Overview
On December 22, 2023, President Biden issued a new Executive Order (“EO”) 14114 “Taking Additional Steps With Respect to the Russian Federation’s Harmful Activities” which amended EOs 14024 and 14068. These amendments introduce the authority to impose secondary sanctions with respect to foreign (i.e., non-US) financial institutions determined to have engaged in any significant transaction for or on behalf of certain entities designated under EO 14024, or to have engaged in any significant transaction or provided any service involving the Russian military-industrial base (which is broadly defined). The amendments also expand upon the ban on the importation and entry into the United States of Russian-origin fish and seafood, alcoholic beverages, non-industrial diamonds, and gold.
Secondary Sanctions Directed at Non-US Financial Institutions
In relevant part, Section 11(a) of EO 14024, as added by EO 14114, provides authority to impose secondary sanctions against foreign financial institutions (“FFIs”) determined to have:
- (i) conducted or facilitated any significant transaction or transactions for or on behalf of any person designated pursuant to section 1(a)(i) of EO 14024 for operating or having operated in the technology,[1] defense and related materiel,[2] construction,[3] aerospace,[4] or manufacturing sectors of the Russian economy,[5] or other such sectors as may be determined to support Russia’s military-industrial base by the Secretary of the Treasury, in consultation with the Secretary of State; or
- (ii) conducted or facilitated any significant transaction or transactions, or provided any service, involving Russia’s military-industrial base, including the sale, supply, or transfer, directly or indirectly, to the Russian Federation of any item or class of items as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce.
The terms “significant transaction” and “foreign financial institution” are defined similarly to other OFAC sanctions programs.[6] For the purpose of the EO 14024 amendments, the definition of “foreign financial institution” also includes operators of credit card systems and insurance companies. The term “Russia’s military-industrial base” includes “the technology, defense and related materiel, construction, aerospace, and manufacturing sectors of the Russian Federation economy (and other sectors as may be determined pursuant to E.O. 14024)” and “individuals and entities that support the sale, supply, or transfer of critical items identified in determinations pursuant to subsection 11(a)(ii) of E.O. 14024.”[7]
Pursuant to Section 11(b), sanctions that can be imposed on FFIs under Section 11(a) include: (i) prohibiting the opening of, or prohibiting or imposing strict conditions on the maintenance of, correspondent accounts or payable-through accounts in the United States for such FFIs (i.e., “CAPTA” sanctions); or (ii) blocking sanctions against such FFIs. OFAC has issued General License (“GL”) 84 which authorizes certain wind-down transactions during the 10-day period beginning on the effective date of CAPTA sanctions against an FFI. OFAC has not issued a comparable general license to authorize wind-down transactions after the effective date of blocking sanctions against an FFI, although OFAC could issue new general licenses when it imposes such blocking sanctions.
With respect to Section 11(a)(i), we note that the new secondary sanctions authority does not apply to transactions involving designated entities in all sanctioned sectors of the Russian economy. Specifically, Section 11(a)(i) does not provide authority for sanctions on FFIs that engage in transactions involving a designated entity in the following sectors of the Russian economy: (i) financial services; (ii) electronics; (iii) marine; (iv) accounting; (v) trust and corporate formation services; (vi) management consulting; (vii) quantum computing; (viii) metals and mining; (ix) architecture; (x) engineering; and (xi) transportation.
With respect to Section 11(a)(ii), FFIs may also be sanctioned for conducting or facilitating any significant transaction(s) or providing any service, involving Russia’s military-industrial base. This includes “maintaining accounts, transferring funds, or providing other financial services to persons, either inside or outside Russia, that operate in” the sectors of the Russian economy specified in or pursuant to Section 11(a)(i).[8] This also includes facilitating the sale, supply, or transfer, directly or indirectly, to Russia of items identified in the Russia Critical Items Determination (see below).[9] Further information is available in OFAC’s Guidance for Foreign Financial Institutions on OFAC Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base also issued on December 22, 2023.
As noted above, sanctionable transactions involving Russia’s military-industrial base include the sale, supply, or transfer to Russia of critical items identified in determinations pursuant to Section 11(a)(ii) of EO 14024. OFAC has issued a determination listing items covered by this provision. OFAC refers to this determination as the “Russia Critical Items Determination.” The list of critical items includes certain: (i) machine tools and manufacturing equipment; (ii) manufacturing materials for semiconductors and related electronics; (iii) electronic test equipment; (iv) propellants, chemical precursors for propellants and explosives; (v) lubricants and lubricant additives; (vi) bearings; (vii) advanced optical systems; and (viii) navigation instruments.
Importantly, the items in the Russia Critical Items Determination are not an exclusive list of items that are in scope for the secondary sanctions authority in Section 11(a)(ii) of EO 14024. Facilitating or conducting any significant transaction or transactions, or providing any service, involving Russia’s military-industrial base will expose an FFI to sanctions, regardless of whether the transaction involves items named in the Russia Critical Items Determination.
Ban on the Importation of Russian-origin Seafood, Diamonds, and Gold
The New EO also amends EO 14068. Specifically, Section 1(a)(i)(A) of EO 14068, as amended, continues to prohibit the importation the United States (now clarified to include importation and entry into the United States or a foreign trade zone located in the United States), of the following products of Russian Federation origin: fish, seafood, and preparations thereof; alcoholic beverages; non-industrial diamonds; and any other products of Russian Federation origin, as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Commerce.
