News

BIS, OFAC, and U.S. State Department target Russia’s military and defense-industrial base

02 December 2024

Key takeaways

On October 30, 2024, the US government imposed additional trade controls to target procurement networks supporting Russia’s military and defense-industrial system.

These additional trade controls include sanctioning 400 individuals and entities across 17 jurisdiction and imposing license requirements for nine chemical precursors.

These rules also expand the authorizations available for official business of diplomatic or consular missions of governments.

On October 30, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security, the U.S. Department of the Treasury’s Office of Foreign Assets Control, and the US Department of State took several actions targeting procurement networks in various countries for allegedly supplying U.S.-origin and U.S.-branded products to the Russian military and defense-industrial base. These actions expand the scope of U.S. export controls and sanctions against Russia and Belarus and add 400 parties to the Specially Designated Nationals and Blocked Persons List.

On October 30, 2024, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”), the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”), and the U.S. Department of State targeted procurement networks in several countries, alleging that these parties are supplying U.S.-origin and U.S.-branded products (including microelectronics, chemical precursors for riot control agents (“RCA”), and chemical weapons) to the Russian military and Russia’s defense-industrial base.

These actions expand the scope of BIS’s export controls against Russia and Belarus by imposing restrictions on certain entities located in China, India, Malaysia, Russia, Singapore, Türkiye, Estonia, Finland, the United Arab Emirates, and the United Kingdom. These actions also expand the scope of the Russian and Belarussian Industry Sector Sanctions within the Export Administration Regulations (“EAR”), and clarify the applicability of the BIS Entity List Foreign-Direct Product (“FDP”) rule to apply to any destination or end user. OFAC (together with the State Department) designated 400 individuals and entities across 17 jurisdictions as Specially Designated Nationals and Blocked Persons (“SDN”). OFAC also issued new and amended Russia-related general licenses (“GLs”) and Frequently Asked Questions (“FAQs”) related to these designations.

Expansion of BIS export controls and sanctions

BIS published two Final Rules amending the EAR that are effective as of November 1, 2024.

Updates to the Entity List

The first rule, “Additions and Revisions of Entities to the Entity List,” adds 40 entities and 4 addresses as separate entries to the Entity List. The rule also amends 49 existing entities (under 52 entries) on the Entity List. Generally, a license is required to export, reexport, or transfer any item subject to the EAR to parties on the Entity List, including EAR99 items such as food or medicine. Certain additions also received a footnote 3 designation, meaning these entities are subject to the Russia/Belarus Military End User and Procurement FDP Rule (“the Russia/Belarus MEU FDP Rule,” 15 CFR § 734.9(g)). The Russia/Belarus MEU FDP Rule means that items subject to the EAR for which a license would be required for export, reexport, or transfer to footnote 3 entities include certain foreign-produced items outside the United States that are the “direct product” of any “technology” or “software” identified on the Commerce Control List (“CCL”) of the EAR, or are produced by a complete plant or “major component” of a plant that itself is a “direct product” of any “technology” or “software” on the CCL. Under the Russia/Belarus MEU FDP Rule, a license is required (1) when the foreign-produced item will be incorporated into, or used in the “production” or “development” of any “part,” component,” or “equipment” produced, purchased, or ordered by a footnote 3 entity, or (2) when a footnote 3 entity is a party to any transaction involving the foreign-produced item (e.g., “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end-user”).

While most of the entities have been added to the Entity List with a license review policy of a policy of denial, certain entities, including footnote 3 entities, are subject to a license review policy of denial - except for EAR99 food and medicine that will be reviewed on a case-by-case basis.

The addresses added to the Entity List are all in China and not associated with a named entity. Exporters must review addresses carefully to identify whether the address is separately included on the Entity List. In that case, a license would be required to export, reexport, or transfer any item to that listed address even if the named party receiving the item at that address is not separately set forth on the Entity List.

Expansion of Russia and Belarus export controls

The second rule, “Implementation of Additional Export Controls Against Russia and Belarus Under the Export Administration Regulations (EAR); And Clarifications” (1) imposes a license requirement for nine chemical precursors that can be used in certain weapons; (2) expands the authorizations available for official business of diplomatic or consular missions of governments of Country Group A:5¹and A:6² destinations; and (3) clarifies that the three Entity List FDP rules’ license requirement apply to any destination or any end user or party.

