Stopping Just Short of the Kitchen Sink, USG Requires Licenses for Exports of Entire HTS Chapters to Russia
In summary, through these two new rules, BIS has strengthened its existing sanctions through the following measures:
- Expanding Supplement Nos. 4, 6, and 7 to Part 746 of the Export Administration Regulations (EAR) to add three entire harmonized tariff system chapters (Chapters 84, 85, and 90) as well as make other additions;
- Expanding the Russia/Belarus Foreign-Direct Product (FDP) Rule to add the temporarily occupied Crimea region of Ukraine;
- Clarifying licensing requirements; and
- Adding 71 entities in Russia, Armenia, and Kyrgyzstan to the Entity List. Read the entire list of additions to the Entity Lists here.
On the same day, the Office of Foreign Assets Control (OFAC) prohibited, effective June 18, 2023, the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a US person, of “architecture services” or “engineering services” to any person located in the Russian Federation. OFAC also identified the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation so that, in the future, it can designate persons as Specially Designated Nationals and Blocked Persons (SDNs) who operate in those sectors.
Except for the prohibition on exporting architecture and engineering services to Russia (which goes into effect on June 18, 2023), the new rules became effective on May 19, 2023.
Below is a summary of the new restrictions.
Addition to Lists of EAR99 Items Requiring a License to Russia and Belarus
The most significant change to the Russia/Belarus sanctions is the addition to several supplements of more EAR99 items, so that now entire harmonized tariff system (HTS) chapters are covered by a license requirement (and a policy of denial for the most part).
In particular, the new sanctions added the remaining HTS-6 Codes under three entire HTS chapters, 84, 85, and 90, so that in total there are now more than 2,000 entries to the industrial and commercial controls listed in Supplement No. 4 to Part 746 of the EAR. As a result, every HTS-6 Code under these three chapters now requires a license for export, reexport, or transfer to or within Russia and Belarus. The added items cover a variety of useful equipment, such as engines, boilers, pumps, air conditioning machines, furnaces and ovens, sterilizers, machinery to make hot drinks, dishwashing machines, spray guns, winches, plows mowers, printers, machine tools, calculators, vacuum cleaners, electric heaters, microwaves, microphones, loudspeakers, microphones, monitors, burglar alarms, capacitors, ultra-violet lamps, contact lenses, other lenses, microscopes, levels for surveying, as well as medical devices such as dental fittings, artificial joints, hearing aids, pacemakers, thermometers, hydrometers, and spectrometers.
In its press release, BIS does its best to make the new items sound more technically exciting. BIS states that the additions include “a variety of electronics, instruments, and advanced fibers for the reinforcement of composite materials, including carbon fibers” rather than noting that the new controls now require licenses for the export of medical devices such as hearing aids and pacemakers to Russia and Belarus.
As BIS correctly points out, imposing controls on everything contained in three huge HTS chapters makes it easier for exporters to comply: no more hunting around to see if your individual six-digit HTS code is included! But the approach also sweeps in a huge swath of EAR99 items, some of which have little or no potential military use, and some of which could be considered humanitarian in nature. Nearly everything short of the kitchen sink.
These additions also ensure, if there were any doubt, that virtually all exits from Russia by means of an asset sale of manufacturing and office equipment (not to mention the stray dishwasher) will require a BIS license. In an interesting side effect, a number of six-digit HTS numbers are now in BOTH Supplement 4 (Industry Sector Sanctions) and Supplement 5 (Luxury Goods).
When some of these six-digit HTS numbers were only in Supplement 5, many of them contained a value threshold to ensure that only the “luxury” (i.e., more expensive) items were captured. Because the same six-digit HTS numbers in Supplement 5 have now been added to Supplement 4, which is not restricted to luxury items, the dollar values were removed from Supplement 5 to avoid creating a trap for the unwary. Overall, any exporters still exporting these six-digit HTS items at values lower than those previously in Supplement 5 to Russia/Belarus need to watch out and stop exporting unless they obtain a BIS license, which is unlikely.
Supplement No. 6:
Moreover, the rule also adds certain chemicals to Supplement No. 6 to Part 746 of the EAR, including triethylamine (used for waterproofing agents, catalysts, and propellants), different varieties of lithium chloride, assay and reagents for nucleotide or peptide isolation, extraction or purification, and laboratory equipment for the analysis or detection, destructive or non-destructive, of chemical substances.
Supplement No. 7:
Lastly, the rule adds a single six-digit HTS number, 854800, electrical parts of machinery or apparatus, not elsewhere specified or included, to the list of foreign-produced direct products subject to the EAR under the Russia/Belarus-Military End User FDP rule (734.9(g)) in Supplement No. 7 to Part 746 of the EAR that require a license when destined to Russia, Belarus, and Iran. This addition aims at further limiting Russia’s ability to use unmanned aerial vehicles (UAV) against Ukraine.
1. Expanding the scope of destination of Russia/Belarus FDP Rule
BIS expanded the Russia/Belarus FDP Rule to apply to temporarily occupied Crimea, ensuring that certain foreign-produced items that are the product of or produced using US-origin technology or software will now require a license for export, reexport, or transfer (in-country) to Crimea while it continues to be occupied by Russia.
2. Clarification on Licensing Requirements
With the new export controls, BIS also clarified certain licensing requirements. For example, making conforming changes so that the Russian and Belarussian Industry Sector sanctions in 746.5 have a comparable US content exclusion for de minimis when exported from US allies and the same deemed export/reexport exclusion as 746.8.
