June 18, 2024, Covington Alert

On June 12, 2024, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”) and the U.S. Commerce Department, Bureau of Industry and Security (“BIS”) issued additional measures to counter Russia’s continued aggression in Ukraine. The measures, announced in advance of the G7 summit in Italy last week, are intended to “continue to drive up costs for the Russian war machine.”

The actions taken by OFAC and BIS include new prohibitions on providing certain information technology- and software-related services to persons located in Russia, establishing additional sanctions designed to target the Russian financial infrastructure, strengthening secondary sanctions that can be applied to non-U.S. persons (including in particular non-U.S. financial institutions), and expanding export controls restrictions on items destined for Russia and Belarus (including with respect to certain types of software). Along with the new rules, OFAC designated for property-blocking sanctions more than 300 individuals and entities (including parties identified for sanctions by the U.S. State Department), while BIS used its authority to make additions to the Entity List, issue Temporary Denial Orders, and notify U.S. distributors of additional restrictions on shipments to parties known to be supplying items to Russia. Significantly, BIS altered its Entity List rules to permit certain address-only designations to the Entity List and, among other designations, added to the Entity List eight addresses in Hong Kong with a high diversion risk. Exports, reexports, or transfers of certain items subject to the Export Administration Regulations (“EAR”) to purchasers, intermediate or ultimate consignees, and end ­users who use those addresses generally will require authorization from BIS.

Separately, on June 13, 2024, the UK Government imposed a new round of asset-freezing sanctions on a number of notable Russian entities. The European Union is also considering a 14th package of sanctions measures relating to Russia, although as of this writing the EU has not yet enacted the new package.

New U.S. Sanctions

Prohibition on Certain Information Technology and Software Services

As part of the joint actions, OFAC issued a determination pursuant to the authority of Executive Order 14071 (the “IT and Software Services Determination”) that prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of (i) information technology (“IT”) consultancy and design services, and (ii) IT support services and cloud-based services for enterprise management software and design and manufacturing software (collectively, “Covered Software”) to any person located in the Russian Federation, unless licensed or otherwise authorized by OFAC. The IT and Software Services Determination is effective beginning at 12:01 eastern daylight time on September 12, 2024. “U.S. persons” include U.S. legal entities and their non-U.S. branches; U.S. citizens and lawful permanent residents, no matter where located or employed; and persons present in the United States.

Notably, the IT and Software Services Determination excludes the following with respect to services otherwise covered by the Determination: (1) any service to any entity located in the Russian Federation that is owned or controlled, directly or indirectly, by a U.S. person; (2) any service in connection with the wind down or divestiture of an entity located in the Russian Federation that is not owned or controlled, directly or indirectly, by a Russian person; and (3) any service for software that is: (i) subject to the EAR and for which the exportation, reexportation, or transfer (in-country) to the Russian Federation of such software is licensed or otherwise authorized by the Department of Commerce; or (ii) not subject to the EAR and for which the exportation, reexportation, or transfer (in-country) to the Russian Federation of such software would be eligible for a license exception or otherwise authorized by the Department of Commerce if it were subject to the EAR.

As summarized in its press release announcing the IT and Software Services Determination, OFAC concurrently issued public guidance on the IT and Software Services Determination. With respect to “IT consultancy and design services,” OFAC clarified that these include both IT consultancy services and IT design and development services for applications, consistent with United Nations’ Central Production Classification (“CPC”) Codes 83131 and 83141, respectively. See OFAC Frequently Asked Question (“FAQ”) 1187. IT consultancy services include providing advice or expert opinion on technical matters relating to the use of IT, such as: (a) advice on matters such as hardware and software requirements and procurement; (b) systems integration; (c) systems security; and (d) provision of expert testimony on IT-related issues. (These CPC standards have, notably, also been cited by the EU and UK authorities in relation to the IT consultancy sanctions previously implemented in the EU-Russia and UK-Russia sanctions.)

IT design and development services for applications include services of designing the structure and/or writing the computer code necessary to create and/or implement a software application, such as: (a) designing the structure of a web page and/or writing the computer code necessary to create and implement a web page; (b) designing the structure and content of a database and/or writing the computer code necessary to create and implement a database; (c) designing the structure and writing the computer code necessary to design and develop a custom software application; and (d) customization and integration, adapting, and installing an existing application so that it is functional within the clients’ information system environment. See OFAC FAQ 1187. In contrast, the retail sale of off-the-shelf software, falling under CPC Code 63252, would not be included within the meaning. See OFAC FAQ 1185.

As set out in OFAC FAQ 1185, examples of activities that could be prohibited as “IT consultancy and design services” under the IT and Software Services Determination include:

  • A U.S. company signing a contract with a Russian company to assist the Russian company in upgrading its IT systems, with the U.S. company advising on the kinds of software and hardware needed for the Russian company’s operations and how best to procure such technology;
  • A U.S. company working to modify existing web applications to be functional within a Russian company’s internal IT environment;
  • A U.S. service provider signing a contract with a Russian company for the design and engineering of custom-made software that the Russian company uses for internal purposes; and
  • A U.S. person working at a third country-company signing a contract with a Russian company to design the structure of the Russian company’s sales website.

