On May 19, 2023, in conjunction with the G7, Australia, and other international partners, the US government announced a range of new export controls and sanctions and added 71 entities to the Entity list, primarily for supporting Russia’s military and defense sectors. The new export controls – and new sanctions, which are the subject of a separate blog post – reflect the continued efforts of the US (in coordination with international allies) to target those attempting to circumvent or evade sanctions or export controls against Russia and Belarus. The new measures are intended to further undermine the Russian and Belarusian industrial bases and counteract their ability to continue to support the war in Ukraine and to further limit Russia’s energy revenue and future extractive capabilities.
Also on May 19, 2023, the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and the Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a Joint Supplemental Alert entitled “FinCEN and the U.S. Department of Commerce’s Bureau of Industry and Security Urge Continued Vigilance for Potential Russian Export Control Evasion Attempts” (the “Supplemental Alert”), which is intended to assist financial institutions in the risk-based screening of export-related financial transactions in order to determine whether customers and transactions may be connected to export controls evasion.
Export Controls
Effective May 19, 2023, BIS published new export, reexport, and in-country transfer control regulations to counter Russia’s invasion of Ukraine by expanding the: (A) Russian and Belarusian Industry Sector Sanctions and controls regarding certain chemicals; (B) list of items identified in Supplement No. 7 to Part 746 of the Export Administration Regulations (“EAR”); and (C) destination scope of the Russia/Belarus Foreign Direct Product (“FDP”) Rule by adding the Crimea region of Ukraine.
The information below should be reviewed by exporters, reexporters, and transferors of any commodity, software, or technology (collectively, “items”) that is “subject to the EAR” under Part 734 of those regulations. In light of the Supplemental Alert, US financial institutions should also carefully consider their risks under the EAR when financing trade with or to Russia or Belarus that involves items subject to the EAR.
1. Russian and Belarusian Industrial Sector Sanctions
BIS has amended Supplement No. 4 to part 746 by adding 1,224 new Harmonized Tariff Schedule (“HTS-6”) codes corresponding to 1,224 industrial items, including a variety of electronics, instruments, and advanced fibers for the reinforcement of composite materials, including carbon fibers. Under EAR section 746.5(a)(1)(ii), all items listed in Supplement No. 4 to that part require a license for export or reexport to or transfer within Russia or Belarus under § 746.5(a)(1)(ii). Notably, with this rule, BIS now controls all HTS-6 codes found in chapters 84, 85, and 90 of the harmonized system schedule. License applications for the export or reexport to or the transfer (in-country) within Russia or Belarus of items listed in these chapters will be reviewed by BIS under a policy of denial, except for certain listed items that are “predominantly agricultural or medical in nature,” which will now be reviewed on a case-by-case basis.
The stated BIS policy objective of these restrictions is to cut off Russia’s access to any items of potential military significance and to simplify compliance decisions for persons trading in items that are listed in chapters 84, 85, and 90 of the harmonized system schedule, because all of the items listed in them now require a license for export or reexport to and transfers (in-country) within Russia or Belarus. US and non-US exporters and reexporters engaging in transactions involving Russia or Belarus and items subject to the EAR should carefully review these three chapters, which list a wide variety of products including, among other items, nuclear reactor components, mechanical appliances, engines, motors, turbines, and even items used in daily life including contacts, contacts lenses, electric toothbrushes, and sunglasses.
Relatedly, BIS added certain chemicals to Supplement No. 6 to Part 746 of the EAR, which consists of discrete chemicals, biologics, fentanyl and its precursors, and related equipment designated EAR99. Chemicals listed under Supplement No. 6 are identified by their CAS numbers since industry typically identifies such chemicals by CAS numbers. Under BIS’s new rule, ‘[l]ithium chloride (CAS 7446-41-8),’ ‘[l]ithium chloride monohydrate (CAS 16712-20-2)’ and ‘[l]ithium carbonate (CAS 544-13-2)’ are now controlled to Russia or Belarus. A license is required to export, reexport, or transfer (in-country) any item subject to the EAR listed in Supplement No. 6 to Part 746 to or within Russia or Belarus.
2. Items that Require a License When Destined to Iran, Russia, Belarus, or Crimea
BIS also expanded the list of items identified in Supplement No. 7 to Part 746 in order to address an inadvertent omission in the Iran UAVs rule. (The Iran UAVs rule is discussed in detail in our March 1, 2023 blog post.) More specifically, BIS amended Supplement No. 7 by adding one additional HTS-6 Code entry, 854800, which includes a variety of electrical parts of machinery or apparatus, not elsewhere specified. BIS stated that this addition builds on the Iran UAV rule that created Supplement No. 7, which identifies a number of priority items of concern and that is being used to advance counter-evasion efforts. As a result, a license is now required to export or reexport any US- or foreign-produced item identified in Supplement No. 7, including by HTS-6 Code entry, 854800, to Iran under § 746.7(a)(1)(ii) and to Russia, Belarus, and Crimea under § 746.8. The purported goal of this change is to further undermine Iran’s ability to support the Russian and Belarusian industrial bases and their ability to support Russia’s war in Ukraine.
