Introduction

In response to the Russian Federation’s invasion of Ukraine, President Biden issued two new Executive Orders, and both the Department of Commerce’s (DOC) Bureau of Industry and Security (BIS) and the Department of Treasury’s Office of Foreign Assets Control (OFAC) announced severe export restrictions and sanctions designed to cripple Russia’s economy and penalize its unwarranted and illegal attack against a sovereign nation. Beginning on February 24, 2022, the Commerce and Treasury Departments have issued a series of press releases and most importantly, new designations, rules, and license requirements. In addition to being anxiety provoking for many compliance professionals, the speed at which the new announcements of regulations were being made caused many to halt exports altogether. It would be a mistake, however, for companies to think that halting exports to Russia and Belarus would be sufficient. As is often the case, companies added to the Department of Commerce’s Entity List have offices in several locations despite being headquartered in a country where there is a total, or near total, embargo. Indeed, the Department of Commerce has added more than 150 entities to their Entity List since February 24^th located in 13 countries. Prohibited end-users will utilize front companies located in countries with less severe export restrictions and transshipment routes to get U.S. goods and evade sanctions. Consequently, U.S. authorities will likely be more closely scrutinizing exports to countries like China (one of Russia’s largest trading partners) and Turkey, which may be used to transship parts to Russia.

OFAC’s economic sanctions have broad and sweeping implications for companies as they have targeted both the banking and energy sectors. For instance, they bar U.S. persons and U.S. companies from engaging in any transactions or dealing in the assets of Central Bank of Russia or any other designated entity or person (referred to as a Specially Designated National (SDN). Additionally, under OFAC’s 50 percent rule, U.S. companies are prohibited from doing business with any foreign entity in which a SDN has a direct or indirect interest of 50% or more.

The Biden-Harris Administration has made clear that it intends to use the whole-of-government approach to address Russia’s threat to the national security and foreign policy interests of the United States. Accordingly, the Department of Justice (DOJ) and law enforcement agencies will undoubtedly be vigorously investigating any violations of these new sanctions. As described below, there will be a coordinated and significant law enforcement effort designed to uncover violations and sanctions evasion, and companies need to take steps now to ensure they do not become an investigative target. Criminal violations of OFAC’s Economic Sanctions and the new Russian and Belarus export control restrictions incorporated into the Export Administration Regulations (EAR) carry a statutory maximum of 20 years’ imprisonment.^[1] On March 7, 2022, FinCEN issued an advisory to assist in the enforcement effort. It advised all financial institutions to identify potential sanctions evasion activities and quickly report such suspicious activity using the key term – “FIN-2022-RUSSIASANCTIONS.”

Additionally, because the standard for civil liability for violating economic sanctions is strict liability, companies face a high likelihood of severe civil penalties for even negligent violations of the economic sanctions and the possibility of debarment. The importance of effective compliance programs cannot be overstated at this time.

The purpose of this advisory is to provide (1) a summary of the export control restrictions and new sanctions; (2) a description of how violations of the new regulations will likely be identified and prosecuted; and (3) practical compliance tips that will minimize your company’s criminal and civil liability.

Summary of New DOC/BIS and OFAC Sanctions

The United States, Europe, and its allies have imposed financial and export-based sanctions against Russia, Belarus, and two regions of Ukraine (Donetsk People’s Republic and Luhansk People’s Republic).

BIS NEW RULES BAR THE EXPORT OF VIRTUALLY ALL U.S. GOODS TO RUSSIA AND BELARUS.

Beginning on February 24, 2022, the Commerce Department imposed several significant and complex export restrictions on exports to Russia and Belarus on items that were previously uncontrolled. See DOC Factsheet updated 3/11/22. With very few exceptions, the new rules make it illegal to export any U.S. manufactured parts, software or technology, or foreign products that contain U.S. components or technologies, or were created using U.S. software or tools, to Russia or Belarus. BIS imposed a new license requirement, with a presumption of license denial, for all items in Categories 3-9 of the Commerce Control List (CCL). This includes items such as microelectronics, commercial aircraft components, and telecommunications items and navigation equipment.