With respect to “IT support services” and “cloud-based services” for Covered Software, OFAC indicated that “cloud-based services” would include the supply of software and associated services via the internet or the cloud, including through Software-as-a-Service (“SaaS”). “IT support services,” defined consistent with CPC Code 83132, includes: (1) providing technical expertise to solve problems for clients in using software, hardware, or an entire computer system; and (2) providing technical expertise to solve specialized problems for the client in using a computer system. See OFAC FAQ 1187.

Examples of such activities that could be prohibited include:

  • A U.S. company selling a cloud-based enterprise resource planning software subscription to a Russian company;
  • A U.S. employee of a third-country company providing customer support services to a Russian company that is experiencing technical difficulties with its human resources software; and
  • A U.S. company providing a software patch to a Russian company to fix a bug in its computer-aided design software. See OFAC FAQ 1186.

Under the IT and Software Services Determination, Covered Software includes the term “enterprise management software,” which means the following types of software: enterprise resource planning (“ERP”), customer relationship management (“CRM”), business intelligence (“BI”), supply chain management (“SCM”), enterprise data warehouse (“EDW”), computerized maintenance management system (“CMMS”), project management, and product lifecycle management (“PLM”) software. Covered Software also includes the term “design and manufacturing software,” which means the following types of software: building information modeling (“BIM”), computer aided design (“CAD”), computer-aided manufacturing (“CAM”), and engineer to order (“ETO”) software. See OFAC FAQ 1187.

The categories of software identified as Covered Software generally parallel those software categories included in the European Union’s 12th package of sanctions introduced on December 21, 2023, targeting Russia that were listed in Annex XXXIX to Council Regulation No. 833/2014, which we described in greater detail in our December 21, 2023 client alert.

OFAC has indicated that the aim of the IT and Software Services Determination is not to prohibit all activity relating to the provision of IT and software-related services to Russia. Indeed, General License No. 6C was amended, and is now General License No. 6D, so as not to prohibit transactions covered by the Determination that otherwise fall within the scope of the general license, which authorizes certain activities related to agricultural commodities, medicine, and medical devices. Moreover, General License No. 25D authorizes certain transactions ordinarily incident and necessary to the receipt or transmission of telecommunications involving the Russian Federation and the provision of certain services incident to the exchange of communications over the internet, subject to certain restrictions. See OFAC FAQ 1184.

Sanctions Targeting Russian Financial Infrastructure and Evasion Concerns

In conjunction with the Department of State, OFAC also targeted for property-blocking sanctions by adding to its List of Specially Designated Nationals and Blocked Persons (“SDN List”) more than 300 individuals and entities both in and outside of Russia in connection with their ongoing support for Russia’s war campaign in Ukraine. These included individuals and entities across Russia, Belarus, the British Virgin Islands, Bulgaria, Kazakhstan, the Kyrgyz Republic, China, Serbia, South Africa, Turkiye, and the United Arab Emirates that were sanctioned for aiding Russia’s efforts to evade sanctions or for operating or having operated in the defense and related materiel, manufacturing, technology, transportation, or financial services sectors of the Russian federation economy. U.S. persons are broadly prohibited from transacting or dealing with SDNs and entities that SDNs own 50 percent or more, directly or indirectly, individually or in the aggregate, with other SDNs, absent authorization from OFAC. In addition, the property of such sanctioned persons must be blocked and reported to OFAC when it is in the United States or in the possession or control of a U.S. person.

Of note, the Moscow Exchange (“MOEX”), the National Clearing Center (“NCC”), the Non-Bank Credit Institution Joint Stock Company National Settlement Depository (“NSD”), Gas Industry Insurance Company Sogaz (“Sogaz”), and Joint Stock Company Russian National Reinsurance Company (“RNRC”) were designated for property-blocking sanctions pursuant to Executive Order 14024. Public reporting has indicated that, as a result of these measures, MOEX has suspended trading of U.S. dollars and euros on the exchange.

OFAC issued the following General Licenses in connection with these newly issued sanctions:

  • General License No. 98 – authorizes the wind down of certain transactions involving one or more of the following newly blocked entities: Aviatech FZC; Beijing Deepcool Industries Co., Ltd.; Guangdong Pratic CNC Technology Co., Ltd.; Joint Stock Company Uralredmet; Joint Stock Company Goznak; Limited Liability Company Elga Story Mining Services; Limited Liability Company Elgaugol; Limited Liability Company Management Company Elga; Limited Liability Company Koulstar; Max Jet Service Limited Liability Company; Mile Hao Xiang Technology Co. Ltd.; Platin Group Machine Manufacturing International Company Limited; Public Joint Stock Company Seligdar; Shandong Oree Laser Technology Co. Ltd; Wuhan Tianyu Information Industry Co. Ltd.; or any entity in which one or more of these persons own, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest. This authorization expires at 12:01 a.m. eastern daylight time on July 27, 2024.
  • General License No. 99 – authorizes the wind down of certain transactions involving MOEX, NCC, and NSD, or any entity in which one of these entities owns, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest, as well as certain transactions related to the divestment to non-blocked, non-U.S. persons of debt or equity issued or guaranteed by, or derivative contracts involving, these entities. This authorization expires at 12:01 a.m. eastern daylight time on August 12, 2024.
  • General License No. 100 – authorizes certain transactions for the divestment to non-blocked, non-U.S. persons of debt or equity, or for the conversion of currencies, involving MOEX, NCC, and NSD, or any entity in which one of these entities owns, directly or indirectly, individually or in the aggregate, a 50 percent or greater interest solely as a securities, trade, or settlement depository, central counterparty or clearing house, or public trading market. GL 100 is intended to cover the divestment of debt or equity of non-blocked companies that may be traded on or through one these entities in their capacity as a securities, trade, or settlement depository, central counterparty or clearing house, or public trading market. This authorization expires at 12:01 a.m. eastern daylight time on August 12, 2024.

Secondary Sanctions Risks Under Executive Order 14024

OFAC further expanded, through OFAC FAQs 1147 and 1148, the definition of Russia’s military-industrial base to include all persons blocked pursuant to Executive Order 14024. Under Executive Order 14024, as amended by Executive Order 14114, the Secretary of the Treasury, in consultation with the Secretary of State and Secretary of Commerce, may impose on a foreign financial institution certain sanctions if it is determined that the foreign financial institution has conducted or facilitated any significant transaction, or provided any service, involving Russia’s military-industrial base (as discussed in detail in our January 2, 2024 client alert). In light of this recent action, foreign financial institutions risk being sanctioned for conducting or facilitating a significant transaction or providing any service involving any person blocked pursuant to Executive Order 14024, including designated Russian banks such as VTB Bank Public Joint Stock Company and Public Joint Stock Company Sberbank of Russia.

The practical effect of this development may be limited by the fact that Executive Order 14024 had already provided authorization for the Secretary of the Treasury, in consultation with the Secretary of State, to designate for property-blocking sanctions any person determined to have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to this order. However, this action reflects OFAC’s focus on clarifying and emphasizing the risks that foreign financial institutions in particular face by providing services and/or facilitating significant transactions involving Russia’s designated banks or any other person subject to property-blocking sanctions under Executive Order 14024, and thus may have a broad impact if non-U.S. banks refuse to process a greater range of transactions involving Russia.

In connection with this development, OFAC issued public guidance emphasizing that legitimate humanitarian activity and agricultural and medical trade are not the target of these actions. As such, foreign financial institutions may continue to conduct or facilitate any transactions or provide any service related to activities that are otherwise authorized or exempt under the Russian Harmful Foreign Activities Sanctions Regulations (“RuHSR,” 31 CFR Part 587), and do not risk the imposition of sanctions for engaging in such transactions as are authorized for U.S. persons under the general licenses issued under the RuHSR. See OFAC FAQ 1182.

New U.S. Export Controls

In parallel with the OFAC actions described above, BIS issued a new rule (the “June 12 BIS Rule”) imposing new export controls intended to restrict trade in more items destined to Russia and Belarus and to crack down on illicit diversion to Russia of items subject to the EAR. Except as noted below, each of these controls took effect on June 12, 2024. The new controls, as well as recent related BIS actions, are summarized below.

Expansion of EAR99 Items Requiring BIS Licensing for Russia and Belarus

The June 12 BIS Rule expanded further the range of otherwise non-sensitive EAR99 items subject to BIS licensing requirements for export, reexport, or transfer (in-country) to or within Russia or Belarus under Supplement Nos. 4 and 6 to EAR Part 746. These changes were made to further undermine the Russian and Belarusian industrial bases and their ability to continue to support Russia’s military aggression in Ukraine.

With respect to Supplement No. 4, BIS added 522 additional Harmonized Tariff Schedule (“HTS”) Code entries including for certain mineral and metal products; vehicles, aircraft, vessels, and associated transport equipment; parts and accessories for arms and ammunition; and miscellaneous manufactured articles. With the addition of these 522 HTS Codes, Supplement No. 4 now covers items subject to the EAR and classified under all HTS Codes in 18 additional HTS chapters (for a total of 22 HTS chapters that BIS now controls for export, reexport, or transfer to or within Russia or Belarus). BIS explained that this expansion is intended to prevent situations where someone could seek to circumvent license requirements by changing the classification of an item that requires a license to the classification of an item in a similar HTS Code that does not require a license.

BIS also added a new paragraph (h) to Supplement No. 6 to EAR Part 746 to require licensing for certain riot control agents. BIS explained that these chemicals meet the definition of riot control agents under Article II, Paragraph 7 of the Chemical Weapons Convention. Their addition to Supplement No. 6 is intended to supplement existing Commerce Control List (“CCL”) controls under Export Control Classification Numbers (“ECCN”) 1A984 and 1C607 to address Russia’s use of riot control agents as a method of warfare against Ukrainian forces in violation of the Chemical Weapons Convention.