3. The Russia/Belarus FDP Rule
Effective May 19, 2023, BIS amended § 734.9(f) by adding the “temporarily occupied Crimea region of Ukraine” to the destination scope of the Russia/Belarus FDP Rule. More specifically, foreign-produced items that meet the product scope are subject to the expanded Russia/Belarus FDP Rule if there is “knowledge” that the foreign-produced item will be: (i) destined to Russia, Belarus, or Crimea, or (ii) incorporated into, or used in the “production” or “development” of any “part,” “component” or “equipment” specified in any ECCN or in Supplement Nos. 6 or 7 to Part 746 of the EAR and produced in or destined to Russia, Belarus, or Crimea. If a foreign-produced item meets the product and destination scope of the Russia/Belarus FDP Rule, then a license is required for a reexport, export from abroad, or transfer (in-country) to “any destination” of any foreign-produced item subject to the EAR under this FDP Rule. The Russia/Belarus FDP Rule is now renamed as the Russia/Belarus/temporarily occupied Crimea region of Ukraine FDP Rule. To date, this FDP Rule does not extend to the Donetsk, Luhansk, Kherson, or Zaporizhzhia regions of Ukraine.
The stated objective of the Russia/Belarus/temporarily occupied Crimea region of Ukraine FDP Rule is to strengthen the EAR’s controls on Crimea, thereby making it more difficult for items to be procured for Russia’s use in Crimea in support of its ongoing war in Ukraine.
4. Savings Clause
With respect to the changes to the Russian and Belarusian Industry Sector Sanctions, the Russia/Belarus FDP Rule, and Iran UAV rule, shipments of items removed from eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (“NLR”) as a result of this regulatory action that were en route aboard a carrier to a port of export, reexport, or transfer (in-country), on May 19, 2023, pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export, reexport, or transfer (in-country) without a license, provided the export, reexport, or transfer (in-country) is completed no later than on June 20, 2023.
5. Entity List Additions
BIS also added 71 entities to the Entity List, including 69 Russian entities for providing support to Russia’s military and defense sector, and one Armenian entity and one Kyrgyz entity, which were added to the Entity List for preventing the successful accomplishment of end-use checks and posing a risk of diversion of items subject to the EAR to Russia. The 69 Russian entities are receiving “footnote 3” designations as Russian or Belarusian “military end users,” and will thus be subjected to the restrictions imposed under the Russia/Belarus-Military End User FDP Rule in § 744.21 of the EAR.
Shipments of items removed from eligibility for a License Exception or export, reexport, or transfer (in-country) without a license as a result of these Entity List Additions that were en route aboard a carrier to a port of export, reexport, or transfer (in-country), on May 19, 2023, pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination, may proceed to that destination under the previous eligibility for a License Exception or export, reexport, or transfer (in-country) without a license (NLR) before June 20, 2023. Any such items not actually exported, reexported, or transferred (in-country) before midnight, on June 20, 2023, will require a license.
Supplemental Alert
FinCEN and BIS issued the Supplemental Alert, which provides US financial institutions further guidance on evasion typologies, provides nine high priority Harmonized System (“HS”) codes to inform their customer due diligence, and identifies additional transactional and behavioral red flags to assist financial institutions in identifying suspicious transactions relating to possible export control evasion. The Supplemental Alert builds upon FinCEN and BIS’s June 2022 Joint Alert and reflects the US government’s ongoing effort to assist financial institutions in the identification and reporting of potentially suspicious activity related to export controls evasion. (For an analysis of the June 2022 Joint Alert, please see our July 18, 2022 blog post.)