Additionally, BIS implemented two new foreign “direct product” rules related specifically to Russia and expanded the military end-user/end-user rule contained in Section 744.21 of the EAR. Under the Russian Foreign Direct Product rule (FDP), foreign-produced items will require an export license if they are produced using any U.S. origin technology, software, or equipment, that is controlled on the CCL (i.e., not EAR99 items), and there is knowledge that they are destined for export to Russia or Belarus. The second rule extends the FDP rule to Russian Military End-Users (MEU). Under this rule, an export license is required for the export of ANY foreign-produced items (with limited exceptions) that are made or developed using U.S. origin technology, software, or equipment if there is knowledge that one of the newly identified Russian and Belarusian MEUs on the Entity List is involved in the transaction, whether directly or indirectly. Here again, there will be a presumption of denial of any license application for Russia or Belarus.

Commerce expanded the scope of the existing military end-user/end-use rule contained in Section 744.21 for its application to Russia and Belarus. Unlike other countries like China, the Russian MEU rule constitutes a complete ban on all items, including EAR99 items, going to Russian MEUs, except for food and medicine, unless the food or medicine is going to Russian “government end users” and Russian state-owned enterprises. A further ban on all items subject to the EAR, including EAR99 items, extends to the “Covered Regions of Ukraine,” which include the “Donetsk People’s Republic (DNR) region” and the “Luhansk People’s Republic (LNR) region,” as well as the “Crimea region of Ukraine.” While OFAC has issued general licenses allowing certain transactions in these regions, BIS is restricting the export of goods subject to the EAR to those areas.

On March 3, 2022, BIS added new controls to target Russia’s oil refining section.

BIS added more than 150 individuals and companies to its Entity List. They are not only located in Russia and Belarus; these entities are located in a total of 13 different countries. No U.S. origin goods or technology may be exported to any of these entities without a license, and there is a presumption that the license will not be approved.

Most recently, on March 11, 2022, BIS implemented a ban on exporting luxury goods to Russia and Belarus and to Russian and Belarusian “oligarchs and malign actors” wherever located, which have been designated by OFAC as Specially Designated Nationals.

OFAC IMPOSED BLOCKING SANCTIONS AGAINST RUSSIA’S FINANCIAL AND ENERGY SECTORS AND ITS LEADERS

In a coordinated effort with Commerce to cripple the Russian economy, using existing Executive Orders and two new Executive Orders, OFAC issued sweeping sanctions against large portions of the Russian financial sector, against President Putin and leaders in both Russia and Belarus. Among these are sanctions against the largest financial institutions in Russia, including the Central Bank of the Russian Federation, the Russian Direct Investment Fund, over a dozen of Russia’s largest financial institutions and their subsidiaries. The full list of entities added to the Specially Designated Nationals (SDN) List is available here.

The assets of SDNs are blocked and U.S. persons are generally prohibited from dealing with them. Thus, U.S. persons, including U.S. citizens and permanent residents, as well as entities incorporated in the U.S. and persons located in the U.S., are prohibited from engaging in any transactions with all Russian and Belarusian persons and entities that OFAC added to the SDN list. Additionally, U.S. persons are prohibited from engaging in any transactions with entities in which a SDN has an ownership interest of 50% or more.

In addition to imposing a full blocking prohibition against entities, OFAC also has the authority to announce less severe restrictions on foreign entities and has done so against certain Russian financial entities. These sanctions are imposed against Non-SDN entities, including those on the Foreign Financial Institutions Subject to the Correspondent Account or Payable-Through Account Sanctions (CAPTA List). These sanctions prohibit, among other things, U.S. financial institutions from processing transactions with such entities or the opening or maintaining of correspondent accounts or payable-through accounts for such entities. The entities added to the Non-SDN Menu-Based Sanctions List are available here, and those entities added to CAPTA List are available here.

As mentioned above, the standard for civil liability for violating OFAC sanctions is strict liability and therefore, the government is not required to prove any wrongfulness or intent. This can result in significant monetary penalties.

Finally, OFAC issued sweeping sanctions prohibiting U.S. financial institutions from participating in the primary or secondary markets for bonds issued by specific Russian state banks, banning new investment in the Russian energy sector by U.S. Persons, and banning the export, re-export, sale, or supply, directly or indirectly, from the U.S. or by a U.S. Person, of U.S. banknotes to the Russian government or any person located in Russia. Finally, the U.S. and its allies have agreed to cut Russia off from the SWIFT international banking communication system. See, e.g., European Council Press Release dated Mar. 2, 2022.