Moreover, the June 12 BIS Rule added language in each of Supplement Nos. 2, 4, 5, and 7 to EAR Part 746 to clarify the scope of the exclusion from these supplements for fasteners (e.g., screws, bolts, nuts, nut plates, studs, inserts, clips, rivets, or pins). Specifically:

  • A sentence was added to the introductory language of each supplement specifying that the exclusion of fasteners from the scope of each supplement does not apply to fasteners that are designated under an HTS Code that is specified in that supplement;
  • The word “generally” was added before the term “fasteners” in each supplement to clarify that the exclusion for fasteners has limits; and
  • The rule clarified that in all cases a washer, spacer, insulator, grommet, bushing, spring, wire, or solder is excluded from the scope of these supplements regardless of the HTS Code or HTS description.

New License Requirement for Certain Software Destined to or Within Russia or Belarus

In conjunction with the forthcoming OFAC prohibition on the provision by U.S. persons to persons located in Russia of certain IT- and software-related services as described above, BIS will impose—effective on or about September 16, 2024 (90 days after publication of the June 12 BIS Rule in the Federal Register, which is scheduled to occur on June 18, 2024)—a new license requirement at EAR § 746.8(a)(8) for the export, reexport, or transfer (in-country) to or within Russia or Belarus of certain software subject to the EAR. This new license requirement will apply to the same types of enterprise management and design and manufacturing software as are relevant to the OFAC prohibitions described above: enterprise resource planning (“ERP”); customer relationship management (“CRM”); business intelligence (“BI”); supply chain management (“SCM”); enterprise data warehouse (“EDW”); computerized maintenance management system (“CMMS”); project management software, product lifecycle management (“PLM”); building information modelling (“BIM”); computer aided design (“CAD”); computer-aided manufacturing (“CAM”); and engineering to order (“ETO”). No license exceptions will be available to overcome this license requirement, which also will apply to software updates for covered software that are subject to the EAR and classified as EAR99.

Neither BIS nor OFAC has yet provided any guidance on how each of these specific types of software is defined. Experience with restrictions on the similar scope of software under the EU 12th sanctions package suggests that the agencies could view each category of software broadly, to cover a range of software products ordinarily used in the business context. Moreover, while the preamble to the June 12 BIS Rule and the heading of new EAR § 746.8(a)(8) suggest that this new license requirement will apply only to covered software that is classified as EAR99, the text of new EAR § 746.8(a)(8) does not contain this limitation; BIS has in the past taken the position that headings and preambular text are not controlling and that regulatory text governs.

Notably, this new software license requirement will not apply to EAR99-designated software destined to “entities engaged exclusively in the agriculture or medical industries.” However, BIS also has not yet provided any guidance on what it means by the terms “exclusively” or the “agriculture or medical industries.”

Moreover, the existing carveout from the EAR § 746.8(a)(1) license requirements for certain mass market encryption commodities and software classified under ECCNs 5A992.c and 5D992.c will be expanded to include EAR99-designated enterprise management and design and manufacturing software and software updates, if such software is destined for the following civil end users in Russia or Belarus:

  • Wholly-owned U.S. subsidiaries, branches, or sales offices;
  • Joint ventures between two or more U.S. companies, including the wholly-owned subsidiaries, branches, or sales offices of such joint ventures;
  • Joint ventures between U.S. companies and companies headquartered in Country Groups A:5 and A:6 in Supplement No. 1 to EAR Part 740, including the wholly-owned subsidiaries, branches, or sales offices of such joint ventures;
  • Wholly-owned subsidiaries, branches, or sales offices of companies headquartered in Country Groups A:5 and A:6; or
  • Joint ventures between two or more companies headquartered in Country Groups A:5 and A:6, including the wholly-owned subsidiaries, branches, or sales offices of such joint ventures.

These carveouts from BIS license requirements for the provision of such software should reasonably be considered “authorization” from BIS for purposes of the carveout from the OFAC IT- and software-services related provisions discussed above. Moreover, these carveouts provide avenues for the provision of covered software (if designated EAR99) to entities exclusively in the agricultural and medical sectors, and to the Russian affiliates and joint ventures of companies headquartered in the United States and Country Groups A:5 and A:6, which are not available under the EU 12th sanctions package.

Revisions to the Scope of License Exception CCD and Confirmation of the Standard for Revising, Suspending, or Revoking a License Exception

The June 12 BIS Rule revised the scope of eligible commodities and software subject to the EAR that may be authorized for export, reexport, or transfer (in-country) to and within Russia or Belarus under License Exception Consumer Communications Devices (“CCD”) at EAR § 740.19. Specifically, only commodities and software identified in reorganized paragraphs (b)(1) through (b)(8) of License Exception CCD are eligible for export and reexport to Russia and Belarus, as well as Cuba. Commodities and software now identified in paragraphs (b)(9) through (b)(17) of License Exception CCD—e.g., lower-level graphics processing units—are only eligible for export or reexport to Cuba. BIS explained that the redesignation of these paragraphs was intended to make it easier for exporters, reexporters, and transferors to identify the commodities and software that may be eligible for License Exception CCD for export to each of the three eligible countries.

