Overview
On May 19, 2023, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) and the US Department of State announced a new round of multifaceted sanctions against Russia. These sanctions actions were announced alongside additional export controls imposed by the US Commerce Department’s Bureau of Industry and Security (“BIS”) and the publication of a new joint alert by BIS and the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), which are the subject of a separate blog post.
The new sanctions include expanded secondary sanctions authorities targeting additional sectors of the Russian economy; designations of more individuals and entities on the List of Specially Designated Nationals and Blocked Persons (“SDN List”); the inclusion of additional services among those that are prohibited for export to Russia; and new reporting requirements for US holders of property in which Russia’s Central Bank, Finance Ministry, or National Wealth Fund have an interest.
US persons, and others doing business that involves US jurisdiction, should continue to be vigilant against transacting with SDNs or entities that are owned by 50% or more by SDNs. US and non-US persons alike should also carefully consider whether any of their business could constitute operations in one of the newly sanctioned sectors of Russia’s economy.
Architecture, Engineering, Construction, Manufacturing, and Transportation Sectors Determination
OFAC issued a determination that identified the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian economy pursuant to section 1(a)(i) of Executive Order (“EO”) 14024. This determination allows for sanctions to be imposed on any person (i.e., individual or entity) determined by the Secretary of the Treasury, in consultation with the Secretary of State, to operate or have operated in any of those sectors of the Russian economy.
OFAC also issued guidance on the new determination. Frequently Asked Question (“FAQ”) 1126 provides that OFAC expects to promulgate regulations that define the terms as follows:
- Architecture sector of the Russian Federation economy: The term architecture sector of the Russian Federation economy includes activities such as advising; pre-designing; designing; preparing sketches, reports, studies, assessments, site plans, working drawings, specifications, cost estimates, as-built drawings, or other materials; contract administration; site selection; and inspections concerning architectural and related matters involving the Russian Federation. Such activities may be related to the following types of projects, e.g.: residential, institutional, leisure, commercial, and industrial buildings and structures; recreational areas; transportation infrastructure; land subdivisions; urban planning; landscape architecture; and not necessarily relate to a new construction project. The term additionally includes any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the architecture sector of the Russian Federation economy.
- Engineering sector of the Russian Federation economy: The term engineering sector of the Russian Federation economy includes activities such as advising; designing; recommending; consulting; constructing; installing, surveying; preparing studies, specifications, cost estimates, working drawings, process flow diagrams, arrangement drawings, or other materials; map making; planning; testing; analysis; and inspecting for engineering and related matters involving the Russian Federation. Such activities may be undertaken during any phase of an engineering project of any type and may not necessarily relate to a new construction or development project. The term additionally includes any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the engineering sector of the Russian Federation economy.
- Construction sector of the Russian Federation economy: 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.
- Manufacturing sector of the Russian Federation economy: 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 EO 14024.
- Transportation sector of the Russian Federation economy: The term transportation sector of the Russian Federation economy includes activities such as the production, manufacturing, testing, financing, distribution or transport to, from, or involving the Russian Federation of any mode of transport or any goods, services, or technology for the movement or conveyance of persons or property and the loading, unloading, or storage incidental to the movement of such persons or property; and any related activities, including the provision or receipt of goods, services, or technology to, from, or involving the transportation sector of the Russian Federation economy.
FAQ 1127 reiterates that persons sanctioned pursuant to a determination under EO 14024 section 1(a)(i) are added to one or more OFAC sanctions lists based on the type of sanction, including the SDN List, the List of Foreign Financial Institutions Subject to Correspondent Account or Payable-Through Account Sanctions (“CAPTA List”), and the Non-SDN Menu-Based Sanctions List (“NS-MBS List”).
In addition, in order to align with measures taken by the United Kingdom and European Union, OFAC issued a determination pursuant to EO 14071 prohibiting the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of architecture services or engineering services to any person located in the Russian Federation. The prohibition takes effect beginning at 12:01 a.m. eastern daylight time on June 18, 2023. Concurrently with the issuance of the determination, OFAC amended FAQs 1059, 1060, 1061, and 1062 to provide additional guidance on the scope of prohibitions under EO 14071’s directives. To date, there are no prohibitions on U.S. persons’ exports of construction services, manufacturing services, or transportation services to Russia under EO 14071.
OFAC also published new FAQ 1128, which notes that OFAC expects to promulgate regulations that define the terms architecture services and engineering services consistent with FAQ 1126’s enumeration of the activities included in the definition of the architecture, engineering, and construction sectors of Russian Federation economy.
Reporting Requirement under Executive Order 14024 Directive 4
OFAC amended Directive 4 under EO 14024 to require US persons to report to OFAC any property in their possession or control – whether within or outside the United States – in which the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation (collectively, the “Directive 4 Entities”) has an interest of any nature whatsoever, direct or indirect. Under the amended Directive 4, US persons (wherever located) who are in possession or control of property in which any Directive 4 Entity has an interest must submit a report to OFAC on or before June 18, 2023 and annually thereafter by June 30, with the following information:
(1) the name and address of the person in possession or control of the property;
(2) the date the property came into the possession or control of such person;
(3) the entity or entities subject to the prohibitions of the Directive having an interest in the property;
(4) a description of the property and its location in the United States or otherwise, including any relevant account types, account numbers, reference numbers, dates, or other information necessary to identify the property;
(5) the actual, or if unknown, estimated value of the property in US dollars as of May 31, 2023, for the initial report, and annually thereafter as of May 31; and
(6) a copy of the most recent relevant account statement or other documentation to support the estimated value of the property.