A license is now required to export, reexport, or transfer nine chemical precursors added to supplement no. 6 to Part 746 of the EAR (Malononitrile, 2-Chlorobenzaldehyde, 2-Chlorobenzyl Alcohol, 2-Chlorobenzylamine, Benzene 1-chloro-2-(dimethoxymethyl), Acetophenone, Chloroacetyl Chloride, Chloroform, o-Aminophenol). These precursors can be used to produce certain chemical weapons or RCAs. The license review policy for items on supplement no. 6 is generally a policy of denial. Applications for these nine chemical precursors will be subject to the same license review policy except for applications that meet humanitarian needs (such as applications relating to the medical and agricultural sectors) that will be reviewed on a case-by-case basis.

The rule expands the scope of authorizations available for governments of Country Groups A:5 or A:6 in Russia and Belarus. License Exception Encryption commodities, software, and technology (“ENC”) can be used for exports, reexports, or transfers of eligible items to Russia or Belarus for “the official business of diplomatic or consular missions of the governments of Country Group A:5 and A:6 destinations that are operating in Russia or Belarus.”

A license is not required to export, reexport, or transfer (in-country) mass market encryption commodities and software, and EAR99 software for the official business of diplomatic or consular missions of the governments of Country Group A:5 and A:6 destinations that are operating in Russia or Belarus.

License applications for certain items used in the exploration or production of oil and gas, items on supplements no. 4, 5, and 6, and certain EAR99-designated software will be subject to a case-by-case review policy when the items are destined for official business of governments of Country Group A:5 and A:6 destinations that are operating in Russia or Belarus.

The rule clarifies that the Entity List FDP Rules, including the Russia/Belarus MEU FDP Rule, require a license to reexport or transfer, any foreign produced item subject to the EAR pursuant to the Entity List FDP Rules to or within any destination or to any end user or party. In other words, even if an Entity List FDP party is identified under one country, reexports or transfers of items subject to the EAR pursuant to the relevant Entity List FDP rule still require a license even if the item is destined for another country.

Finally, the rule includes a 30-day savings clause ensuring that items impacted by this rule that were shipped to a foreign destination pursuant to actual orders for export, reexport, or transfer as of November 1, 2024 may proceed to that destination under the previous eligibility so long as the actions are completed by December 2, 2024.

OFAC/State Department actions

400 individuals/entities added to the SDN List

Pursuant to Executive Order (“EO”) 14024, in which entities operating or having operated in specific sectors of the Russian Federation economy may be sanctioned, OFAC added 275 individuals and entities in 17 jurisdictions to the SDN List for their involvement in supplying Russia with advanced technology and equipment to support Russia’s ongoing war efforts. OFAC alleges the entities and associated jurisdictions are also considered sanctions evasion actors and networks or are Russian importers and producers involved in propagating Russia’s military-industrial base.

OFAC’s designations included entities operating within the “trust and corporate formation services sector” and the “transportation sector.” OFAC designated several “[f]inancial facilitators such as trust and corporate formation service providers,” as “key nodes in sanctions evasion ecosystems,” including two Swiss nationals providing trust and corporation formation services to Russian clients (including SDN individuals), and a Thailand-based company that facilitates the establishment of companies in Thailand for Russians and for third-country nationals wishing to do business with the Russian market. Many of these designations were enabled or informed with support from Treasury’s Financial Crimes Enforcement Network (“FinCEN”).

OFAC also designated a Russia-based freight logistics company for taking delivery in Russia of multiple shipments of nitrocellulose (a component for gunpowder/explosives/artillery shells), a Turkey-based logistics company for shipping such products from Turkey to Russia (i.e. the purchaser of transportation services), and another Turkey-based logistics services company for exporting items on BIS’s Common High Priority List (“CHPL”) to Russia. For context, BIS developed the CHPL in coordination with the European Union, Japan, and the United Kingdom to indicate the initial 50 items identified by the Harmonized System (“HS”) Codes that are the most significant to Russia’s weapons procurement and development.

The State Department also designated 120 individuals and entities pursuant to EO 14024 for operating or having operated in designated sectors of the Russian Federation economy (see a Fact Sheet and Press Statement). These designations targeted the following activities and entities in Russia and other countries, including China, India, Malaysia, Thailand, Turkey, and the United Arab Emirates:

Sanctions evasion networks and backfilling efforts;
Senior Russian Ministry of Defense officials appointed earlier this year;
Russia’s military-industrial base, including military repair facilities, producers of advanced technologies, and entities supporting the Belarus-Russia defense relationship; and
Subsidiaries of State Atomic Energy Corporation Rosatom.

US persons are prohibited from dealing in the property/property interests of SDNs (and entities owned 50% or greater, directly or indirectly, individually or in the aggregate by SDNs), absent authorization from OFAC. The US government is calling on other countries to take similar actions.