The June 12 BIS Rule did not substantively revise the scope of eligible items in paragraphs (b)(1) through (b)(17), except for former paragraph (b)(15) (“batteries, chargers, carrying cases, and accessories for the equipment described in paragraphs (b)(1) through (5) of this section that are designated EAR99”) which is now separated into two paragraphs, the items in one of which are eligible for export or reexport to Russia and Belarus and the items in the other paragraph which are not.

The new rule also did not change any of the other requirements for reliance on License Exception CCD, including the scope of eligible and ineligible end users under paragraph (c).

Separately, the June 12 BIS Rule revised paragraph (b) of EAR § 740.2 (Restrictions on All License Exceptions) to clarify the standard under which BIS may revise, suspend, or revoke a license exception, in whole or in part, without notice. Specifically, the revised text confirms and makes explicit that BIS may make such revisions, suspensions, or revocations—applicable either as to specific entities (including natural persons) or to all transactions involving a particular destination—to protect U.S. national security or foreign policy interests, consistent with the policy considerations in § 1752 of the Export Control Reform Act of 2018 (“ECRA,” 50 U.S.C. § 4811).

Revisions to the Entity List Structure and Entity List Designations

Significantly, BIS revised EAR § 744.16, which describes the license requirements, license exceptions, and license review policy for parties on the Entity List, to add a new paragraph (f), which authorizes BIS to identify addresses (not just entities) that present a high risk of diversion to Russia, without designating a specific entity name in connection with such addresses. Previously, the Entity List license requirements applied only to the entity listed by name on the Entity List; as a result of the June 12 BIS Rule, among other conforming revisions, BIS revised EAR § 744.11(a) such that the license requirement for an address-only entry on the Entity List will apply to all entities using that address.

BIS explained that this change in its Entity List designation approach is intended to target diversion to Russia via international transshipment through shell companies, which rely on service providers to supply addresses that can be listed on corporate paperwork and mailboxes where the shell companies can receive shipments. BIS further explained that it typically identifies shell companies on the Entity List at the address of these service providers, but that some of these addresses present a high risk of diversion for controlled items such that the addresses themselves merit designation. Accordingly, and consistent with prior BIS guidance, BIS indicated in the June 12 BIS Rule that when a party to a transaction uses the same address as (e.g., is co-located with) a listed entity, the address is a red flag and the exporter, reexporter, or transferor must undertake sufficient due diligence to verify that the entity co-located with the listed entity is not, in fact, the listed entity and is not acting on behalf of the listed entity.

In conjunction with this revision, BIS for the first time added to the Entity List eight addresses, without designating a corresponding entity name. Each of these addresses, all based in Hong Kong, was determined to be associated with significant transshipment of sensitive goods to Russia. BIS licenses will be required for all entities at these addresses for all items that are subject to the EAR and identified on the CCL or in Supplement No. 7 to EAR Part 746, which is comprised of various items (including EAR99 items) identified in HTS Chapters 84, 85, 88, and 90. BIS explained that these addresses are associated with a significant number of entities, whose activities risk violating the EAR through association with parties on the Entity List or the Unverified List at the listed addresses. Additionally, it is worth noting that each of the newly listed addresses is already associated with a pre-existing Entity List designation, and each appears to be affiliated with corporate service providers in Hong Kong.

Additionally, BIS added to the Entity List three entities in China and one entity in Russia with a “footnote 3” designation because it determined that these entities are Russian or Belarusian “military end users” as defined in EAR § 744.21. Each of these entities was determined to have procured components, including U.S.-origin components, that are used to develop and produce Shahed-series unmanned aerial vehicles (“UAVs”) used by Russia on the battlefield in Ukraine, or to have otherwise contributed to and supported the Russian military and defense sectors and companies that have been added to the Entity List or the SDN List. Exports, reexports, and transfers of items subject to the EAR to these entities, or where these entities are a party to the transaction, will require BIS licensing. Further, each of these entities will be subject to the Russia/Belarus Military End User FDP Rule at EAR § 734.9(g).

BIS also designated to the Entity List one additional entity in China—Shenzhen Daotong Intelligent Aviation Technology Co., Ltd.—for shipping controlled items to Russia after February 2022 and acquiring and attempting to acquire U.S.-origin items applicable to UAVs to be used by Chinese military entities.

Savings Clause

The June 12 BIS Rule contains a savings clause for 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 the June 12 BIS Rule that were en route aboard a carrier to a port of export, reexport, or transfer (in-country) on June 12, 2024, pursuant to actual orders for export, reexport, or transfer (in-country) to or within a foreign destination. Such items may proceed to that destination under the previous eligibility for a license exception or export, reexport, or transfer (in-country) without a license, provided that the export, reexport, or transfer (in-country) is completed no later than on July 12, 2024.

