Russia’s Alleged Annexation of Ukraine Leads to Increased Sanctions for Third-Country Individuals and Entities Supporting the Russian Defense Sector | Snell and Wilmer

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On September 30, 2022, the United States instituted new sanctions to address the ongoing Russian-Ukrainian conflict. The new sanctions follow the statement by the leaders of the Group of Seven (“G7”) condemning the Russian referendum aimed at annexing the Ukrainian regions of Kherson, Zaporizhzhya, Donetsk and Lugansk.1 In support of the G7 statement, the Treasury Department’s Office of Foreign Assets Control (“OFAC”), Commerce Department’s Bureau of Industry and Security (“BIS”) and the Department of state announced increased sanctions and export control risks regarding international suppliers supporting Russia’s alleged annexation of additional areas of Ukraine.2

Specifically, OFAC issued FAQ 1091, which provides that it will now target activities outside of Russia that politically or economically support the Russian defense industry. These activities include:

  • “Provide material support for the organization of fictitious referenda or annexation of Russia, as well as economic or other activities aimed at legitimizing the fictitious referendum or annexation of Russia;
  • Provide material support to Russia’s military and defense industrial base, including material transactions by third-country entities that provide material support to Russia’s military and defense industrial base, as well as entities and designated persons operating in Russia’s defense industrial base;
  • Attempt to circumvent or evade US sanctions against Russia and Belarus; and
  • Provide material support to Russian entities or individuals subject to certain blocking sanctions.3

Notably, OFAC emphasizes that its sanctions are not intended to “target Ukraine or the Ukrainian people, including those living in areas occupied or allegedly annexed by Russia.”4 Nevertheless, the latest OFAC sanctions send a strong message that international suppliers to sanctioned Russian entities and the Russian defense sector are at risk of being sanctioned and that further Russian aggression against Ukraine will prompt a response. increased OFAC.

Additionally, the BRI has issued a similar warning to entities and individuals operating outside of Russia who support Russia’s aggression against Ukraine. More recently, the BRI added 57 Russian entities to its entity list; however, the BIS has made it clear “that it is prepared to aggressively enforce export controls. . .both inside and outside Russia. To accomplish this, the BIS extended the “military end-user” controls in § 744.21 of the EAR to apply to entities in third countries, as well as extending the application of the Russian rule / Belarusian-military on foreign direct products to entities operating in third countries. Going forward, these countries will have a “footnote 3” designation and require a license for a “party to any export, re-export, or transfer (into the country), for example, as a “purchaser”, “intermediate consignee”, “end-consignee”, consignee” or “end-user”, involving not only articles originating in the United States or articles located in the United States, but also articles manufactured abroad, which are:

  • the “direct product” of any “software” or “technology” subject to the EAR and specified in any ECCN in the articles of product groups D or E on the CCL, or
  • produced by a plant or major component of a plant located outside the United States, where the plant or major component of a plant itself is a direct product of a “technology” or ” software” of US origin that is specified in any ECCN in product groups D or E in all CCL categories. Any item produced overseas that meets these criteria, including items that would be designated EAR99, would require a license.5

Companies still navigating operations involving Russia may want to proceed with caution, particularly as their operations involve third-country entities. Companies may consider reassessing their policies and procedures, especially screening procedures to ensure they are not doing business with recently blocked individuals or entities. Additionally, companies should consider whether the BIS rule introduces additional licensing requirements that impact their supply chains. Additionally, companies should consider additional due diligence related to actual end users and the use of traditional transshipment countries to Russia. Such due diligence should possibly include additional “know your customer” steps and consideration of “why” a product is purchased by a foreign buyer. For example, if a company traditionally sold a certain product to Russia and then ceased due to sanctions, the company may consider new buyers looking for the exact same product. More importantly, companies should keep in mind that the latest US response indicates strict compliance and heavy penalties.

As the ripple effects of these potentially significant new sanctions have yet to be fully felt, Snell & Wilmer will continue to monitor developments in the Russian-Ukrainian conflict. Companies should consider contacting legal counsel to better understand the impact of ever-evolving economic sanctions, and the potential for additional sanctions, on their business opportunities and employee support as the military conflict continues and expands. .

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To note:
[1] The G7 Leaders Statement is available at https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/23/g7-leaders-statement-3/.
[2] See United States Treasury Department, Treasury sanctions international suppliers for supporting Russia’s defense sector and warns of costs for those outside Russia who provide political or economic support for Russia’s alleged annexation (September 30, 2022) available at https://home.treasury.gov/news/press-releases/jy0981.
[3] See FAQ 1091 at https://home.treasury.gov/policy-issues/financial-sanctions/faqs/1091.
[4] ID.
[5] See Department of Commerce FAQ available at https://www.bis.doc.gov/index.php/documents/about-bis/3145-2022-09-30-bis-faq-third-country-application-of-controls /file.

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