1. High Priority Items List by Harmonized System Code
The Supplemental Alert identifies nine HS codes determined to be “high priority items,” which Russia is using evasive measures to try to acquire. These include:
- “[e]lectronic integrated circuits: [p]rocessors and controllers, such as microcontrollers” (8542.31);
- “[e]lectronic integrated circuits: [m]emories, such as SRAM” (8542.32);
- “[e]lectronic integrated circuits: [a]mplifiers, such as op amps” (8542.33);
- “[e]lectronic integrated circuits: [o]ther, such as FPGAs” (8542.39);
- “[m]achines for the reception, conversion and transmission or regeneration of voice, images, or other data, such as wireless transceiver modules” (8517.62);
- “[r]adio navigational aid apparatus, such as GNSS modules” (8526.91);
- “[t]antalum capacitors” (8532.21);
- “[m]ultilayer ceramic capacitors” (8532.24); and
- “[e]lectrical parts of machinery or apparatus, not specified or included elsewhere, such as EMI filters.” (8548.00)
Treasury and BIS have determined that Russia is using evasive methods to try to acquire items described by these HS codes, which have been found in “multiple Russian weapon systems used in Ukraine, including the Kalibr cruise missile, the Kh-101 cruise missile, and the Orlan-10 UAV.” The High Priority Items complement the “commodities of concern” identified in the June 2022 Joint Alert, and are listed in Supplement No. 7 to Part 746 of the EAR, meaning a license is required for any items associated with these HS codes destined to Russia, Belarus, the Crimea region of Ukraine, or Iran, including certain foreign-produced items subject to the EAR. In reviewing US export data related to these nine HS codes, BIS identified three fact patterns associated with importers in countries outside the Global Export Control Coalition (“GECC”) that raised diversion concerns:
- “[t]he company never received exports prior to February 24, 2022;
- [t]he company received exports that did not include any of the nine HS Codes prior to February 24, 2022; or
- [t]he company received exports involving the nine HS Codes prior to February 24, 2022, but also saw a significant spike in exports thereafter.”
2. Risk-Based Approach to Trade Finance
Similar to the June 2022 Joint Alert, the Supplemental Alert notes that a variety of financial institutions may be involved in transactions related to export violations. These financial services include “processing payments for exported goods, issuing lines of credit for exporters, providing or handling the payments supported by letters of credit, processing payments associated with factoring of accounts receivables by an exporter, providing general credit or working capital loans, and issuing or paying insurance on the shipping and delivery of goods to protect the exporter from nonpayment by the buyer.” The Supplemental Alert calls upon financial institutions with customers in maritime or export/import industries to employ appropriate risk-mitigation measures consistent with their underlying obligations under the Bank Secrecy Act (“BSA”), including by conducting due diligence when encountering one of the nine HS codes.
When opening accounts for new customers engaged in international trade, especially those located in non-GECC countries, such as the transshipment countries identified in the June 2022 Joint Alert, financial institutions are urged to collect due diligence, including evaluating:
- “the customer’s date of incorporation (e.g., incorporation after February 24, 2022),”
- “the end user and end use of the item (e.g., whether the customer’s line of business is consistent with the ordered items),” and
- “whether the customer’s physical location and public-facing website raise any red flags (e.g., business address is a residence, no website is available.”
For existing customers, financial institutions are urged to pay attention to anomalous increases in the volume of orders or inconsistencies between the items ordered and the customer’s line of business.
3. New Transactional and Behavioral Red Flags
The Supplemental Alert provides additional red flag indicators of export control evasion that “should be read in conjunction with those set out in the 2022 Alert.” The red flags should be considered “in conjunction with conducting appropriate risk-based customer and transactional due diligence” and “all the surrounding facts and circumstances should be considered.” The Joint Alert states that “no single financial red flag is necessarily indicative of illicit or suspicious activity.” However, an identified red flag may warrant further investigation in the absence of a readily apparent or known explanation. Examples of red flags include, among others, “[t]ransactions involving smaller-volume payments from the same end user’s foreign bank account to multiple, similar suppliers of dual-use products” and a “customer [who] is significantly overpaying for a commodity based on known market prices.”
4. Suspicious Activity Reporting
FinCEN requests that financial institutions reference the Supplemental Alert by including “FIN 2022-RUSSIABIS,” the existing SAR code from the June 2022 Joint Alert, in SAR field 2 (Filing Institution Note to FinCEN) and the narrative to indicate a connection between the suspicious activity being reported and the activities highlighted in the alert. Financial institutions may highlight additional advisory or alert keywords in the narrative, if applicable.
FinCEN also requests that financial institutions check box 38(z) (Other Suspicious Activity) and note “Russia Export Restrictions Evasion” when reporting suspicious activity of the sort highlighted in the June 2022 Joint Alert and the Supplemental Alert. FinCEN also requests that field 45(z) (Other Product Types) is populated with the appropriate North American Industry Code(s) (“NAICs”) for the involved product, or with the appropriate financial instrument or payment mechanism in field 46, if known. This request for information illustrates the US government’s ongoing efforts to use trade data to identify potential evasion of US export controls.
For assistance in interpreting and complying with the complex array of US trade controls and sanctions related to Russia and Belarus, please contact a member of Steptoe’s export controls or economic sanctions practice groups.