Note that items that require licensing for export, reexport, or transfer to or within Russia or Belarus under the new software controls are not eligible for a savings clause because that license requirement does not take effect until 90 days after publication of the rule in the Federal Register.

Consolidation of Export Controls Targeting Russia and Belarus into a Single Section of the EAR

Finally, the June 12 BIS Rule consolidated the EAR license requirements for exports, reexports, and transfers (in-country) to or within Russia or Belarus—which previously were located in EAR §§ 746.5 (for a variety of industrial goods), 746.8 (for items subject to the EAR and identified on the CCL and items subject to the EAR under one of the Russia- and Belarus-related foreign-direct product (“FDP”) rules), and 746.10 (for “luxury goods”)—into one section at EAR § 746.8. BIS explained that this consolidation was undertaken because of the increasingly wide-ranging and complex nature of the export control measures against Russia and Belarus, and suggested that doing so should enhance clarity and facilitate compliance. Revised and expanded EAR § 746.8 now contains:

  • At EAR § 746.8(a)(1)-(3), license requirements formerly in EAR § 746.8;
  • At EAR § 746.8(a)(4)-(6), license requirements formerly in EAR § 746.5; and
  • At EAR § 746.8(a)(7), license requirements formerly in EAR § 746.10.

The applicable supplements identifying items subject to industry sector sanctions (Supplement Nos. 2, 4, and 6 to EAR Part 746) and “luxury goods” sanctions (Supplement No. 5 to EAR Part 746) remain in effect “for now.” BIS stated that, because controls on “luxury goods” destined for certain Russian and Belarusian oligarchs and malign actors worldwide were removed from EAR § 746.10 and added to EAR § 744.8 on March 21, 2024 (pursuant to a separate rule, as described in our April 2, 2024 client alert), the license requirements for “luxury goods” now are effectively the same destination-based controls that apply to items identified in Supplement Nos. 2, 4, and 6. BIS indicated that it may therefore in the future consider consolidating these three lists into one supplement. Additionally, to assist with compliance, BIS is posting a list of all HTS codes set forth in Supplement Nos. 2, 4, and 5 to EAR Part 746 in downloadable XML format.

BIS also consolidated into EAR § 746.8(a)(12) existing exclusions from license requirements for:

  • Certain deemed exports or reexports;
  • Certain transactions involving mass market encryption commodities and software destined to companies headquartered in the United States or in Country Groups A:5 and A:6 (as discussed above in the context of the new software license requirements); and
  • Exports, reexports, and transfers (in-country) originating in the Global Export Control Coalition (“GECC”) member countries identified in Supplement No. 3 to EAR Part 746.

Further, the June 12 BIS Rule moved the order of review for the various Russia- and Belarus-related license requirements to the revised § 746.8(a) introductory text; consolidated applicable licensing policies into revised EAR § 746.8(b); combined license exception availability into revised EAR § 746.8(c); and made various conforming changes to revise references to former EAR §§ 746.5 and 746.10 to refer to the corresponding sections of revised EAR § 746.8.

Other Recent BIS Actions

Issuance of Temporary Denial Orders

In addition to the EAR revisions described above, BIS recently issued two Temporary Denial Orders (“TDOs”) against two Russian procurement networks—(1) Turboshaft FZE and associated entities and individuals, and (2) SkyTechnic and associated entities and individuals—for facilitating exports of aircraft parts to Russia through third countries in violation of U.S. export controls. TDOs deny the subject parties the right to export items subject to the EAR from the United States and the ability to receive or participate in exports from the United States or reexports of items subject to the EAR.

“Is Informed” Notifications

In its press release announcing the June 12 BIS Rule, BIS indicated that it recently used its existing “is informed” authority to notify over 130 U.S. distributors of additional restrictions on shipments to parties known to be supplying items to Russia. These actions focused on disrupting the flow of U.S. and foreign-produced electronic components destined to Russia through intermediaries and build on BIS’s ongoing efforts to crack down on shipments of high-priority items to Russia.

Potential Future Entity List Designations

Finally, in its June 12 press release, BIS stated that, “to further impair Russia’s diversion efforts, BIS will more extensively target foreign companies who supply U.S.-branded products to Russia through Entity List additions and other related actions. Products of U.S.-headquartered companies are often reliant on U.S. technology, software or tooling, and even though they may not be of U.S.- origin, they may nonetheless be subject to U.S. jurisdiction.” This suggests that BIS may consider Entity List designations for non-U.S. companies that are selling U.S.-branded products to Russia, particularly where such products are subject to the EAR.