As reiterated by amended OFAC FAQ 1001, OFAC’s so-called 50 Percent Rule does not apply to Directive 4 Entities—the prohibitions and new reporting requirements of Directive 4 do not apply with respect to entities that are owned by Directive 4 Entities. OFAC also amended FAQ 998 and FAQ 1000 to provide guidance on the reporting requirements under the amended directive. This reporting requirement is consistent with a similar measure adopted by the European Union, and the Treasury Department stated it is intended to provide additional information on the Russian sovereign assets immobilized in U.S. jurisdiction. But since the reporting requirement extends to property interests “of any nature whatsoever, direct or indirect,” it could be read to reach well beyond assets that are immobilized in the United States: Directive 4 prohibits only “any transaction involving” the Directive 4 Entities, and as amended FAQ 1004 clarifies, Directive 4 Entities are not subject to blocking sanctions.
Concurrently with the issuance of the amended directive, OFAC amended a number of FAQs. Amended FAQ 1002 reiterates that US persons cannot engage in indirect transactions with persons subject to Directive 4 under EO 14024 unless exempt or authorized by OFAC, including debiting funds from restricted accounts.
OFAC also issued an amended General License No. 13E authorizing certain administrative transactions prohibited by Directive 4 under EO 14024. More specifically, as detailed by amended FAQ 999, US persons, or entities owned or controlled, directly or indirectly, by a US person are authorized to pay taxes, fees, or import duties, and purchase or receive permits, licenses, registrations, or certifications, to the extent such transactions are prohibited by that directive, provided that such transactions are ordinarily incident and necessary to such person’s day-to-day operations in the Russian Federation. With respect to the scope of GL No. 13E, FAQ 1118 clarifies that payment of an exit tax is not considered ordinarily incident to day-to-day operations in Russia: US persons whose divestment from the Russian Federation will involve the payment of such an exit tax require a specific license from OFAC prior to the payment of such tax, unless otherwise authorized by OFAC.
Additions to the SDN List
OFAC and the State Department have in this round of sanctions added hundreds of entities, individuals, vessels, and aircraft located in more than 20 countries or jurisdictions to the SDN List. The designations focus primarily on targeting: (i) those attempting to circumvent or evade sanctions or export controls; (ii) channels Russia uses to acquire critical technology; (iii) Russia’s future energy extraction capabilities; (iv) Russia’s access to financial services used to finance its war against Ukraine; and (v) Russia’s largest gold miners. Notably, OFAC also designated the Foreign Intelligence Service of the Russian Federation (“SVR”), a Russian intelligence agency, pursuant to EO 14024 for being a political subdivision, agency, or instrumentality of the Government of Russian Federation.
1. Targeting Global Evasion and Circumvention Networks
OFAC designated five members of Walter Moretti’s covert procurement network pursuant to EO 14024 for assisting Walter Moretti in procuring sensitive technologies and equipment for Russia’s intelligence services and military. These targets are India-based companies and individuals who are nationals of Germany or India. OFAC had previously designated Swiss-Italian businessman Walter Moretti and his network pursuant to that same EO.
In addition, pursuant to EO 14024, OFAC sanctioned individuals and entities, including an entity in Czechia, tied to Radioavtomatika LLC, an SDN entity that specializes in procuring foreign items for Russia’s defense industry. Also pursuant to EO 14024, OFAC designated individuals and entities belonging to Russian intelligence services’ procurement networks in Liechtenstein and the Netherlands.
The Department of State designated an international network of eight entities in Russia, China, Hong Kong, and Macau that engaged in procurement of engine parts and export-controlled components for the Special Technology Center, an entity previously designated under EO 13694, as amended. OFAC found that these entities operated in the technology sector of the Russian economy or had materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of an SDN entity.
These designations implement the G7 Leaders’ call for third countries or other international actors who seek to circumvent sanctions and export controls to cease providing material support to Russia’s war, or face severe costs.
2. Targeting Channels Used to Acquire Critical Technologies
In an effort to disrupt Russia’s ability to acquire foreign-made semiconductors and other microelectronics, OFAC designated, pursuant to EO 14024, a number of Russian and foreign persons and entities enabling Russia’s military-industrial complex to acquire advanced materials, technology, and military industrial equipment. The new SDNs include individuals and entities affiliated with the Russia-based defense technology supplier, Ostec Group; technology transfer networks and companies based in Finland and Estonia; and more than 30 Russia-based companies that import, ship, or manufacture electronics components, semiconductors, and microelectronics to or in Russia.