How Will These New Rules Be Enforced and Violations Be Identified and Prosecuted?

The export controls are being enforced multi-laterally, not unilaterally. Foreign countries (the European Union, Japan, Australia, United Kingdom, Canada, and New Zealand) agreed to impose “substantially similar restrictions” and accordingly, were exempted from the application of the Foreign Direct Product Rule. See DOC Press Release dated Feb. 24, 2022. Consequently, there is unprecedented international coordination in enforcing these export restrictions. This means that foreign law enforcement will be sharing information with U.S. government law enforcement and government authorities about suspicious activities in an unprecedented and more comprehensive way. Due to concerns regarding the close relationship between Russia and China, companies and exporters should expect increased scrutiny of their exports to China. Shipments to potential transshipment destinations such as Turkey will also likely be closely watched and analyzed.

Historically, foreign officials have informally and formally shared information with U.S. law enforcement – CBP, HSI, BIS^[2] and FBI. Often, this is done pursuant to Customs Mutual Assistance Agreements. For instance, investigations have been opened based upon leads provided by foreign governments. If that occurs, the target typically is limited in its ability to make any Fourth Amendment^[3] claims to suppress evidence obtained overseas. Additionally, BIS/OEE agents are authorized to conduct pre-license and post-shipment verifications overseas. Thus, they can inspect the end-user identified in an export license application or in the Electronic Export Information filed with the U.S. government through the Automated Export System. Any false statements made on those records constitute violations of federal law that could be charged under the Export Control Reform Act (ECRA).

Due to the level of coordination between the U.S. and foreign governments, enforcement will likely be far less difficult. Enforcement will also be easier under the current circumstances because there is a shared commitment to penalize Russia for its actions. As a result, industry sources, your competitors, and your employees will likely feel it’s their duty to report any potential violations of the new sanctions.

Commerce Secretary Gina Raimondo has made clear that the new export controls will be vigorously enforced. In so doing, it should be expected that law enforcement will be using every available tool. Thus, they will be conducting undercover investigations, serving administrative and grand jury subpoenas, conducting border searches, detaining and seizing shipments, executing search warrants, and intercepting electronic communications. While individuals enjoy an act of production privilege to producing documents pursuant to a Grand Jury Subpoena, the EAR requires companies and exporters to maintain at least five years of shipping records and make them available to BIS upon request for inspection, even overseas. See 15 C.F.R. § 762.

Law enforcement and prosecutors will be inspecting financial records for potential violations of OFAC’s sanctions. FinCEN’s March 7^th advisory reminded financial institutions of their obligation to file a Suspicious Activity Report (SAR), provided a list of red flag indicators for activities that would violate or evade the Russia/Belarus economic sanctions, and requested all financial institutions to identify any SARs related to potential sanctions evasion as “FIN-2022-RUSSIASANCTIONS.” These SARs will likely form the basis for numerous criminal investigations. Based solely on a SAR, a federal prosecutor could issue grand jury subpoenas to American banks and financial institutions or seek records from foreign countries.

Every tip will be thoroughly investigated and if the evidence supports it, prosecutors working with DOJ’s National Security Division will be charging these cases. This area will be a priority for DOJ and falls squarely within Attorney General Garland’s renewed and strengthened focus on white-collar crime. See DOJ Justice News dated Mar. 3, 2022. The Attorney General’s creation of the KleptoCapture Task Force demonstrates DOJ’s commitment to bringing prosecutions and holding anyone accountable for assisting in the evasion of the Russia/Belarus sanctions. See DOJ Justice News dated Mar. 2, 2022. There is no greater deterrence than an actual and significant threat of imprisonment for individuals and debarment for companies. Over the last 20 years, criminal prosecutions in the export and sanctions area has dramatically increased. Companies should expect even more vigorous enforcement and prosecution of individuals who violate the new Russia/Belarus export restrictions and sanctions.

Guidance: What Can Companies Do to Prevent Becoming an Investigative Target?

Know your products and services

• Are your products/services controlled under the CCL?
• Do your products/services have any military or nuclear applications?
• Have you received suspicious inquiries from foreign countries or governmental officials previously?