European Sanctions Developments

Coinciding with the new U.S. measures, on June 13, 2024, the UK Government imposed a new round of asset-freezing sanctions in relation to Russia. The new measures target a number of notable Russian entities, including the major Russian insurance company Ingosstrakh, the Moscow Exchange Group, the National Settlement Depositry, other entities involved in the Russian financial system, and persons/entities involved in the maritime, civil nuclear, industrial/electronics, energy, and defense sectors.

Separately, the European Union reportedly is considering a 14th package of EU sanctions against Russia, which could introduce (among other measures) new prohibitions relating to LNG imports and new provisions intended to further restrict actions that result in the circumvention of EU sanctions. The EU Council has, however, not yet agreed on the final text of the new package. The timing of its passage is unclear, although reports suggest that the new measures could be implemented in the coming days or weeks.

*           *           *

We are closely monitoring developments concerning the U.S., UK, and EU sanctions against Russia, and will issue further updates in the event of material developments. In the meantime, we would be happy to address any questions you may have.

Covington’s International Trade Controls team—which includes lawyers in the firm’s offices in the United States, London, and Frankfurt—regularly advises clients across business sectors, and would be well-placed to provide support in connection with the evolving Russia sanctions. Our trade controls lawyers also work regularly with Covington’s Global Public Policy team—consisting of over 120 former diplomats and policymakers in the United States, Europe, the Middle East, Latin America, Africa, and Asia—many of whom have had substantial government experience in sanctions and export controls matters, and who regularly advise our clients on emerging sanctions policy matters and related engagements with government stakeholders. Moreover, as the Ukraine crisis continues to unfold, Covington is exceptionally well-positioned to assist clients in navigating their most complex challenges, drawing on the multidisciplinary capabilities of additional practices in areas such as international arbitration and disputes, cybersecurity, anti-money laundering, insurance, and corporate restructuring.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls practice.

Photo of Peter Flanagan Peter Flanagan

Peter Flanagan counsels clients on a broad range of compliance requirements affecting international trade and investment. These include most notably export controls, economic sanctions constraints, defense trade limitations, and the implications of related non-U.S. requirements. He also has experience in financial services regulation.…

Peter Flanagan counsels clients on a broad range of compliance requirements affecting international trade and investment. These include most notably export controls, economic sanctions constraints, defense trade limitations, and the implications of related non-U.S. requirements. He also has experience in financial services regulation.

Mr. Flanagan has advised leading companies in the oil and gas sector, pharmaceutical and medical technology companies, defense contractors, manufacturing entities, financial institutions and private equity firms, software and high-technology concerns, and university-affiliated laboratories. Consistently ranked as a top-tier practitioner, Mr. Flanagan has deep experience in assisting multinational clients with complex compliance, enforcement, and licensing matters before the key U.S. trade controls agencies, including the U.S. Departments of Treasury, Commerce, and State.

Photo of Kimberly Strosnider Kimberly Strosnider

Co-chair of the firm’s International Trade Controls practice group, Kim Strosnider advises companies on the application of international trade controls, including export controls, economic sanctions, and antiboycott laws and regulations.

A vice-chair of the firm’s International Trade and Finance practice group, Ms. Strosnider…

Co-chair of the firm’s International Trade Controls practice group, Kim Strosnider advises companies on the application of international trade controls, including export controls, economic sanctions, and antiboycott laws and regulations.

A vice-chair of the firm’s International Trade and Finance practice group, Ms. Strosnider counsels clients across a range of industries on trade control matters, including resolving complex compliance, enforcement, licensing, and jurisdiction/classification issues. She regularly advocates for clients before the key trade controls agencies, including the U.S. Departments of State, Commerce, and Treasury.

Photo of David Lorello David Lorello

David Lorello is a partner in the firm’s London office and serves as a vice chair of the firm’s International Trade and Finance practice group.  Mr. Lorello advises clients concerning a range of international regulatory, white collar, and commercial matters under both European…

David Lorello is a partner in the firm’s London office and serves as a vice chair of the firm’s International Trade and Finance practice group.  Mr. Lorello advises clients concerning a range of international regulatory, white collar, and commercial matters under both European and U.S. laws.  Mr. Lorello is recognized in the leading peer review publications for his work on trade controls and anti-corruption compliance and investigations matters, with Chambers Global describing Mr. Lorello as a “compliance authority” in those areas.

Anti-Corruption Compliance and Investigations

Mr. Lorello regularly assists clients in investigating anti-corruption compliance issues arising under the U.S. Foreign Corrupt Practices Act (FCPA), the UK Bribery Act and other related U.S., UK, and European anti-bribery and anti-money laundering laws.Mr. Lorello has particular experience in managing corporate investigations and developing anti-corruption compliance programs for companies operating in Europe, including coordinating advice concerning parallel risks under U.S. and European anti-corruption laws, advising clients concerning European criminal enforcement and debarment risks, and ensuring compliance with European data protection and workplace laws in the course of investigations and compliance matters.

Mr. Lorello also regularly represents clients before the World Bank, and other international financial institutions, in debarment proceedings concerning allegations of corrupt practices in connection with contracts financed by those institutions. In addition, Mr. Lorello advises clients concerning the commercial liability risks arising from corrupt practices, including private rights of action that may arise for parties that suffer losses as a result of corrupt practices.