Perhaps the most significant “clarification” is the addition of ECCN 5A991 to the items exclusion for items controlled under ECCNs 5A992 and 5D992 (mass market encryption items) from the 746.8 and 746.10 licensing requirements, provided they are going to end-users that are wholly owned subsidiaries of companies headquartered in the US and its allies in country groups A:5 and A:6. ECCN 5A991 telecom equipment frequently is exported or reexported together with the mass market encryption items, forcing exporters and reexporters to obtain a license for the combined shipment of 5A991, 5A992, and 5D992 items. This is a welcome simplification.
3. Addition of Entity List
In total, BIS added 71 entities to the Entity List.
BIS added 69 Russian entities to the Entity List “for providing support to Russia’s military and defense sector.” These entities also will have “footnote 3” designations as Russian or Belarusian “military end users,” meaning that they will be subjected to the additional restrictions imposed under the Russia/Belarus-Military End User FDP Rule. These restrictions represent some of the most severe available under the EAR, as they can apply to foreign products that are EAR99 that are the direct product of US technology or software on the Commerce Control List or are made on production/text equipment that are the direct product of such technology or software.
In addition, BIS added an Armenian entity, Medisar, LLC, for “engaging in conduct that prevented the successful accomplishment of an end-use check.” A Kyrgyz entity, Tro.Ya, LLC, has also been added for “both preventing the successful completion of an end-use check and for posing a risk of diversion of items subject to the EAR to Russia.” This means both entities are now subject to a license requirement for all items subject to the EAR and a license review policy of presumption of denial.
4. OFAC Actions
Among other things, OFAC published two new determinations, which added architecture and engineering services to EO 14024 of April 15, 2021, (“Blocking Property With Respect To Specified Harmful Foreign Activities of the Government of the Russian Federation”) and EO 14071 of April 6, 2022, (“Prohibiting New Investment in and Certain Services to the Russian Federation in Response to Continued Russian Federation Aggression”). EO 14024 now also covers the construction, manufacturing, and transportation sectors.
OFAC broadly defines architecture services in newly published FAQ 1128 as follows:
Architecture services include advisory services; pre-design services; design services, including schematic design, design development, and final design; contract administration services; combined architectural design and contract administration services; including post construction services; and all other services requiring the expertise of architects. The prohibition applies to such services as they relate to residential, institutional, leisure, commercial, and industrial buildings and structures; recreational areas; transportation infrastructure; land subdivisions; and not necessarily related to a new construction project. The term also includes urban planning services (i.e., land use, site selection, and servicing of land for systemic, coordinated urban development) and landscape architectural services. OFAC intends to interpret this term consistent with UN Central Product Classification (CPC) Codes 86711-86704, 86719, and 86741-86742.
OFAC applies the same broad approach to engineering services, which it defines as follows:
Engineering services include assistance, advisory, consultative, design, and recommendation services concerning engineering matters or during any phase of an engineering project. Engineering design services may be for: the construction of foundations and building structures (i.e., structural engineering); mechanical and electrical installations for buildings; the construction of civil engineering works; industrial processes and production; or other engineering designs, such as those for acoustics, vibration, traffic control systems, or prototype development for new products. The term additionally includes geotechnical, groundwater, and corrosion engineering services; integrated engineering services, such as those for transportation infrastructure or other projects; engineering-related scientific and technical consulting services, including geological, geophysical, geochemical, surface or subsurface surveying, and map making services; testing and analysis services of chemical, biological, and physical properties of materials or of integrated mechanical and electrical systems; and technical inspection services. OFAC intends to interpret this term consistent with UN CPC Codes 86721-86727, 86729, 86731-86733, 86739, 86751-86754, 86761-86764, and 86769. Additionally, OFAC does not consider maritime classification services to be subject to the prohibition, as is consistent with the OFAC Guidance on Implementation of the Price Cap Policy for Crude Oil and Petroleum Products of Russian Federation Origin.
What does this mean in practice? Effective June 18, 2023, US persons will generally be prohibited from providing engineering or architecture services, as defined above, to persons located in the Russian Federation.
Additionally, as noted above, OFAC also identified the architecture, engineering, construction, manufacturing, and transportation sectors of the Russian Federation as sectors within which OFAC can designate SDNs simply for operating in. OFAC’s FAQ 1127 notes that while a sector determination “exposes persons that operate or have operated in an identified sector to sanctions risk,” such a determination “does not automatically impose sanctions on all persons who operate or have operated in the sector.”
Finally, OFAC amended Directive 4 under EO 14024 (“Prohibitions Related to Transactions Involving the Central Bank of the Russian Federation, the national Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation”) to implement a reporting requirement for any US persons who possess or control property in which the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation have any interest.
The new sanctions are a demonstration of sustained determination to impede Russia’s ability to execute its military strategy in Ukraine. Therefore, every economic operator concerned should update its compliance program and screen its business for transactions that are now covered by the new measures. In particular, any company that continues to export, reexport or transfer items subject to the EAR to Russia or Belarus — particularly medical devices in HTS Chapter 90 and equipment in HTS Chapters 84 and 85 — needs to recheck and determine if it now needs a BIS license and whether, given the licensing policy, a license application is likely to be granted.
In case of uncertainty, companies should seek legal counsel to remain in compliance with these new rules, as unlawful transactions in this context will be harshly pursued in efforts to force Russia to end the war.
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