Know your customer

• Where is your customer located?
• Is your customer the end user? If not, do you know who is? Where are they located?
• Use a geographic IP blocking service to block communications from Russia and Belarus and any other embargoed country. While there are ways to mask your IP address (i.e. VPN), this shows the government that you took efforts to prevent prohibited transactions.
• What is your customer using your product or service for? Are they using it for military purposes? To explore for oil and gas? As part of a nuclear power plant?
• Is your customer owned or controlled by another party? Do they have any subsidiaries or are they involved in a joint venture with a prohibited person/entity?

Know your end user and the end use of your products, equipment, or technology

• How will your product, equipment, or technology be used?
• Will your equipment or technology be used to develop or manufacture products for customers in a foreign country? Where?

Know your transaction

• Other than the customer, are there any other parties to the transaction?
• Are you paying the same entity with whom you are contracting?
• Are there any guarantors, indemnitors, or other parties involved?
• Does the transaction involve the issuance of any debt or the acquisition of any equity?

Document, Document, Document

• Keep track of all screening you have performed on your customers and the end users of your products pursuant to your compliance policy.
• Keep all communications and information received from customers and third parties regarding transactions.
• Keep track of all internal screening done on products and services.
• Update your compliance policy and provide training on the new rules and regulations.

Do Not Rely on Automated Screening Services

• Such services will alert you if there is a problem with a party, not a transaction.
• Each transaction will need to be evaluated and an analysis conducted of the ownership of each company that is involved to ensure that it does not involve an entity that has 50% or greater ownership by a prohibited Person/SDN.

Trust but Verify Information Provided by Your Customers

• Make sure you understand the end use of your product/service.
• Conduct due diligence searches of publicly available information on your customer/client.
• If you have any concern that a product or service you are selling to a customer/client is intended for Russia or Belarus, ask and have your customer confirm in writing using an End User Certification.
• Consider having your clients certify where the product/service is going, even if it is EAR99, to ensure compliance with the expanded Military End User/End Use Rule.

Things to watch for

• Software updates – if you have provided software to Russia or Russian Persons in the past, automated software updates going forward may violate the new sanctions.
• Financial transactions – understand all parties to the transaction, including obligors, indemnitors, etc.
• Where the money is going – if you are shipping to X but being paid by Y, screen both parties.

Conclusion

The new export control restrictions and sanctions will be strictly enforced and any violation will be prosecuted if sufficient evidence exists. Accordingly, companies should consider availing themselves of the voluntary self-disclosure policies of DOJ, BIS, and OFAC to mitigate their potential criminal and civil liability. See SAP SE Global Resolution of thousands of violations of Iranian OFAC Embargo and EAR as a result of voluntary self-disclosure to DOJ, its cooperation and remediation. Every company should immediately review the guidance available on the BIS and OFAC websites, update their compliance polices, and provide training to their employees.

Hinckley Allen’s International Trade & Global Security Team can assist you with navigating this complicated area.

[1] Violations of OFAC’s economic sanctions programs are prosecuted under the International Emergency Powers Act, 50 U.S.C. §§ 1701-1708, and violations of the EAR are charged under the Export Control Reform Act, 50 U.S.C. §§ 4801-4852. See 50 U.S.C. §1705(c) (willfully violating, attempting or conspiring to violate, or causing another person or entity to violate an Executive Order or OFAC regulation carries a maximum penalty of imprisonment for 20 years and a $ 1,000,000 fine for each violation); 50 U.S.C. § 4819(b)(2) (the maximum criminal penalty for violating, attempting to violate, conspiring to violate, or causing a violation of the EAR is 20 years’ imprisonment and a $1,000,000 fine per violation). The Federal Sentencing Guidelines treat these violations very seriously assigning them a Base Offense Level of 26 (63-78 months for criminal history category I).

[2] Special Agents that work on criminal investigations in the Department of Commerce are assigned to the Bureau of Industry and Security’s Office of Export Enforcement (OEE).

[3] See U.S. v. Verdugo-Urquidez, 494 US 259 (1990).

This article is not intended to be legal advice. The above materials are provided for educational and informational purposes only, for the use of clients and others who are interested in the subject matter. If legal advice is required concerning a particular matter, your attorney should be consulted.