Export Controls and Economic Sanctions

Mr. Lorello regularly represents clients before the major agencies responsible for export controls and economic sanctions laws and regulations, both in the United States and European Union. He has assisted clients in export and sanctions licensing and compliance issues with regard to a variety of industries and products, including encryption and other computer technologies, satellites, oil and gas products, military items, and other goods and technology controlled for export due to national security reasons. Mr. Lorello has extensive experience assisting clients in developing effective export compliance strategies, including preparing export license requests, voluntary self-disclosures and intra-company agreements as well as policies necessary to ensure export controls and economic sanctions compliance.

Mr. Lorello has particular experience in assisting clients in economic sanctions matters relating to the financial services industry. He has represented financial services clients in various matters before U.S. and EU Member State regulators, and he has worked with financial services clients in developing tailored internal controls focused on economic sanctions compliance.

Photo of Lisa Peets Lisa Peets

Lisa Peets leads the Technology Regulatory and Policy practice in the London office and is a member of the firm’s Management Committee. Lisa divides her time between London and Brussels, and her practice embraces regulatory counsel and legislative advocacy. In this context, she…

Lisa Peets leads the Technology Regulatory and Policy practice in the London office and is a member of the firm’s Management Committee. Lisa divides her time between London and Brussels, and her practice embraces regulatory counsel and legislative advocacy. In this context, she has worked closely with leading multinationals in a number of sectors, including many of the world’s best-known technology companies.

Lisa counsels clients on a range of EU law issues, including data protection and related regimes, copyright, e-commerce and consumer protection, and the rapidly expanding universe of EU rules applicable to existing and emerging technologies. Lisa also routinely advises clients in and outside of the technology sector on trade related matters, including EU trade controls rules.

According to the latest edition of Chambers UK (2022), “Lisa is able to make an incredibly quick legal assessment whereby she perfectly distils the essential matters from the less relevant elements.” “Lisa has subject matter expertise but is also able to think like a generalist and prioritise. She brings a strategic lens to matters.”

Photo of Stephen Bartenstein Stephen Bartenstein

Steve Bartenstein advises companies on the application of international trade controls, including export controls, sanctions, and antiboycott laws and regulations. Mr. Bartenstein also is a litigator with experience representing clients in complex and high-stakes civil litigation, including antitrust matters.

Seth Atkisson

Seth Atkisson advises clients on all aspects of U.S. trade controls, including economic sanctions and dual-use and defense export controls, as well as business transactions before the Committee on Foreign Investment in the United States (CFIUS).

Seth represents clients before a number of…

Seth Atkisson advises clients on all aspects of U.S. trade controls, including economic sanctions and dual-use and defense export controls, as well as business transactions before the Committee on Foreign Investment in the United States (CFIUS).

Seth represents clients before a number of U.S. governmental bodies, including the Department of Justice, the Treasury Department’s Office of Foreign Assets Control (OFAC), the Commerce Department’s Bureau of Industry and Security (BIS), and the Department of State’s Directorate of Defense Trade Controls (DDTC).

In addition to his work before the government, Seth advises clients on the design and implementation of trade controls compliance programs and has performed trade controls-related due diligence in connection with many mergers, acquisitions, and capital markets transactions.

Photo of Caroline Garth Caroline Garth

Caroline Garth is an associate in the International Trade Practice Group who regularly advises clients on the application of international trade controls, including economic sanctions and export controls laws and regulations administered by the U.S. Departments of State, Commerce, and Treasury. She has…

Caroline Garth is an associate in the International Trade Practice Group who regularly advises clients on the application of international trade controls, including economic sanctions and export controls laws and regulations administered by the U.S. Departments of State, Commerce, and Treasury. She has also performed trade controls-related due diligence and prepared submissions for regulatory approvals in connection with M&A transactions. Caroline further has experience representing clients in antidumping and countervailing duty investigations conducted by the U.S. Department of Commerce and the U.S. International Trade Commission, as well as related litigation before the U.S. Court of International Trade.

Photo of Kevin Zhou Kevin Zhou

Kevin Zhou is an associate in the firm’s International Trade Controls group. He advises clients across industries on a broad range of international trade control issues, including economic sanctions and export control laws, in regulatory, enforcement, and transactional matters.
Previously, Kevin served in…

Kevin Zhou is an associate in the firm’s International Trade Controls group. He advises clients across industries on a broad range of international trade control issues, including economic sanctions and export control laws, in regulatory, enforcement, and transactional matters.
Previously, Kevin served in the Office of the Secretary of Defense as Country Director for India and Sri Lanka Policy where his portfolio included U.S.-India defense trade issues, among others. He was presented with the Under Secretary of Defense Award for Excellence in 2016 for his role in the development and execution of the U.S.-India Defense Technology and Trade Initiative (“DTTI”). He entered government service as a Presidential Management Fellow.