Section 1(a)(i)(B) of EO 14068, as amended, prohibits the importation and entry into the United States (including a US foreign trade zone) of categories of fish, seafood, and preparations thereof; diamonds; and any other such products as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, the Secretary of Commerce, and the Secretary of Homeland Security, that were mined, extracted, produced, or manufactured wholly or in part in Russia, or harvested in Russian waters or by Russia-flagged vessels, notwithstanding whether such products have been incorporated or substantially transformed into other products outside of Russia.
Section 1(a)(i)(C) of EO 14068, as amended, prohibits the importation and entry into the United States (including a US foreign trade zone) of products containing any of the products subject to subsections (a)(i)(A) and (a)(i)(B), as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, the Secretary of Commerce, and the Secretary of Homeland Security.
Section 1(a)(i)(D) of EO 14068, as amended, prohibits the importation and entry into the United States (including a US foreign trade zone) of products subject to the prohibitions of subsections (a)(i)(A)-(a)(i)(C) that transited through or were exported from or by Russia, as may be determined by the Secretary of the Treasury, in consultation with the Secretary of State, the Secretary of Commerce, and the Secretary of Homeland Security.
OFAC also stated its intention to issue a determination pursuant to EO 14068 in the near term relating to the importation of certain Russian-origin diamonds processed in third countries.[10] OFAC has also issued the Russian-origin Seafood Determination which specifies that the import prohibition in Section 1(a)(i)(B) of EO 14068 applies to salmon, cod, pollock, and crab produced in Russia or harvested in Russian waters or by Russian-flagged vessels, regardless of whether they have been incorporated or substantially transformed into another product outside of Russia. OFAC also issued GL 83 to authorize the importation of certain products (namely seafood derivative products) that would otherwise be prohibited pursuant to the Seafood Determination, through February 21, 2024 at 12:01 a.m. eastern standard time, provided that the importation is pursuant to written contracts or written agreements entered into prior to December 22, 2023.
Risk Mitigation
In its new Guidance for FFIs on OFAC’s Sanctions Authorities Targeting Support to Russia’s Military-Industrial Base, OFAC states that in addition to the customer due diligence and anti-money laundering controls banks already implement, FFIs should take steps to identify their exposure to activity involving Russia’s military-industrial base and those that support it, take appropriate mitigation measures to such exposures, incorporate such risks in sanctions risk assessments, and as a risk-based approach, obtain attestations from certain customers. For assistance in understanding how these new sanctions may apply to your business, contact any of the authors.
[1] The term “technology sector of the Russian Federation economy” includes activities such as the production, procurement, research, development, design, engineering, testing, servicing, financing, distribution, use, or transport involving the Russian Federation, of software, equipment, electronics, items, tools, materials, or devices, and any components, parts, or accessories of the foregoing, related to the fields of computing, engineering, applied mathematics, or applied sciences involving the Russian Federation and any related activities, including the provision or receipt of goods or services involving the technology sector of the Russian Federation economy. OFAC FAQ 1126.
[2] The term “defense and related materiel sector of the Russian Federation economy” includes military, armed forces, or security forces of or within the Russian Federation; the use of arms or related materiel by military, armed forces, or security forces of or within the Russian Federation; any person designing, developing, manufacturing, supplying, financing, procuring, or distributing goods, services, or technology to, from, or involving military, armed forces, or security forces of or within the Russian Federation; and any related activities, including the provision or receipt of goods, services, or technology involving the defense and related materiel sector of the Russian Federation economy. The term defense and related materiel sector of the Russian Federation economy also includes acquisition, possession, procurement, research, design, development, testing, evaluation, manufacture, maintenance, upgrade or refurbishment, shipping, supply, sale, transfer, or storage to, from, within, for, transiting, or on behalf of the Russian Federation of arms or related materiel of all types; enablers, aggregates, components, parts, as well as related documentation and instructions for any such arms or related materiel; or training for the use of included systems, provision of simulation equipment, documentation (including training manuals, maintenance orders, or technical bulletins), prototypes, software upgrades, and licensing and manufacturing agreements for such items. Id.
[3] The term “construction sector of the Russian Federation economy” includes activities such as the production, procurement, devising, framing, design, testing, financing, distribution, or transport involving the Russian Federation, of goods, services, or technology to fabricate, shape, alter, maintain, or form any buildings or structures, including the on-site development, assembly, or construction of residential, commercial, or institutional buildings, or of transportation infrastructure, in the Russian Federation; and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the construction sector of the Russian Federation economy. Id.
[4] The term “aerospace sector of the Russian Federation economy” includes activities such as the production, procurement, development, design, testing, servicing, financing, distribution, use, or transport involving the Russian Federation and its airspace, of aircraft or any other device used or intended to be used for flight or activities in the air or in space, missiles, unmanned aerial vehicles, space-based vehicles, satellites, high-altitude balloons, any other device that operates above the surface of the earth, and any items, components, parts, or accessories intended for the foregoing; airports or any other area of land or water used or intended to be used for a purpose related to the aerospace sector of the Russian Federation; and any related activities, including the provision or receipt of goods, services, or technology involving the aerospace sector of the Russian Federation economy. Id.
[5] The term “manufacturing sector of the Russian Federation economy” includes activities such as the creation, modification, repair, testing, or financing, of goods by manual labor or machinery involving the Russian Federation and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the manufacturing sector of the Russian Federation economy. Note that persons conducting or facilitating transactions that are exempt or authorized by OFAC—such as those related to the provision of agricultural commodities, food, medicine, or medical devices, or related to energy—will not be subject to sanctions under E.O. 14024. Id.