3. Targeting Russia’s Future Extractive Capabilities and Energy Revenue
Pursuant to EO 14024, OFAC and the Department of State designated individuals and entities supporting Russia’s extractive capabilities and energy revenue, including Russia-based energy educational institutions, energy-related research institutes, drilling and mining companies, management consulting and investment companies, and the owner and operator of one of the largest dredging fleets in Russia. As with the G7 price cap coalition, the policy objective of these SDN designations is to reduce Russia’s energy revenue while mitigating spillover effects on global energy security.
4. Targeting Russia’s Access to Financial Services
Pursuant to EO 14024, OFAC designated Dubai-headquartered Huriya Private FZE LLE, a private equity and corporate structuring entity involved in moving Russian finance into the United Arab Emirates (“UAE”) and money laundering. Also designated were the Irish founder and Chief Executive Officer of Huriya, John Desmond Hanafin, Cyprus- and Hong Kong-based firms owned or controlled by Hanafin, and Aquila Capital Group (“ACG”), which is a Moscow-based investment banking firm that worked with Hanafin to start operations in the UAE and open bank accounts with UAE banks.
OFAC also designated Switzerland-headquartered DuLac Capital, an asset management company and multi-family office with branches in Moscow and Saint Petersburg, and Anselm Oskar Schmucki, DuLac’s Moscow branch chief and regional head for Russia, the Commonwealth of Independent States, and the UAE. DuLac and Schmucki were designated pursuant to EO 14024 for operating or having operated in the financial services sector of the Russian Federation economy, and more than a dozen companies were designated for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, Schmucki.
5. Targeting Russia’s largest gold miners
The Department of State designated multiple entities and individuals pursuant to EO 14024 for operating or having operating in the metals and mining sector of the Russian Federation economy. More specifically, the State Department designated Joint Stock Company Polimetall AO, the Russian holding company for a top ten global gold producer and top five silver producer; Public Joint Stock Company Polyus, Russia’s largest gold producer; Joint Stock Company Polyus Krasnoyarsk, the parent company of most of Polyus’s assets; Joint Stock Company Polyus Alda, a company that mines gold and gold ores from various deposits; and Pavel Sergeyevich Grachev, the former General Director of Polyus. A number of other entities were designated for being owned or controlled by, or for having acted or purported to act for or on behalf of, directly or indirectly, Polyus, and the current General Director and Senior Vice President of Operations of Polyus were designated for being leaders, officials, senior executive officers, or members of the board of directors of Polyus.
OFAC issued General License 66, “Authorizing the Wind Down of Transactions Involving Public Joint Stock Company Polyus,” which authorizes all transactions prohibited by EO 14024 that are ordinarily incident and necessary to the wind down of any transaction involving Public Joint Stock Company Polyus, or any entity in which Public Joint Stock Company Polyus owns, directly or indirectly, a 50 percent or greater interest, through 12:01 a.m. eastern daylight time, August 17, 2023, provided that any payment to a blocked person must be made into a blocked account.
OFAC also issued General License 67, ”Authorizing Certain Transactions Related to the Debt or Equity of, or Derivative Contracts Involving, Public Joint Stock Company Polyus,” which authorizes all transactions prohibited by EO 14024 that are ordinarily incident and necessary to the divestment or transfer, or the facilitation of the divestment or transfer, of debt or equity of Polyus, or any entity in which Polyus owns, directly or indirectly, a 50 percent or greater interest, purchased prior to May 19, 2023 (“covered debt or equity”), to a non-US person through 12:01 a.m. eastern daylight time, August 17, 2023. GL 67 also authorizes all transactions that are ordinarily incident and necessary to facilitating, clearing, and settling trades of covered debt or equity that were placed prior to 4:00 p.m. eastern daylight time, May 19, 2023, through 12:01 a.m. eastern daylight time, August 17, 2023. Moreover, GL 67 authorizes all transactions prohibited by EO 14024 that are ordinarily incident and necessary to the wind down of derivative contracts entered into prior to 4:00 p.m. eastern daylight time, May 19, 2023 that: (i) include Polyus or any blocked person in which Polyus owns a 50 percent or greater interest or (ii) are linked to covered debt or equity, provided that any payments to a blocked person are made into a blocked account in accordance with the Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587 (“RuHSR”).
OFAC issued new FAQ 1129 which makes clear that the Department of State’s designation of Polimetall AO applies only to that entity and any entities in which it owns, directly or indirectly, a 50 percent or greater interest. Because neither the State Department nor OFAC designated Polimetall AO’s ultimate parent, Jersey-based Polymetal International PLC, which is not owned 50 percent or more by any blocked persons, US persons are not prohibited from dealing with Polymetal International PLC, its non-blocked subsidiaries, or non-blocked affiliates to the extent the proposed dealings do not involve any blocked person, any interest in property of a blocked person, or any other activities prohibited pursuant to any OFAC sanctions authorities.
6. Additional State Department Designations
The State Department also designated entities involved in a Russia-Iran maritime logistics network, various Russian defense industry entities, two airlines (and numerous aircraft) with ties to Private Military Company Wagner, companies in Russia’s advanced technology industries, and numerous individuals, including Russian government officials.
For assistance in interpreting and complying with the complex array of US sanctions and trade controls related to Russia and Belarus, please contact a member of Steptoe’s economic sanctions or export controls practice groups.