Related to these designations, OFAC also issued new, as well as amended, Russia-related GLs. OFAC issued two amended GLs: GL 8K (“Authorizing Transactions Related to Energy” only to extend the authorization period to 12:01 am EDT, 30 April 2025) and GL 25G (“Authorizing Transactions Related to Telecommunications and Certain Internet-Based Communications”).

GL 25G is amended to add two entities to those excluded from the authorization in paragraph (d)(4) (i.e., transactions involving XH Smart Tech China Co Ltd and CJSC Perspective Technologies Agency are not authorized by GL 25G), and standard text that nothing in GL 25G relieves compliance obligations for other Federal laws/regulations, including the EAR.
Newly-issued GL 110 (“Authorizing the Wind Down of Transactions Involving Certain Entities Blocked on October 30, 2024”) authorizes all transactions prohibited by EO 14024 that are ordinarily incident and necessary to the wind down of any transaction involving one or more of the following entities: XH Smart Tech China Co Ltd, Lokesh Machines Limited, Galaxy Bearings Ltd, Orbit Fintrade LLP, Wuhan Huazhong Numerical Control Co Ltd, Beijing Dynamic Power Co Limited, Sharpline Automation Private Limited, and any entity owned 50% or greater (directly or indirectly, individually or in the aggregate) by these listed entities through 12:01 am EST 14 December 2024. Payments to these entities must be made into a blocked account in accordance with OFAC’s Russian Harmful Foreign Activities Sanctions Regulations, 31 CFR part 587 (“RuHSR”).
Newly-issued GL 111 (“Authorizing Certain Transactions Related to Debt or Equity of, or Derivative Contracts Involving, Certain Entities Blocked on October 30, 2024”) authorizes all transactions prohibited by EO 14024 that are ordinarily incident and necessary to certain activities involving debt or equity issued or guaranteed by XH Smart Tech China Co Ltd, Lokesh Machines Limited, Galaxy Bearings Ltd, Beijing Dynamic Power Co Limited, Wuhan Huazhong Numerical Control Co Ltd, and any entity owned 50% or greater (directly or indirectly, individually or in the aggregate) by these listed entities through 12:01 am EST 14 December 2024. Payments to these entities must be made into a blocked account in accordance with the RuHSR.
Newly-issued GL 112 (“Authorizing Civil Aviation Safety and Wind Down Transactions Involving Shaurya Aeronautics Private Limited”) authorizes all transactions prohibited by EO 14024 that are ordinarily incident and necessary to certain activities involving civil aviation safety and wind-down of transactions involving Shaurya Aeronautics Private Limited (“Shaurya”), or any entity in which Shaurya owns, directly or indirectly, a 50% or greater interest through 12:01 am EST 14 December 2024. Payments to these entities must be made into a blocked account in accordance with the RuHSR.

Finally, OFAC also issued new, as well as amended, Russia-related FAQs pertaining to the new SDN designations. OFAC amended FAQ 976 and FAQ 1040 to refer to the amended GLs just issued (GL 8K and GL 25G, respectively). FAQ 976 discusses whether a US financial institution can process energy-related transactions when a sanctioned Russian financial institution is involved. GL 8K, as referenced in FAQ 976, defines those transactions that are “related to energy.” FAQ 1040 elaborates on whether transactions related to telecommunications and certain internet-based communications involving designated Russian persons are authorized by the new GL 25G.

OFAC’s new FAQ 1198 clarifies that US persons are authorized under GL 6D to engage in transactions related to pharmaceutical and other humanitarian-related goods involving Shreya Life Sciences Private Limited (designated an SDN under OFAC’s October 30 action). FAQ 1198 also states that non-US persons would not generally face risk of exposure under US secondary sanctions for engaging in transactions authorized for US persons under Russia-related GLs. For reference, GL 6D authorizes transactions related to “the production, manufacturing, sale, transport, or provision of agricultural commodities, medicine, medical devices, replacement parts and components, software updates, the prevention, diagnosis, or treatment of COVID-19, or clinical trials.” GL 6D does not have an expiration date.

Authored by Nicki Ghazarian-Foye, Ashley Roberts, Deborah Wei, and Julia Diaz.

Next steps

Companies should continue to review their business activities and trade compliance procedures regularly to confirm they are in compliance with applicable new restrictions. Hogan Lovells lawyers can assist you with assessing the potential impact of these and other trade restrictions on the global operations of your company.

Please contact any of the listed Hogan Lovells lawyers for further information or assistance.

1 Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, South Korea, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, Switzerland, Türkiye, and the United Kingdom.

2 Albania, Cyprus, Israel, Malta, Mexico, Singapore, South Africa, and Taiwan.