, and internal operations and personnel) in order to identify activities that may involve Russian or Belarusian persons or organizations and implement effective, documented processes to conduct diligence and reduce risk.
How Can Ankura Help?
Ankura combines our International Trade Controls team’s unique expertise as former in-house compliance executives and professionals, global “boots on the ground” forensics and risk mitigation capabilities, and McLarty Associates’ unmatched global intelligence and advisory network to rapidly and efficiently help our clients and their counsel navigate emerging developments.
Ankura’s experts can help companies and their counsel, with:
- Distribution, Supply Chain, and Customer Diligence – Ankura integrates our world-class trade compliance expertise with sophisticated geopolitical intelligence and global “boots on the ground” diligence and asset tracing capabilities. We regularly assist clients with conducting deep-dives into third party and supply chain relationships to assess risks that may implicate trade restrictions.
- Technology Export Assessments – Our team has deep subject matter expertise in conducting export jurisdiction, classification, de minimis and foreign direct product rule analyses, and can assist companies and counsel in quickly determining the degree to which their products and technologies are subject to export restrictions. We can assist clients in creating an internal program to make such assessments as controls and technologies evolve in the future.
- Export Licensing Analysis and Application Preparation, Submission, and Management – Ankura currently assists a wide range of clients in determining whether export authorizations are required to engage in various business transactions. Our team has also developed a turnkey solution around the authorization application, tracking, and management process.
- Trade Regulator Engagement – Ankura regularly advises and assists clients in engaging with trade regulators and senior government officials to obtain jurisdiction and classification determinations, advisory opinions, and export/reexport/transfer licenses. Our experts have decades of collective experience engaging with trade government agencies on sensitive trade matters and have helped our clients successfully navigate complex, business critical scenarios through strategic engagement with trade regulators.
- Business Risk Mitigation – Ankura has deep experience assisting companies to adapt to changing regulatory environments with smart, managed application of business-integrated controls. Our team includes team members who have designed and built industry-proven corporate compliance programs in-house, and understand how to design, deliver, and execute rigorous compliance programs and solutions that operate at the speed of business and provide a competitive advantage.
- Geopolitical Analysis and Strategy – The Ankura team integrates world class trade compliance advisory expertise with sophisticated global intelligence and policy advisory capabilities to provide clients and counsel with deep insight and comprehensive strategies to achieve optimal results in a dynamic business risk environment.
© Copyright 2022. The views expressed herein are those of the author(s) and not necessarily the views of Ankura Consulting Group, LLC., its management, its subsidiaries, its affiliates, or its other professionals. Ankura is not a law firm and cannot provide legal advice.